Estee Lauder Cos. Inc (EL) — Q3 2023 Earnings Call Transcript

Hello. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. During the Q&A session, we ask that you please limit yourselves to one question, so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

Thank you, Rainey, and hello to everyone. We appreciate you being with us today to discuss our third quarter results and revised outlook for fiscal year 2023. In the third quarter, organic sales fell 8% at the high end of our outlook range, and the sequential improvements from the decline of 11% in the second quarter. Nearly all developed and emerging markets grew organically and outperformed our expectations to offset an even lower-than-expected recovery in our Asia travel retail business. As we discussed in February, Asia travel retail faced two headwinds in the third quarter. The first, elevated inventory in Hainan, given retailers' expectations for a more accelerated recovery proved very challenging, as conversion of travelers to consumers in prestige beauty lagged historical trends, as travelers initially gravitated through other categories. This led to even lower replenishment orders than we anticipated. The second headwind, the transition in Korea to post-pandemic regulations as traveling consumers gradually returned pressured sales meaningfully. In China and Korea, the resumption of international flights was subdued. Limited visas were granted, and group tours were slow to restart. These factors resulted in lower-than-expected traffic in airports throughout the region, which combined with a lower-than-expected conversion further moderated replenishment orders. With this said, there were bright spots for travel retail in Hong Kong, Macau, Europe, and the Americas. All told, global travel retail organic sales declined 45%. This was partially offset by excellent organic sales growth of 10% in the rest of our global business. Our retail sales growth was even stronger than organic sales growth in many markets around the world, including China and the U.S. Encouragingly, retail sales performance is significantly ahead of organic sales results in global travel retail, which gives us confidence that the challenges in travel retail are abating with time. Furthermore, this strength at retail, including prestige beauty share gains in many markets demonstrated a benefit of our continuing investment in innovation and building the desirability of our brand around the world. This positive retail trend is expected to continue in the fourth quarter. Adjusted diluted EPS in the fiscal third quarter fell 75%, which was also at the high-end of our outlook. We invested to fuel markets in various stages of post-pandemic recovery, launching sought-after innovation, expanding brands into markets, and increasing advertising as a percentage of sales. As the shape recovery for Asia travel retail comes into better focus, it is proving to be both far more volatile than we expected and more gradual relative to what we experienced in other markets. We are therefore lowering our organic sales and EPS outlook for fiscal year 2023, as we reduced our implied fourth quarter outlook, primarily for Asia travel retail. For Asia travel retail, there are two factors driving our revised outlook. In Hainan, the pressure from elevated inventory in the trade is proving to be deeper and longer-lasting, driven by this lower-than-expected consumption trend I discussed compounded by the retailer inventory tightening. Second, the resumption of international travel by Chinese consumers is evolving more slowly than we anticipated. Having visited Shanghai and Hainan in March, and witnessed firsthand the optimism of consumers, retailers, fashionists, and our local teams, I am very encouraged for the future of our business with Chinese consumers. I also had the good fortune to officially open our new China Innovation Lab and met with the amazing scientists and product development specialists in the state-of-the-art R&D facility, which further bolstered my confidence in the business fundamentals. Indeed, the opportunity for prestige beauty and our brands with Chinese consumers in the mid- to long term remains vibrant in the domestic market, in Hainan and internationally, which remains our focus through this complex phase of recovery from the pandemic. For our fourth quarter outlook, the far slower organic sales growth that we anticipated in February is impacting profitability significantly. There are two factors at play under pressure to a bigger margin accretive area of our business. First, with the rest of the business growing strongly, we will continue to invest to drive the momentum in those areas. Second, strategic and necessary long-term investments in manufacturing, R&D, and information technology capabilities are pressuring margin with the slow recovery of sales. With this said, we are obviously not satisfied by the profitability in our revised outlook for fiscal year 2023. For the future, we are focused on a plan to further accelerate our growth in key markets, return to organic sales growth in our Asia travel retail business, and skincare category, and to progressively rebuild margin across brands, categories, and regions. Let me now share more about our third quarter performance as numerous growth engines excelled. Looking at regions, each of the Americas and Asia-Pacific returned to organic sales growth, which complemented ongoing gains in the domestic markets of EMEA. Developed markets from every region contributed, led by the United States, U.K., and Hong Kong. While organic sales in our emerging markets grew an outstanding 17% globally. Impressively, in the domestic markets of EMEA we realized broad-based trends as every category grew double digits organically. The breadth of growth engines by category was matched by the breadth of growth engines by channel, led by specialty-multi and online, driven by the successful go-to-market strategy as we focus on high-potential channels. In Western Europe, our brands successfully engaged with consumers to generate trial and repeat. The examples are many; Estée Lauder, Bobbi Brown, and Too Faced driving vital success on TikTok, M·A·C leveraging Paris Fashion Week for its M·A·C Locked Kiss Ink lipstick launch, and La Mer hosting dermatologists for a unique event. This collective initiative featuring enticing innovation in hero brands drove the company accelerating prestige beauty share gains for the quarter in Western Europe. Looking at Asia-Pacific, it similarly delivered diversified growth in nearly every market, and each category contributed to the region's return to organic sales growth. Fragrance was a standout, rising double digits, fueled by excellent performance of our luxury and seasonal portfolio, led by Jo Malone London, Le Labo, and TOM FORD Beauty. These brands' hero franchises welcome new consumers into the category, while locally inspire innovation and enriching in-store services further contributed to the expansion of this promising category in the region. Mainland China grew low single digits organically, after four quarters of pressure from COVID-19 restrictions and outbreaks. The beginning of the quarter was impacted by the lingering effect of the COVID cases in November/December. In January, retailers were to existing inventory, gradually extracting, such that organic sales declined steep double digits. As the reopening progressed, organic sales grew double digits in each of February and March. Even in this complex quarter in Mainland China, consumer desire for high-quality products elevated the experience as newness was clear, and our brands delivered, led by Estée Lauder and La Mer. For Estée Lauder, skincare fueled its growth. Consumers gravitated to the brand's innovation, and cheered across franchises, most especially its luxury-oriented ReNutriv, as well as Supreme. La Mer further contributed, boosted by its beauty advisor offering, differentiated services, and the launch of a reformulated moisturizing soft cream, which attracted new consumers with its advanced benefits. Encouragingly for the third quarter, our prestige beauty share gains in Mainland China accelerated sequentially, driven by skincare as well as both online and brick-and-mortar. In the Americas, the United States returned to organic sales growth, invigorated by strategic go-to-market initiatives and innovation, to engage existing as well as new consumers. We're originally going to hero and winning streak of innovation, with the latest being multi-peptide eye serum, which is bringing in the new consumer demographic. Estée Lauder's introduction of the revamped nutritious franchise focused on Gen Z with all new skincare products and launched exclusively with Ulta Beauty realized strong initial uptake. Looking at makeup in the United States, M·A·C, Clinique, and Too Faced fueled excellent performance with targeting initiatives to serve various consumer demographics across freestanding stores, specialty-multi, and department stores. For Clinique, it is a case study in successfully leveraging vital success of a product. In its case, Almost Lipstick and Black Honey to drive organic sales growth in many subcategories. Across regions, emerging markets showed their promise as a long-term growth engine. As our in-market team executed with excellence to meet the local needs of consumers, the double-digit organic sales growth in emerging markets this quarter extends our fiscal year-to-date momentum with strong contributions from India and Brazil. Globally, our diverse portfolio brands served as a powerful catalyst for growth. M·A·C, Tom Ford Beauty, The Ordinary, and Le Labo each contributed strong organic sales growth and demonstrated again to be ahead across our large scale and developing brands. M·A·C with its global reach, service-oriented freestanding stores continue to realize the evolution of the make-up renaissance as markets progressed in recovery from the pandemic. Furthermore, the brand leverages its market-leading EMV ranking with high visibility and product launches in makeup. Consumers also embraced M·A·C new Hyper Real franchise in skincare, which should represent an incremental growth engine for the brand over time. Importantly, Hyper Real is another example in our portfolio of exciting east-to-west innovation as it was born in Asia-Pacific and launched globally. Tom Ford Beauty delivered double-digit organic sales growth excelling across fragrance and make-up. In fragrance, the Private Blend Cherry Collection was an instant hit while the brand's extension of Tom Ford Noir Extreme Eau De Parfum into the parfum category caters to consumers seeking intensity and the highest quality. We are thrilled to have reached our brand portfolio last week when we acquired Tom Ford, a power play in luxury with promising growth opportunities ahead. The deal is a wonderful outcome of our successful journey with the brand, which began when we collaborated to create TOM FORD Beauty over 15 years ago. The Ordinary ingredient-focused products prospered in its heritage as well as in new markets, evident by the brand's very successful February launch in the Middle East, while Le Labo continued to evolve from strength to strength globally, rising 60% organically. In closing, while we are lowering our outlook for fiscal year 2023 to reflect the deeper pressure in Asia travel retail, given its standard recovery and related retail inventory tightening, we are encouraged by the strong momentum in the rest of our business. Looking ahead, we are focused on a strong acceleration, balanced organic sales growth across regions, categories, and channels, and progressively rebuilding margin. Indeed, consumer demand is robust for our diverse portfolio brands in developed and emerging markets globally, evidenced in both organic sales growth and retail sales trends. This drives our confidence in the future. To our employees, I extend my deepest gratitude for your exceptional dedication to our company and each other amid a difficult external environment. You have demonstrated an unwavering passion to exceed consumer desires around the world with our beautiful portfolio brands. I will now turn the call over to Tracey.

Thank you, Fabrizio, and hello, everyone. Our third quarter organic net sales declined 8% and earnings per share decreased 75% to $0.47. As Fabrizio mentioned despite continued challenges in our Asia travel retail business, we experienced accelerated growth across our markets globally, with nearly every market expanding as they progressed through various stages of recovery from the pandemic. From a geographic standpoint, organic net sales in our Asia-Pacific region rose 7%, with nearly all markets contributing led by Hong Kong, which doubled in size partially due to the return of Chinese travelers, while Australia grew nearly 50% and Japan rose double digits. Mainland China also returned to growth this quarter, showing positive signs of recovery in February and March, after the pressure from the increase in COVID cases and slower retail traffic in January. Throughout the regions, markets continue to progress and recover with fewer COVID restrictions compared to last year, leading to growth in all product categories with the return of brick-and-mortar traffic. Strong double-digit growth from the regions in emerging markets contributed one point to Asia-Pacific's growth. Organic net sales in the Americas grew 6%, led by the United States. In North America, organic net sales grew mid-single-digits, reflecting growth in skincare, makeup, and fragrance. The Ordinary, M·A·C, and Le Labo excelled, each rising double digits in the quarter. Specialty multi-growth, including distribution expansion, drove the increase in brick-and-mortar along with contributions from freestanding stores and department stores. In Latin America, organic net sales grew double digits, benefiting from growth in every country and in all product categories, with particular strength in makeup and fragrance. Organic net sales in our Europe, the Middle East, and Africa regions fell 24%, driven entirely by the travel retail business. Our global travel retail sales continue to be pressured by our Asia travel retail business, which Fabrizio described. Outside of Asia, we experienced double-digit sales growth in travel retail, as international travel increased throughout Europe and the Americas. The overall performance in travel retail more than offset the organic net sales growth from the rest of the EMEA region, where we drove strong performance in all product categories and from nearly all channels of distribution. Organic net sales rose across both developed and emerging markets, led by the United Kingdom, Germany, France, Italy, and Turkey, as the progression to recovery continued and tourism resumed. From a category standpoint, fragrance continued its momentum as organic net sales rose 14%. Strong demand for our products and high-touch services, as well as innovation, fueled growth across every geographic region. TOM FORD Beauty, Le Labo, and Estée Lauder each grew double digits in the quarter. Organic net sales in hair care grew 3%, and sales were virtually flat in makeup. Makeup growth in the Americas, Asia-Pacific, and the markets in EMEA, excluding travel retail, was offset by the pressures in Asia travel retail. M·A·C and Clinique continue to drive makeup recovery and double-digit growth from TOM FORD Beauty and Too Faced also contributed. Nearly every market in Asia-Pacific realized strong growth in the category, partially offset by softness in Mainland China. Organic net sales in skincare fell 17%, due to the pressures effecting Asia travel retail. The declines from La Mer and Estée Lauder were partially offset by standout performance from The Ordinary and M·A·C. The Ordinary benefited from strong growth in specialty multi-channel, particularly in the U.S., as well as from geographic expansion into India and the Middle East this year, as well as the success of new product innovation. The launch of M·A·C's hyper-real product franchise expanded its offering in the category, and contributed to growth. Our gross margin declined 750 basis points compared to last year, largely due to the slower-than-expected recovery in Asia travel retail. This includes obsolescence charges, higher promotional costs, and marketing expenses that drove increased consumption, along with excess overhead absorption in our plants due to the pull down of production throughout the year, given higher inventory levels and less favorable brand and category mix. Operating expenses increased 570 basis points as a percent of sales, driven largely by the reduction in sales. We continued our investments to support recovery markets in areas such as advertising, promotional activities, and innovation, which collectively increased 230 basis points compared to last year. Operating income declined 66% to $360 million, and our operating margin contracted 1,320 basis points to 8.4% in the quarter. Despite the volatility that has significantly impacted net sales, we have sustained certain of our strategic investments to support recovery in select markets and the strengthening of our multiple engines of growth. We continue to invest in areas integral to long-term profitable growth, including innovation, advertising, the growth of our emerging markets, the geographic expansion of some of our brands, production capacity, and consumer engagement. Our effective tax rate for the quarter was 43.1%, compared to 21.3% last year. The increase in rate was primarily due to the expected further reduction in earnings, related to our travel retail business for fiscal 2023. Diluted EPS of $0.47 decreased 75% compared to last year. This was at the high-end of our outlook, despite the significantly higher-than-normal tax rate. The impact from foreign currency translation and foreign currency transactions in key travel retail locations negatively impacted diluted EPS by 1%, and 3% respectively. For the nine months, we generated $1 billion in net cash flows from operating activity, compared to $2 billion last year. The decline from last year reflects lower net income, partially offset by lower working capital. We invested $652 million in capital expenditures and returned $945 million in cash to stockholders through both dividends and share repurchases. On April 28, we were pleased to complete the acquisition of the TOM FORD brand. The amounts paid at closing of approximately $2.25 billion were funded through a combination of cash, including the proceeds from the issuance of commercial paper, and $250 million received from one of the licensees of the brand, Marcolin. An additional aggregate amount of $300 million in deferred payments and 5% interest per annum to the sellers becomes due from the company, beginning in July 2025. We estimate an EPS dilution to the full year of approximately $0.03 to $0.04. And now turning to our outlook for fiscal 2023, clearly this fiscal year has proven to be a perfect storm of higher-than-anticipated volatility, from both global external headwinds and uncertainties surrounding the timing and pace of recovery from the COVID-19 pandemic, primarily in China and Asia travel retail. In August, we expected a gradual improvement throughout the first half of the fiscal year, as markets in international travel began to recover from the impacts of COVID restrictions. However, the actual impacts on our business in Asia travel retail and China to a lesser extent have been far greater than we anticipated, given the prolonged challenges from the pandemic, including a slower-than-expected recovery of traffic and sales conversion in prestige beauty in these markets. Further compounding this pressure is the tightening of inventory by retailers in Hainan. We now expect that a far more gradual return to normal sales growth in Asia travel retail is likely to persist into the first half of fiscal 2024. In addition, higher inflation and currency volatility, as well as promotions in certain markets to alleviate high stock levels, more than offset our price increases and further pressured our business margins. In sight of the volatility in Asia travel retail that delayed the recovery relative to what we had expected, as well as the macro pressures from inflation and currency, we have been encouraged by the faster-than-anticipated improvements across many of our markets globally, as they progress through various stages of recovery from the pandemic. While we are lowering our full-year outlook to reflect continued decline in net sales in Asia travel retail, including the tightening of inventory by certain retailers, we plan to invest in markets where traffic and consumption are returning and expect to return to overall net sales growth in the fourth quarter. This reflects double-digit sales growth in the Asia-Pacific region, including Mainland China, as well as in EMEA, excluding Asia travel retail. The Americas has planned to grow single-digits. Currency also continues to pressure margins relative to the prior year. As Fabrizio mentioned, we are certainly not satisfied with our results this fiscal year and will address plans to progressively rebuild the margin accretive areas of our business beyond this fiscal year from the current year's level. When full recovery does occur from the pandemic, we expect the return to healthy growth of our Asia travel retail business and our related skincare category, supported by a more normalized level of investment in selling, advertising, and promotional activities, reflective of the increased brick-and-mortar traffic. With these assumptions as our backdrop, and using March 31st spot rate of 1.09 for the euro, 1.239 for the pound, 6.872 for the yuan, and 12.97 for the Korean won, we now forecast organic net sales for the full year to decline 75%. Currency translation is expected to dilute reported sales growth for the full fiscal year by 4 percentage points. And we anticipate an additional 1 point of dilution from the impact of certain foreign currency transactions in key international travel retail locations. The impact of sales from certain designer license access is expected to dilute reported growth by approximately 1 point. Full-year operating margin is forecasted to be approximately 11.1%. An 860 basis point contraction from the prior year period, primarily due to the disruptions from COVID restrictions that not only impacted sales in Asia travel retail and Mainland China but also resulted in increased obsolescence charges, discounts, and promotional expenses. Foreign currency impact and the strategic investments I mentioned previously are also expected to pressure margin. We now expect our full-year effective tax rate to be approximately 27%, reflecting the change in our estimated geographical mix of earnings for the balance of the year. Diluted EPS is expected to range between $3.29 and $3.39 before restructuring and other charges, and includes the expected impact of the Tom Ford acquisition I mentioned previously. This includes approximately $0.26 of dilution from currency translation. In constant currency, we expect EPS to decline approximately 51%, which includes a negative impact from foreign currency transactions in key international travel retail locations of approximately four percentage points. While this has been a challenging and disappointing year, navigating through many uncertainties, the strength we are seeing in many of our recovery markets gives us tremendous optimism for the future. Our long-term fundamentals and strategy remain intact, as does our confidence in the long-term growth opportunity for global prestige beauty in our brands, with the investments we have made to sustain long-term profitable growth. On behalf of Fabrizio and the Estée Lauder company's leadership team, we want to extend our immense gratitude to all of our employees around the world. We recognize that this has been an incredibly challenging year for you, and we want to thank you for your extraordinary efforts through dedication and commitment to the company and your resilience as we continue together on our path to recovery. And that concludes our prepared remarks. We will be happy to take your questions at this time.

Hey, good morning, guys. So, I just wanted to touch on the three areas of weakness versus your guidance in terms how Korea and China taking a step back, the magnitude of changes to your guidance stemming from the areas is obviously severe, and it also looks more onerous than peers. So, just as you take a step back and look at the weakness versus what was expected, how much of that do you think more just a timing of recovery in beauty at the consumer level coming out of COVID, or retail inventory issues, which are more shorter term versus the potential for the longer term recovery in the beauty category is low in these areas? So, really just perspective on lower long-term sales potential versus more short-term issues? And I know it's hard to speak relative to peer results and guidance, but it does look like the issues are more severe for Estée versus peers. So, just any perspective on Estée's market share performance in these areas would also be helpful. Thanks.

Okay, Dara, so thank you for the question. In Hainan, as we said in the prepared remarks, we are starting to see during the quarter passenger traffic comeback in Hainan, and that's been very positive. As Fabrizio mentioned in his prepared remarks, we had a group that was in Hainan a few weeks back and saw quite a bit of activity, so we are very encouraged. In fact, Hainan actually reflected the positive retail sales in the third quarter. So, this is the first quarter, the Hainan performance for us has been up and down all year. Some of the swings have been quite severe, but we did see a progression to positive retail sales. I think the thing that gives us more comfort now on a more continuous steady progression of recovery is the fact that the COVID restrictions have been lifted. Therefore, what we were experiencing before with our travel retail business is volatility related to some of the COVID restrictions and the flow of traffic and travel, and people's comfort with travel. That gives us more comfort that we are going to see a recovery. In terms of our experience as it relates to the business and why it has been as significant as it is, when you look back at the beginning of this year, we had very strong momentum coming into the year in travel retail, in Hainan in particular, our July results were up strong double digits. Then, Hainan went into closure, which extended for longer than we had anticipated, but given the results we have seen in July and actually in some previous months, we had expected that recovery would happen faster once the lockdown was lifted, and that didn't happen. Our retailers also expected that recovery. We ended up with more inventory in the trade than what was needed basically for the level of sales that were being done in Hainan. So, our pullback in inventory right now given the pace of recovery that we are seeing, again we are encouraged, but retail inventory needs to come down. Therefore, we are pulling back on our shipments. Korea, we talked about in the last call in terms of what happened in Korea. We basically have a change in the rollback of COVID-19 related supportive measures with Korean duty-free operators, and that too was pretty sudden in the third quarter. The expectation is that we will see travelers come back to Korea and come back to duty-free shopping in Korea, but that has not happened yet. Korea benefits from having a lot of organized tour business from Chinese traveling consumers, and that has been slower to come back. So that certainly is pressuring our fourth quarter as well. Again, it has been difficult to predict the timing of all of this recovery, but we do know the recovery is happening. We don't believe there is an issue at all with prestige beauty. When we look at the recovery we are seeing in the Americas, in other Asia-Pacific regions, and in EMEA, we see a very strong recovery of prestige beauty, and actually you are seeing an acceleration of fragrance, makeup, and skincare.

And Dara, I want to add that, as Tracey explained, it really comes down to the inventory compared to the stage of recovery. A good example is our retail in travel, which is significantly stronger than our net. We experienced a 45% decline in the third quarter versus a single-digit decrease in retail. There's considerable inventory absorption happening with the recovery. The pace of this absorption will largely rely on how quickly the recovery progresses. We anticipate that based on trends in the fourth quarter, retail sales will turn positive. Subsequently, absorption should continue to improve over time and carry into the first quarter of the next fiscal year. I also want to briefly address the situation in China. We have returned to organic growth there, which is fantastic news. We expect double-digit growth in the fourth quarter in mainland China and have gained market share for the second consecutive quarter. It's important to note that the issues with volatility began during the period when Shanghai was closed, which affected us significantly. During those three months of closure, we lost a substantial amount of market share. The good news is that we have now largely recovered that lost market share, and we are back to where we expect to be in quarter four, which will allow for positive market share growth compared to the pre-lockdown period. We said we would aim to recover this in one year, and we are on track to exceed that. Additionally, I want to emphasize the relationship between this travel retail issue and the skincare sector, as it constitutes a significant and profitable category for us. Skincare is experiencing global growth at an asking rate of 6%. We are seeing growth in skincare in mainland China, with our retail performance outpacing the market, and we are building market share in the third quarter, expecting even greater success in the fourth. Estée Lauder and La Mer are driving this growth, with La Mer achieving double-digit growth in retail for the quarter in China, while Lauder is experiencing single-digit growth. In response to the final part of your question regarding our distinct situation compared to peers, I would say that the difference lies in the inventory levels in travel retail and the associated volatility. Additionally, we have a historically larger presence in this highly profitable channel, which during a crisis led to significant challenges.

Hi, good morning everyone.

Good morning.

In response to Dara's question, it appears that APAC and the Americas have actually performed better than expected, which may have contributed to this dynamic. It's important to recognize that companies like L'Oréal have relatively smaller travel retail segments. While this might be acknowledged, the key point is that you have established a distinctive business that is larger in travel retail than many competitors. This sector has seen significant growth over the past few years, providing substantial tailwinds during that growth period, but it has also introduced considerable volatility. As we enter this downtrend, there is a lot of uncertainty. I understand your approach to rebuilding demand and adapting activities in various markets, but I wonder if this market requires a reset to lower levels before discussing validation, or if we only have one more quarter of challenges before significant rebuilding can take place. I appreciate that Korea and China have different dynamics, but the overarching issue is that the volatility in the travel retail market is heavily impacting your business. Additionally, I noticed that the fiscal Q4 guidance range is notably wide, which may indicate a lack of visibility. Could you elaborate on how you plan to approach this guidance amid the uncertainty, so we might mitigate some of these resets? Thank you for your insights, I really appreciate it.

Okay, let me start. Thank you for the question. Our point of view is that, as you said, this is kind of over reset, but then after this reset, travel retail will remain a large very important channel because it's an important channel also for consumer acquisition and it's a growing channel. To grow global market share, to be strong in channel retail remains important, and also in the case of Asia travel retail and China travel retail is very crucial for coverage, because in many emerging markets for China, the coverage of more cities is possible via online, and via the people traveling, because the brick-and-mortars are not there, and are owning a part of the city, which is the reason for high productivity in China. Travel retail is also an opportunity for discovering product for the physical experience for interacting with our product. These are very luxury channels, meaning the experience of luxuries they have. The issue with travel retail has been really during the pandemic the volatility of travel and the interest and the possibility of travel so much impacted the regulation changes. The pandemic's ups and downs, et cetera, obviously during a moment of the pandemic travel retail has been more difficult to predict and has been more volatile to anticipate. But in terms of the positives of the channel in the long-term for brand building, for trial building, for being in accretive and positive profitable channels in the long-term remains intact. We believe that out of the pandemic this will be an important channel. Now, will this be more balanced growth? Absolutely. We have a plan and an interest in balancing our growth and balancing the proportion between all of our business segments, and we will continue to do that. The other thing I want to underline is that the high inventories, as Tracey explained, what was the sequence of events, and the reason why our retailers went for higher inventories, at the beginning of the fiscal year and then we encountered this lower recovery than anticipated, and remember that retailers want less stock. This impacts the replenishment, as Tracey explained. This situation is also affected by our relatively long supply chain, where you need to order and then after that, you receive it. The relatively long supply chain has an impact on the fact that the retailers, when they decide their stock for us, which is not true for every one of our peers, need to make a bet several months before when they receive the products. That issue obviously enabled the worst volatility we have ever experienced for our retailers and for us to estimate with such anticipation. We are acting on this. All the investment we have done, which in part are visible in our short-term profitability pressure, like the manufacturing that we call Sakura in Japan, that the new distribution center in Mainland China and in the near future in Hainan, are all designed for this investment to shorten delivery time. The shortening of delivery time will also reduce the risk of being wrong in the choices in volatile moments. I assume a certain amount of volatility will continue even after the pandemic, but we have done investments to reduce our risk and better manage volatility in this period. The other thing is let's not underestimate the investment in retail guidance that will increase the speed of innovation and reduce the timelines of innovation and will add another impact of better ability to make forecasts in the correct way. So, in summary, we count on continuing to have a strong business in the future. The reset that our retailers and the market are doing for us, but after that we will continue to grow in a more balanced way with better agility to make the right forecasts.

So, as Fabrizio said, we have made some structural changes to the business that going forward should allow us to manage volatility. Hopefully, we will see the level of volatility that we have seen certainly over the past year, but we will have more agility in our operations. To your question on the fourth quarter and what's in our implied guidance, as it relates to travel retail, coming off of the trends that we are seeing in March, the progress of trends that we're seeing through the third quarter, we are expecting that our retail sales and travel retail will be up double digits, and our net sales are down double digits, more than our retail is up. Again, this is another quarter of trying to reduce the inventory that is in the trade, hence the impact that you see in the fourth quarter, and as Fabrizio said, much of that is due to our very strong skincare business. So, we do expect, as I said in my prepared remarks, that some of this will bleed into the first quarter, and perhaps a little bit into the second quarter, but get progressively better. We are working with and partnering with our customers on their programs, and now that traffic has increased back in airports, we are investing in advertising in airports, employing some of the sales staffs that were not there when the airports were empty, and we are working with our brands on great programs and promotions for customers as they return to airports. So, our travel retail team has been quite busy working with our retailers to recapture the growth that we are now seeing, in particular in Hainan and hopefully soon in Korea as well.

Good morning, and thanks for taking my question. So, obviously you had a step back in your earnings power. I am trying to get a sense in terms of how you guys think about the profitability of getting back to 20% operating margins in earnings north of seven. So, I'm just trying to better understand how you guys are thinking about the proper recovery.

So, thank you for the question. I said in the prepared remarks, we expect off of this year, which obviously has been a big setback year for the reasons that we've spoken about, our highest margin category and a very high margin channel being pressured. We do expect a progressive recovery in margin, but that does mean not back to 19% in fiscal '24. And so, we are taking cost actions as we always do. We certainly have cost control measures in place as it relates to areas like headcount, consulting expenses, and other expenses as well. We are in the process now finalizing our budgets for fiscal '24, and certainly will have better information for you in terms of what that margin progression looks like for fiscal '24 in our August call. But it will certainly be more than 50 basis points of margin expansion off of this level, but certainly not to the 19% level.

Hi. Thanks, Fabrizio and Tracey. I was curious about what your most concerns are about for ongoing risk related to your guidance as we have seen. You called out promotions and volatility as well as there are uncontrollable factors regarding the inventory and the channel. And as we think more broadly, you called that previously losing share in independent brands and opportunities in royalty as well as customer data programs, what's your take on how that may give an opportunity going forward as well? Thank you.

Yes. I mean in the prepared remarks, Oliver, we talked about areas that we are gaining share, and so, I think we are seeing strong momentum in some of the recovery markets that are gaining share, inclusive of China, and China is a real indicator for what we can expect when some of the areas that have been suppressed this year, like travel retail Hainan and in Korea, when Chinese traveling consumers returned to Korea. Those things are quite positive. We have strong innovation programs as well to support our growth for certainly next year as well. The fact again, the biggest volatility that we've seen this year has been in some of the COVID restrictions in certain markets that have been lifted. It’s just a matter of the timing in the case of that recovery. We see a little bit better, but I'm a bit cautious, obviously, given what we have experienced this year, but recognizing that trigger is what has really created as much volatility for the reasons that we spoke about. We are feeling a bit better. There will still be volatility in the fourth quarter, and there will be volatility next year, but we have always been a company that’s been relatively good at managing volatility. This year, given the severity of it, and the severity in the channel of operation that it happened has caused us to have these results. Rest assured, myself, Fabrizio, and the entire management team are diligently working on recovering our profitability, and certainly recovering growth, and our brands continue to be very strong with consumers.

Yes, and just to add, Tracey explained everything, but I want to tell you that our retail globally is strong, and in our key markets, we're also growing market share. I already said it, but I want to repeat it; the market share growth in China Mainland is really encouraging because we already made that all work was lost in the Shanghai closure period. The market share growth in EMEA is very strong, and we've seen market share growth in many emerging markets that are doing well. I mentioned our emerging markets are growing 17%. The market is growing about less than 17% in some emerging markets, and in North America we are growing again, although not in the U.S. market share, but we are growing market shares in Latin America and many other places. Our demand is very strong. The other thing that I mentioned already, the several brands that are doing well is very encouraging, but I believe in this quarter the key attention is on skincare. On skincare, we have La Mer growing, Estée Lauder doing well also in China. We have double-digit skincare growth in Europe and Latin America. We have single-digit skincare growth in the U.S., but again, back to growth. We have exciting innovation plans, as Tracey said, but let me give you a few examples; we just launched Clinique, we also surged one of our sun protection products, and The Ordinary and multi-peptide eye serum. We had launched The Ordinary in India and the Middle East with extraordinary results, and M·A·C had a real strong performance in the skincare area. So, all the skincare makeup brands are where we are leveraging very well with good success. Importantly, we had our hero upgrades in the high luxury area. So, La Mer Supreme, ReNutriv Ultimate Diamond, which are going out, that are very important for the Asia trends, where luxury skincare is growing more than skincare in general on average. So, a lot of signs of strength in the fundamentals of demand for our brands are very evident. We are going through an inventory issue and with the profit pressure created by this tight inventory issue, and we are going through focus on sellout, retail acceleration, and profit building as the next steps.

Great, thanks. Good morning. So, one thing that hasn't come up is just visibility into what's in your inventory outside of traditional retail. We know that, Fabrizio, you have spoken many times over the years about travel corridor shifting, and particularly, we think about the further development of Asia travel retail broadly. But there are also shoppers that move around and buy in bulk, and there has been a lot of conversation in the industry about visibility and controls around that practice. I heard your comments on encouraging progression on share and retail sales turning positive in Hainan and so on, but I was curious about what you're doing, I guess (a) visibility into kind of untracked retail, if you will, (b) anything that you are thinking about changing control-wise to sort of have a better read on the quality of sales going out the door from some of your travel retail channels? And then finally, putting clarity on all of it, do you expect the inventory drawdown dynamic to be completed in the fourth quarter, or should we think about there's still being a mismatch between sell-in being down and sell-through into the first quarter of '24? Thanks.

So, Lauren, let me take that last one. Yes, we do expect that our sales will be down again in the first quarter and pick up in the second quarter. That’s the cadence that we are seeing right now. Again, it much depends on retail sales, and again, as we said, we are encouraged by how retail sales have picked up in Hainan, not as much in Korea at the moment, but we remain encouraged that will happen as well. The pace of retail, which has been slower, again than we expected this year, will determine how quickly we resume shipments. We do have some very exciting new products that we do hope that we can actually ship them in the first and second quarter, but again, with the activities that we have going on with our travel retail partners, I believe that we will see a continued acceleration of retail like we started to see in this quarter.

Yes. And Lauren to answer the first part of your question, we sell to our authorized retail customers. We do not sell directly to their goods. However, as you alluded to, during COVID, there have been some temporary government policies, for example, in Korea, that were put in place to support the travel businesses, and the travel retailers in this very tough moment, where they were reaching the brink of bankruptcy because everything was paused. Now that— and you're right there's not complete visibility on that part, during COVID there was less visibility, but what they were doing in that moment when the policies were allowed. Now these policies are changing. There is an interest of the industry in general in our retailers, which is the most important factor, that there is an interest in going back to regular travel, as regular travels go, because this is a more profitable and more interesting business for them as well. Now that airport traffic is gradually recovering, we expect a rebalancing of the total market, and we expect an increased visibility on all of these areas, and we are also putting extra focus as Tracey explained before on retail sell-out onto regular travel. With new investments, we are rebuilding the people, the staff in the airports, and we are rebuilding the advertising there, for what Tracey already established, and our interest is to support our retailers in this transition, and we are really pushing this transition at the maximum speed. During COVID, there was less visibility. There will be more visibility in the future and more control.