The Estée Lauder Companies Inc. (EL) Earnings Call Transcript & Summary

Good morning. I am William Lauder, Executive Chairman of the Estée Lauder Companies. Welcome to the 2020 Annual Meeting of Stockholders. For those of you who attended our meetings in the past, you know how much we would have enjoyed meeting with you in person to celebrate our 25th Annual Meeting as a public company. Given COVID-19, we are holding this meeting virtually. I am now calling the meeting to order. As we begin, I want to start off by thanking the stockholders for your continued support of the company and the Board members for their ability to adapt to the new ways of working and their guidance through these challenging times. As you know, the Board recently increased the quarterly dividend to $0.53 per share, up from $0.48. Based on the preliminary report of the Inspectors of Election, we have a quorum, and we will now proceed with the formal business of the meeting. The Inspectors of Election have issued a preliminary report stating that shares of Class A common stock and Class B common stock present in person or represented by proxy at this meeting together represent over 95% of the total votes entitled to be cast. We will now open the polls and proceed with the voting. If you are a stockholder as of September 11, 2020, the record date, and have already voted, you do not need to vote now unless you wish to change your vote. If you are logged into the meeting as a stockholder and would like to vote, you may do so by using the voting buttons on the meeting screen. Joining me today are Fabrizio Freda, our President and CEO. Rainey Mancini, Senior Vice President of Investor Relations; and Spencer Smul, Senior Vice President, Deputy General Counsel and Secretary. Also on the line are a representative from PricewaterhouseCoopers, the company's independent audit firm beginning in fiscal 2021; as well as a representative from KPMG, the company's former independent audit firm. And finally, members of our Board of Directors are attending today's virtual meeting. Later in the meeting, Fabrizio will review highlights of our recent financial performance. Before we present the items to be voted on today, Spencer will cover some formalities relating to today's meeting.

Thank you, William. This meeting will be conducted in accordance with the agenda and rules of conduct, which can be found in the meeting materials on the meeting site. We will have a question-and-answer period later. Stockholders who would like to ask questions may do so using the question box located in the bottom left corner of the meeting screen. Some of the remarks made today by William Lauder, by Fabrizio Freda or other company representatives might contain forward-looking statements. They may discuss expectations about future performance, strategic goals, product launches and the like. However, our actual results may differ from those that we expect. In the company's filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q, you will find additional information about factors that could cause actual results to differ materially from these forward-looking statements. The discussion of our financial results excludes the impact of restructuring and other charges and adjustments. You can find a reconciliation between GAAP and non-GAAP figures in the Investors section of our website. Additionally, certain references to online sales, including sales of our products from our online channels, including brand.com and third-party platforms, as well as estimated sales of our products through our retailers' websites. On the record date, the company had over 226 million shares of Class A common stock, and over 135 million shares of Class B common stock outstanding. We have received an affidavit from Broadridge Financial Services stating that proper notice of the meeting was made available on the Internet and mailed to stockholders of record as of the record date. Present today is a representative of the Broadridge Financial Solutions who is acting as Inspector of Election and has signed the required oath. There are 3 proposals to be acted upon at today's meeting. The first is to elect Charlene Barshefsky, Wei Sun Christianson, Fabrizio Freda, Jane Lauder and Leonard Lauder as Directors in Class 3 for a term expiring at the Annual Meeting of Stockholders in 2023. The second proposal is to ratify the appointment of PricewaterhouseCoopers as independent auditors of the company for the fiscal year ending June 30, 2021. And the third proposal is to provide an advisory vote to approve executive compensation. I will now turn the floor back to William.

The polls are now closed. Spencer, please report the preliminary results of the voting.

Thank you, William. Because the polls were closed only moments ago, the final tabulation will be available after the meeting. The preliminary results show that all Class 3 Director nominees have been elected to serve as directors; the appointment of PwC has been ratified; and the advisory vote to approve executive compensation has been approved. Final results of the voting will be provided on our Form 8-K filed with the SEC. William?

Thank you, Spencer. There being no further business, this meeting is adjourned. We will now take a few minutes to share with you some highlights from our fiscal year 2020. First, I'd like to thank you again for joining us. While our meeting looks a bit different this year, we're thrilled to have our valued stockholders with us today. Fiscal 2020 was truly a year without parallel, and we are proud of our many accomplishments in the face of a challenging global landscape. I'd like to share my deep gratitude to you, our stockholders, for your support of our company in this particularly challenging time. I'd also like to thank President and CEO, Fabrizio Freda, and our executive leadership team. Under their amazing leadership, our ELC family is continuing to power through extraordinary circumstances as we drive growth across key areas of the business, further strengthening our position as the leader in global prestige beauty. As we navigate the COVID-19 pandemic, we are being tested in many ways, and I am proud of how we are continuing to honor our values and commitments during this time. We have quickly and strategically implemented a series of initiatives designed to help ensure the health and safety of our employees, including the creation of the ELC Cares Employee Relief Fund, which is dedicated to supporting employees worldwide facing financial hardship due to COVID-19. Additionally, the company is producing at least 1 million models of hand sanitizers for high-need groups and populations, including frontline medical staff at our Melville, New York; Witney, U.K.; Oevel Belgium; and Lachen, Switzerland manufacturing facilities. Across our brands and regions, ELC has contributed to more than 25 relief initiatives, with plans to continue supporting further efforts moving forward. This year also marked monumental shifts as a result of systemic racial injustice across the world, and in the United States, in particular. As a company founded on the values of respect and inclusion, we stood and continue to stand with our black employees, consumers and communities. As such, we pledged $10 million over the next 3 years from the company in foundation employee matching gifts and the Lauder family to support nonprofits and other organizations. We know that financial support alone is not enough and also promised to be better participants in building racial equity. To that end, we made a series of commitments across our business to better build a stronger culture, both within and outside the company. These commitments, along with the continued dialogue with employees and the establishment of meaningful partnerships, will help us in our continuous efforts to make equity a reality at the Estée Lauder Companies. Throughout this year, we have also built upon our culture of belonging by harnessing the power and creativity of our employee research groups and expanding them globally. The Women's Leadership Network launched a great success in Paris and London, with global kickoff events featuring executive sponsors: Executive Group President, Jane Hertzmark Hudis; Executive Vice President and Chief Financial Officer, Tracey T. Travis; and Vice Chairman, Sara E. Moss. I'm also proud to share that thanks to Sara's visionary leadership, we recently launched the open doors women's leadership training pilot program, which combined experiential learning and individualized executive coaching so our participants develop core leadership skills. We look forward to continuing to expand these important programs in the future and thank Jane, Tracey and Sara for their tremendous efforts. Holding on our long-standing tradition of community involvement, we recently launched a nonpartisan employee-led civic engagement task force to encourage, empower and inspire employees' civic efforts in their communities. This year, the initially U.S.-focused task force concentrated on supporting voting, including expanding our paid time off to vote policy, equitably across our employee populations conducting a voter registration drive and providing employees with resources to actively participate in the voting process. We also partnered with Civic Alliance, a nonpartisan group of businesses working to increase the voter participation. To support these efforts, we were the first beauty company to join and now are part of their leadership group helping to steer over 1,000 of the company's civic efforts. We are proud to be fostering a culture of civic engagement within our company and look forward to expanding our efforts next year. In addition, last month marked the 28th anniversary of the Estée Lauder Companies' Breast Cancer Campaign. As our largest corporate social impact program, the campaign remains the hallmark of our organization and took a digital-first approach this year to prioritize the health and safety of our employees and all stakeholders. Despite this challenge, our global communities rallied together virtually to support the campaign's many initiatives. We're proud to announce that through fiscal '20, the campaign has raised more than $99 million to support global research, education and medical services, with more than $80 million funding 321 medical research grants through the Breast Cancer Research Foundation. We continue to be recognized for our unwavering commitment to creating a home for the industry's best talent, by providing an inclusive culture and collaborative workplace. For the third consecutive year, we were included in the Bloomberg Gender Equality Index. For the fourth consecutive year, we achieved a perfect score of 100% for the Human Rights Campaign's Corporate Equality Index, and we were once again named one of HRC's Best Places to Work for LGBTQ Equality. We're also honored to be part of Working Mother Magazine's top 10 best companies for multicultural women. It's wonderful to see the company acknowledged in such meaningful ways, a true reflection of the unwavering passion and dedication of our employees around the world. In closing, I would again like to extend my deepest gratitude to Fabrizio; the executive leadership team; my father, Chairman Emeritus, Leonard A. Lauder; and the Board of Directors. Their leadership is critical to the ongoing transformation and growth of our business amidst a continually evolving world. While we faced many challenges this year, I am incredibly proud of all that we have accomplished. As we continue to bring the best to everyone we touch in fiscal '21 and recognize 75 years of the Estée Lauder Companies, I know my grandparents, Estee and Joseph Lauder, would be equally as proud of how we are continuing to drive the company forward and honor their tremendous legacy. And with that, I will now turn it over to Fabrizio to tell you about the highlights of our last fiscal year and our strategy before we begin our question-and-answer period. Fabrizio?

Thank you, William, and hello, everyone. I hope that each of you are in good health as the world continues to confront COVID-19. Our hearts are with those in passes, and our focus remains first and foremost on the safety well-being of our employees, their families and consumers. We appreciate you joining us to review what was an unprecedented year, one in which our employees' compassion and creativity shown brightly, and to hear about the vibrant opportunities of tomorrow for the Estée Lauder Companies. Fiscal year 2020 was a year without parallel for our company. We delivered one of our strongest first half on record, and navigated with agility through an unprecedented pandemic in the second half. We expanded our share in global prestige beauty and strengthened our leadership position in travel retail. Our online business surged worldwide doubling in the fourth quarter, such that online grew significantly to represent 22% of sales for the fiscal year. Our innovation proved highly desirable once again, and represented over 25% of sales. Our share gains were driven by outstanding performance in the skin care category, led by growth in the Estée Lauder, La Mer and Origins brands, and outperformance in Asia Pacific as Mainland China and Korea prospered. The Estée Lauder brand was magnificent, delivering its third consecutive year of double-digit sales growth. For fiscal year 2020, in constant currency, net sales declined 3%, and earnings fell more than 20% as the rapid onset of the pandemic twist the cost actions we took in response. In the first half of fiscal year 2020, sales rose 14%, and adjusted EPS climbed 21%. We were well on our way to a third fiscal year of double-digit sales and adjusted EPS growth. Despite extensive temporary store closures worldwide in the second half as the COVID-19 pandemic took hold, sales fell only 20%, and we were profitable as we quickly pivoted to online to capture consumption and adjusted our cost structure. Once again, we increased stockholder value. For the fiscal year, we've largely overperformed the S&P Consumer Staples Index, producing a total stockholder return of nearly 4%. Despite the actions we took to preserve cash early in the pandemic, we still returned $1.4 billion to stockholders through share repurchases and dividend payments. Thanks to our disciplined cash management and strict cost controls, we were able to resume our dividend payment in the first quarter of fiscal year 2021. And as we announced last week, we are increasing the quarterly dividend rate by 10% beginning with the December payment. Looking ahead, our strategy of multiple engines of growth is helping us to adapt quickly in a fast-changing environment. Over the past several years, we have these capabilities in continuous transformation, allowing us to prepare for the future, while running the business today and reinforcing our values and commitments. Our next fiscal year is off to a promising start relatively to the ongoing challenges of COVID-19. In the first quarter, net sales fell only 9% in constant currency. We successfully adjusted our cost structure to minimize the deleveraging effects of lower sales, resulting in an operating margin of 20%, very close to the first quarter of last year when we had double-digit sales growth. Every category improved sequentially as sales growth in skin care accelerated organically in the area -- in the era of self-care. Sales in health care were nearly equal to the year-ago quarter and a substantial improvement from the last quarter of fiscal year 2020, driven by tremendous growth online and innovation. Fragrance improved significantly from the fourth quarter, as our luxury and artisanal fragrances are booming in Asia Pacific, while makeup also made great strides sequentially despite pressure in the lip subcategory. We continue to believe that prestige beauty is a highly attractive segment for the long term. The industry combines the relatively affordabilities and the continuous replenishment of consumer staples with a strong repurchase rate driven by high-quality products and the premium pricing of luxury brands. Our diversified prestige beauty portfolio of brands, categories, geographies, channels, consumer segments and price points, give us many levers to fuel the business in times of prosperity as well as during more challenging times. In this most difficult moment, our multiple engines of growth strategy is invaluable. We have a compelling array of brands across our 4 categories, with price points from entry level, prestige to luxury, serving consumer tastes from classic to progressive. We have long believed in the excellent growth prospects of online, and have been investing in this dynamic channel for 25 years. Our presence is global. With online sales in over 60 countries on platforms, including direct-to-consumer, retailer sites and online store plays. We are highly diversified with over 300 brand.com sites, over 60 brand boutiques on platforms such as Tmall, and over 1,700 retailer sites. These are also valuable media platforms amplifying our company's core strengths in creativity and storytelling. Our total online business surged worldwide in fiscal year 2020, we delivered nearly double-digit organic sales growth in the fourth quarter and 50% growth for the year, which is a testament to the capabilities and scale we have built. In top markets like the United States, China and the United Kingdom, online represents 40% of sales in the fiscal year. Consumers have discovered new shopping habits online that are enduring, and this is true of all ages. We have developed incredible skills in online marketing, particularly the use of social media. Social media campaigns have both broad and highly targeted consumer reach with a much higher return on investment than traditional advertising. Social media is more than a vibrant channel for marketing, and it is increasingly a vibrant channel of commerce. During the pandemic, our store beauty advisers turned to social media to reach their consumers while brick-and-mortar stores were closed. New technologies of social media and our brand size have also become powerful growth drivers. We have exciting high-touch services live chat, virtual try-on, video consultations and live streaming. Engagement is phenomenal as consumers are spending considerable amounts of time with this and our other online services and conversion is growing strongly. Encouragingly, consumers have discovered that we can have true high-touch experiences online. Innovation is a fundamental to our strategy. And even in the unique year of fiscal year 2020, it once again represented over 25% of sales. It will play a vital role in fiscal year 2021, powering the engines of the moment and what we expect to be engines of the future. Our focus on hero products and hero franchise drives loyalty and fuels long-term profitability, while our focus on local relevance enable us to best meet the diverse needs of consumers around the world. Our speed to market initiatives continue to deliver on track and our success rate of innovation are significant. Let me give you some recent launches across our total category. In skincare, Estée Lauder introduced the breakthrough next generation of its brand icon, Advanced Night Repair serum. This powerhouse serum still has all the benefits and texture loyalty consumer now and loves and now features innovative new technology and relatively benefit to recruit a younger consumer. Its package has been modernized into a luxury glass bottle. That is also recyclable in support to our sustainability initiatives. Luxury brand, La Mer, launched its new The Concentrate as a potent barrier serum with the new protected antioxidant benefit. Clinique Even Better Clinical Interrupter is powerful brightening serum. In Nykaa, M.A.C Powder Kiss Liquid Lipcolour is a back to former that delivers a matt finish with 10 hours of hydration and wear. Bobbi Brown Intensive Skin Serum Foundation is truly makeup with skin care benefits. It delivers a radiant flawless look and finish, with protection from environmental stressors. In fragrance, luxury and artisanal scents has been popular globally. Tom Ford new Rose Prick playful combines all rose floral with a little spicy tender. Jo Malone new Fig & Lotus Flower is a light floral inspired by the ancient Hanging Gardens of Babylon. Le Labo's new Citron 28, Seoul products and other citrus collection showcase the strength of our locally relevant innovation. In health care, we recently introduced Aveda Botanical Repair collection for damaged hair. The launch spans Aveda approach to vegan, plant powered and cruelty-free products. In Bumble and bumble enhanced its Bb.Curl to reduce frizz and boost hydration. These are just a few of our new offerings, and there are many more to come throughout the year. Last week, we released our fiscal year 2020 Citizenship & Sustainability Report entitled, Beauty Inspired, Values Driven. We are incredibly proud of the contributions of our employees around the world in accelerating our citizenship and sustainability efforts and ensure their success in this year's report. The report highlights the achievement of our 2020 ESG goals as well as meaningful progress towards our 2025 goals. These milestones were reached across our citizenship and sustainability priority focus areas despite the challenges of the pandemic. The company achieved net 0 carbonization and 100% renewable electricity globally for our own operations. Building upon this achievement, we also met our goal to set science-based initial reduction targets, addressing Scope 1 and 2 for our daily operations and Scope 3 for our value chain. This is a new level of ambition and dedication to climate action for Estée Lauder Companies. Setting targets in line with the latest climate science is a testament to our values and our commitment to manage our business for the long term. We are also proud to have reached 0 industrial waste to landfill for our manufacturing, distribution and innovation sites. And we are on track to provide access to training on basic sustainability and corporate social impact programs for our employees worldwide this month. In addition, over the past 2 years, our programs and grants focused on health, education and environment and positively impacted the lives of more than 20 million individuals worldwide. As William noted in his remarks, we made strong commitments to our black employees and black consumers to work towards racial equality within our communities and as a company to achieve racial equity within our organization. We are extremely dedicated across our leadership to achieving this vision. We aim to be the most inclusive and diverse beauty company in the world, and to be both the employer of choice for diverse talent and the brand of choice for diverse consumers. To achieve this, we know we must continue to listen and learn and hold ourselves and our leadership accountable. In our fiscal year 2020 Citizenship & Sustainability Report, we disclosed enhanced employee diversity metrics and information on paid equities. We believe this transparency to all our stock -- stakeholders is important to holding ourselves accountable to our vision, while importantly, setting the stage to share our progress. In summary, our multiple engine of growth strategy has been incredibly successful. This has resulted in superior total shareholder returns over the last 5 years. Our stock is right in place the S&P 500 and S&P Consumer Staples Indices. Our diversified portfolio will continue to power our future, driven by the growth and profitability engine of skincare, online, our Asian travel retail and high potential markets and brands. These engines will be supported by outstanding innovation and great cost discipline. Looking ahead, we are even better positioned to embrace the opportunities of tomorrow. Thanks to our strong and passing company values and proven strategy built on multiple engines of growth, we continue to be beautifully positioned as the best diversified pure play in prestige beauty with the house of the most dedicated and talented employees. Thank you. And let me turn it back to William now.

Thank you, Fabrizio. We have allocated approximately 15 minutes for today's question-and-answer session to address questions submitted by shareholders. Rainey, please go ahead with the first question.

Thank you, William. We have received a number of questions submitted by stockholders, many of which cover similar topics. The first question is, could you discuss the company's online strategy? Why are the company's brands sold on some platforms like Tmall in China and not others like Amazon?

So our online business has been very strong and indispensable during the pandemic. The combination of our brand.com, retailer.com, third-party platforms represents now 22% of sales in 2020, and it continues to grow as we speak. We have been investing for more than 20 years to develop a strong direct-to-consumer business and also support our retailers online. We have very strong business with Tmall in China and similar sites worldwide. Where we have our shops on the mall, we provide a luxury experience and maintain consumers' informations. There are other platforms where we don't feel that the service level or the look or the level of control we have on the experience, which allow us to align it to our brand equity, is not sufficient. And in this case, we take different distribution decisions. Our -- we are very serious about our distribution decisions and aligning our brand equities to our distribution. And that's why we call it the model of selected distribution. And selected distribution exist in our brick-and-mortar choices, is existing also in our online choices. Younger consumers are comfortable really online. And the good news of after the pandemic is that older consumers are adapting quickly and becoming more comfortable. Consumers are more and more comfortable buying all categories, even fragrances online. Consumers are driving it with more engagement, more frequency and more of them shop online. We are -- we, and frankly, our major competitors are investing heavily in the experience online, making it more desirable. In some areas, penetration is catching up, namely in Continental Europe. We will continue to invest in this vibrant channel. Our online capabilities include a flexible global distribution network, a common technology backbone, allowing us to roll out new features quickly. Virtual try-on makeup, skincare and hair care, shoppable streaming events, personalized service by voice, by chart or by video and more is a very exciting opportunity.

The next question is, what is your M&A strategy?

Our M&A strategy is pretty clear. The company looks at many brands within prestige beauty. So focused on that. And we are focusing on those that fit our strategic needs and strengthen our business in a product category or in a subcategory or in a geographical region or on a channel. For example, you've seen the beautiful innovation we are having in luxury and artisanal fragrances. Some time ago, we took the decision that we had the goal to grow our market share and to serve consumers better into the area of artisanal fragrance, which is a growing and very appealing segment in the industry, and that's where we focused for some time, some very interesting acquisitions that today are growing, giving us a growing market share in this segment. So that's the way we think, that's the way we strategize about acquisition. Candidates for acquisition must fit our strategic rationale as well as meet our financial hurdles.

Thank you, Fabrizio. The next question, we have had several questions about political activity and donations at the company and among the Lauder family. What is the company's policy regarding these?

The company's policy is that as individuals, shareholders and employees are free to make the choices that they wish. And we, as a company, do not make any contributions.

Thank you. We have several questions on our views regarding increasing our dividend rate. Can you give our philosophy?