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

Good morning, everybody. We're just past the top of the hour, so I'm going to get started. And I am delighted to welcome Fabrizio Freda, who is the CEO of Estée Lauder, as you know. And alongside Fabrizio, I'm particularly delighted that we're also joined by Peter Jueptner. Peter, as some of you might know, was recently promoted to Head of International at Estée, which includes the important Chinese business. So hopefully, very helpful to have Peter join us today and chime in on some of the Chinese questions and also for us to get a picture of some of the bench of talent at Estée Lauder today. So Fabrizio, Peter, thank you very much for joining us.

Welcome.

Pleasure.

And just a quick housekeeping comment. There are QR codes around the room that you can scan and submit questions to submit to me. I'll get them on this iPad, and if there's any very interesting ones, we'll integrate amongst the conversation as we go through. So feel free to do that. And otherwise, without any further ado, let's get started.

Let's get.

Let's start with China. I think it's probably the elephant in the room. The business has obviously faced huge challenges recently with COVID lockdowns in Shanghai in particular. But I know we've got a lot of generalists in the audience, sort of portfolio managers who may not be completely familiar with what's been going on and in particular, how it's impacted your business. So maybe for the benefit of the audience, could you start with just a little bit of background on what's been happening in China and to your business in particular? And why Q4 is expected to be so challenging.

Yes. As you probably know, as a strategy to stop COVID spread, china government has decided to manage it with a zero-tolerance policy against COVID. This created a lot of closures of entire cities and on the city in particularly Shanghai. So what we saw is starting about mid-March, we saw the closures of a lot of retail, of brick-and-mortar retail. The -- some retailers that could not -- were not asked to close were reducing timing of opening. Overall, the traffic in retail in most of the country really dropped, dropped significantly to minus 40%, minus 50%, minus 60% depending on the part of China. The rules anti COVID also impacted travel, which impacted Hainan, so the Chinese travel retail part, that in -- until mid-May was in the minus 70%, in April of minus 80% traffic. And then on top of this big traffic reduction, we, Estée Lauder, have the distribution center, the main distribution center in Shanghai that distribute both online and brick-and-mortar. And because of this, we got the distribution center almost completely shut down for -- as of March -- as of March 15 exactly and for the entire month of April. So when we reported, this was the situation at the time in China. So less travel retail, less brick and mortar, impossibility to ship to other brick-and-mortar inside retail for some time. And so there was a very big impact on quarter 4. Frankly, that's the reason why there was an impact on quarter 4 that we had estimated. To be clear, those are temporary or these were temporary issues. And we -- as we communicated, we remain very, very positive on the inherent demand of the Chinese consumers. But this was a temporary issue that, by the way, we are familiar with because the same happened in the U.S., in Europe during the 2020 when there were the COVID lockdowns also in this part of the world. So it's a similar thing, but just amplified in term of severity of the lockdown methodology.

Okay. Perfect. And that's helpful sort of background. So we heard from you your Q3 results at the start of May. And at the time you were saying you were expecting Shanghai to start reopening in the middle of May. We're at the start of June now, and it seems like that has started to happen from what we can see here. But maybe you can share with us what are you seeing on the ground now today in Shanghai. Were your distribution centers operational by mid-May as you had expected?

The short answer is yes. Our distribution center started getting better, meaning going from not operating to operating gradually more as of mid-May as we expected. And now, is meaning early June, the very good news is that June 1, Shanghai has reopened. And May 30, Beijing travel -- internal travel lockdown stopped, meaning people can move around Beijing. And as far our distribution centers, early June, we are approaching the 100% capacity. So I would say that the China -- from a point of view, distribution is back. However, I used the word gradual to explain that this is not just from one day to another. It's been a gradual process of improvement. Now from a distribution standpoint is 100%. But also, the situation remains in China, as expected, that the traffic in the store is still below the -- 40% below. In terms of the time of recovery, brick-and-mortar is higher. But the opportunities online now are very strong. So online is back, but brick-and-mortar will more gradually recover. And the other important thing to know that the travel retail parts or the travel to Hainan will also gradually recover, as we said, but will recover more based on when the rules will change. So for example, as at June 1, when Shanghai is reopened, then we expect the travel also to Hainan will improve. But before the reopening of the big cities, obviously, the travel has been improving very gradually or very slowly. So it's a gradual process overall, but the good news is that the distribution capability is, as of early June, is back to normal. By the way, another thing I want to add because worse part was discussed before. The one important element of the recovery was the participation to the 6.18 event, so to the big online event. And the good news is that we are participating. We are in a position to ship to reach our consumers in 6.18. That by the way, started on May 23 and now is the first phase that is finished between June 1 and June 4. So we are exactly in the middle of finishing of the first wave of sales, and we are participating. We have been able to, as I said, do that part of the distribution normally, correctly.

Just a final short-term question. So you're participating in 6.18. Do you have enough capacity to fulfill 6.18 demand and the backlog of demand that has built up as you've taken online orders through April and May?

Yes. I think we have the distribution centers close to 100%. And so we have the capacity to operate as demand will evolve. So the key question remains how demand will evolve. But we have the capacity to serve the market.

Perfect. Okay. I think that's clear on the short term. And as you said, they seem to be transitive impact in the short term. So let's pivot and talk about some of the longer-term Chinese questions. Maybe just starting broadly, how do you view the opportunity in China and maybe with Chinese consumers globally as well?

So we remain very, very keen and strong on the Chinese consumers opportunity in the future. That's the question, correct? How do we view the long term? So as the recovery from the COVID lockdowns will happen, we strongly believe that the acceleration of Chinese consumers will continue and will be there for the long term. So the key drivers that I've discussed in several other occasions, but -- the key driver is the growth of the middle class that in China remains, if you look on a 3, 5 years is the biggest part of the world. And not only just entering middle class, but the creation of high-end part of the middle class is the biggest of the world. The other important driver is the sales per consumer that as I -- I think I presented the numbers at the time of the Investor Day a few years ago. Imagine, this was almost 3 years ago. Since then, this has already doubled, the spending per consumers. And this can still double again and again, until reaching the levels, they should reach at a certain moment of Korea or even U.S., if you make a comparison to what this will happen in the group of high-end middle class. So that's the other opportunity, which is just at the beginning of the journey. Then with the opportunity of distribution, we are in 142 cities with our most distributed brand, Estée Lauder. But other brands are in 40, 50 cities, 30 cities, so enormous amount of distribution opportunities in front of us. We have opportunity to further distribution online. We are very strong in Tmall, and we are going to stay. They are excellent partners. But also now we are expanding in JD, and we are expanding in many other opportunities that will emerge as we go. We are also increasing our social media coverage. So the online penetration both in sense of marketing, access, both -- or consumer access via marketing and in sense of distribution has opportunity to grow. We -- now that the animal testing rules have evolved, we have the opportunity in the future to bring more of our brands, more of our strong brands to China. So we have still plenty of brand expansions opportunity in front of us. Then I believe that one of the most important opportunities globally in beauty is the development of the Hainan duty-free space, which we believe is just the beginning of the journey. I want to remind everyone that Hainan is domestic travel, so it's open to the entire middle class in China. While international travel is only exposed to people having a passport. And so Hainan is not an alternative to international travel. It's much, much bigger opportunity than international travel just because the entire middle class has access to it. And that's explained -- by the way, the incredible results in travel retail during the COVID Western lockdowns, because Hainan was more than substituting the amount of travelers in airports around the world just because it was domestic travel duty-free in China. So huge opportunity. This will continue. Now the great strength of the Hainan opportunity is that this is mainly creating new consumption in small cities, in Tier 3, Tier 4, Tier 5 cities. So it's increasing the penetration and exposure of luxury beauty to the entire population. So great, great opportunity. And then the last thing I want to say is that this -- the productivity per door in China is extraordinary because the traffic is extraordinary. But also, as I explained, we are a limited number of doors in brick-and-mortar, still a limited number of cities. High concentration traffic in places like Hainan, and then a lot of the coverage of the country is done by online, no brick-and-mortar. So the issue that many of the market have, the brick-and-mortar is becoming less productive as online develop, that issue doesn't exist in China. Brick-and-mortar is very productive. Maybe not during a COVID lockdown, but in general. And online is super productive. And Hainan is amazing for that since in luxury beauty, which is a service business as well, the productivity per door is the key driver of profitability. That's why China is a very profitable market as well. And in our assumptions, this will continue for many years to come. So very positive on the long term on China. This is intact. The COVID situation today is temporary in our view. And in fact, we are preparing for investing in growth acceleration in the post-COVID lockdown period.

You touched upon the distribution runway for some of the longer tail of brands beyond Estée Lauder, beyond La Mer. And could you build upon that a bit? Which of that longer tail of brands are you most excited about? It seems like today, the majority of the growth is still coming from those 2 big brands.

Actually, no. I think most -- I would say all of our brands in China are growing, but you are true that Estée Lauder and La Mer are bigger. So let me first say that they are bigger, but they are not finished to grow at all also because they are mainly -- Lauder is serving also makeup and in a little part in China, fragrances. But they're mainly skin care brands. And in China, differently from the West, 65%, 70% of the market opportunity is skin care. So Estée Lauder and La Mer are the biggest, not only because they've been earlier they're -- and by the way they're doing fantastic job. But also because they are completely in the biggest part of the Chinese market in luxury beauty, which is skin care. And so those 2 brands are at the beginning of a journey, particularly because the biggest segment and one of -- sorry, one of the fastest-growing and one of the very big segments in China is luxury skin care beauty. So La Mer is growing. Many of our competitors, very luxury brands are growing. In our portfolio, Estée Lauder is part of the brand, which is called Re-Nutriv, which is in the luxury space like La Mer. Brands like Tom Ford, which are extraordinary in China, is in the high-end luxury segment. That segment is explosive in China. Now sometimes I get the question, do you see China consumer moving down? Frankly, if you look at the market and even in our sales, it's the opposite. You see consumer trading up to the luxury part of the business. So Lauder and La Mer, solid brands. They are -- both of them are in the top 5 brands in China in prestige luxury. So extraordinary, strong brands with great critical mass, so that story will continue. Now we have new brands coming. As I said, makeup is growing in China, and the long term will grow because today is still much smaller percentage of the business that is in the West. And MAC is an important brand. Tom Ford is in the makeup luxury segment. MAC is in the entry price of prestige segment. So those brands are also growing and accelerating over time. We have Bobbi Brown, which is also is in the makeup, which is doing very, very well. And then Tom Ford has also a fragrance, luxury business, and we have Jo Malone in the fragrance segment, which also are very, very, very strong. And they will -- are growing, but as you say, will reach the critical mass where their growth will be even more relevant to the results of the total market. Just to mention a few brands, but those are extraordinary. The other thing that is important to understand that the fragrance luxury segment in China is at the beginning of a long journey. Because in China, just a few years ago, about 5% of the total luxury market was fragrances versus 30%, 40%, 50% in countries in the West, depending by market. So huge opportunity to grow. This growth has started. But it start in a different way. In the West, it's the entry price of fragrances. So many designer fragrances, entry that are very big. In China, it's the other way around. Are the very luxury, sophisticated, artisanal fragrance brands, which are growing the fastest and getting the biggest part of the market. We anticipated that. That's why as a company, we decided several years ago to look for market leadership of this high-end segment with brands like Tom Ford, Jo Malone, Frederic Malle, KILIAN, Le Labo. So all these brands now are an extraordinary opportunity to continue to tap in the growth of the fragrance segment in China. And as I said, we are also tapping with Bobbi Brown, MAC, Tom Ford in the makeup segment. So -- and again, I cannot discuss the details, but there will be more brands deployed in China, as I said before, which also will participate. So in China, to conclude on the brand side. You need to look at China the same way we look at our global portfolio. As we explained in the Investor Day, we have the big brands, which are $1 billion plus; the midsized brands, which are brands, which are growing globally getting toward the $1 billion or more; and then we have the small brands that we seed and develop, the one they will be our midsized brands; and then we acquire new brands, they become small and start growing, et cetera. So we have a process of developing the portfolio. Now the same model we're using in China. So no surprise. We have 2 brands, as you said, are very, very big. We have some midsized brands which are growing, have clear potential. And we are going to launch more small brands that will then be and continue to fit the overall growth portfolio for the long term.

Perfect. I want to come back to the M&A model a little bit later, but just tying it off on China. We've got a question from the audience that also is pretty similar to one that I was planning to ask anyway. So the question is around the emergence of local Chinese brands and local Chinese competition. And can you talk to what you see? And looking forward, what do you think that competitive landscape and the pressure from those local brands is going to look like over the next 5 to 10 years?

Yes. No. What I see -- first of all, it's a very good question, a very fair question. We have seen this since a long time. Also because the development in local brands is not only a China thing, it's happening in every single emerging markets in the story of the last 20 years. This is just the process. So as you know, we do this Compass, which is the view of the next 10 years that Peter started many years ago, and we just now updated in the last few weeks. Again, in that process, it was always clear that local brands will have developed. The question is, how do we participate. And so the first good news is that the underlying growth of the Chinese market is so strong that even if you assume that the local brands 5, 10 years from now in luxury will be 30%, 40% of the total, the remaining 70% will be much bigger than today, yes. So there is growth. It's not a zero-sum game. It's not either local brands or international brands will grow. We all will grow, and there is no doubt on this. Then local brands in mass in China are already a reality. Local brand in prestige and luxury in China, for the moment, are a very small percentage of the business, frankly, nonsignificant. But our assumption, that they will develop. And our assumption, that we will compete, meaning that despite this development, we will still compete in a growing market. Because the international sum of brands market will continue to develop strongly, and we have the opportunity to compete in the developing local brands via local acquisitions over time. And so if you have a long-term view, you need to assume the competition as international brands and the competition as part of the local brands develop, both will be great opportunities.

Can you develop those local brands yourselves organically as well? I think you'd tried in 2013 with Osiao. Maybe it wasn't the right time for starting a local...

I'm honored you remember that. But yes, we tried and -- but no, we tried something like a filler. No, we learn. We wanted to learn. We wanted to learn exactly, to your question. And so yes, we can. But we have 3 methodologies. We have organic incubation and Osiao was an example that obviously, organic incubation doesn't work 100% of cases. And so we use that learning and avoid to waste money when we see the learning doesn't give the result we expected. But that's an avenue. The second avenue is incubation of the many founders that are developing in China today, where you can have minority investments, support to people. So where you can seed several bets for the long term. We're already doing that, and we have done it in the past. You have seen us buying DECIEM. You have seen us buying Dr. Jart+. You have seen -- you know probably, we are invested in an India brand called Forest Essential. So we have done this since a long time. We have a minority investment, and some of these brands become really attractive, and then we have the opportunity to go in majority or to buy the entire brand. So that's the second opportunity. And then there is the opportunity of acquisition, regular acquisitions of brands, which are already successful, have a reason for being in our portfolio. Also, we do, obviously, when appropriate. And so those 3 avenues will allow us to continue to develop our brands and participate in the local competition at the appropriate time in the right way.

Okay. Peter, I want to bring you into the conversation. And obviously, this Chinese business is very relevant to you in your new role. It's a big cultural shift, I imagine, moving from running a fairly stable EMEA business in your previous role to having responsibility for this huge, dynamic, volatile growth engine. Can you talk about the learning curve? I think you started the new job just earlier this year. It's early days. What surprised you?

No. Happy to come. So first of all, let me say that EMEA is the most complex business we have in the corporation, actually. As I always strongly said to everybody, I'm the President of 50% of the world population. It truly is 50% of the world population because it covers markets like France, where we obviously have our strongest established competition, over to the Middle East, to India down to South Africa. And the last couple of years were quite volatile, as you may imagine, managing the COVID situation in all these different situations and markets. But more importantly, and Fabrizio was referring to it, I credit the original China strategy with Fabrizio in 2010, and we created what we call China 2020. So this is, again, in the very spirit of having a long-term perspective on developing China. I think China, at the time, was $200 million. It was really, really tiny. And it's very interesting, to Fabrizio's point, that the fundamental growth drivers are still intact, the ones we were talking about at the time. If you ask me, though, what was my biggest surprise coming back into the role of international and reconnecting with China, was really Hainan and the growth of Hainan, and the rise of Hainan that happened over the last couple of years. And that will be, again, as Fabrizio said, one of the major, major growth drivers in China going forward.

And I will like just to add that EMEA, under his leadership, was not a stable business, what he said. It was actually growing market share very well. And what Peter has done in the entire EMEA, which is relevant to his now international thing, is also he's developed probably one of the most interesting online overall organization and business opportunity. Because in EMEA, as you know, online was coming from a low base and now is a significant part of the business. And the online opportunity remains one of the biggest opportunities also for international in general.

Yes. We tripled online in EMEA in 2 years.

So I need to sell your results?

Apparently.

So I'm fascinated by this idea of the China 2020 vision that you set out 10 years ago, and you said you've just been working through the next 10-year vision. Anything you can sort of -- any teasers that you can provide for us for how the next 10 years you think might look different to the past 10 years?

Non-confidential, you mean, teasers?

Exactly.

First of all, I think our Compass look at the consumer evolution. So -- and the consumer evolution in China is very interesting because the Chinese consumer is absolute passionate of beauty and passionate of the beauty category in every aspect of it. And so what the Compass shows in the future is that this passion for the category will continue, that many other -- today has been expressed in making the Chinese consumer probably the most discerning and sophisticated consumer in skin care globally. And so what the Compass shows that the Chinese consumer is not in skin care an amazing consumer, it's also -- is an opportunity for learning what then will be interesting for the rest of the world. So Chinese consumers in skin care, I believe, have evolved from an extraordinary consumers to the most discerning and sophisticated consumer, that if they like something, the world will. And that's why we are putting an R&D center in Shanghai because China is becoming, not only a market or a reference for export, but it's becoming the consumers you want to have in your side for developing the future. At the same time, what the Compass confirmed that the opportunity in makeup, fragrances, frankly, hair care in luxury in China are enormous. Because these 3 categories are not very developed yet, but the consumer interest in them and the education to use this category is on a roll. And so this is net extra. If that's -- by the way, that's the secret. If you connect the 2 things and see that in the Compass work is super clear. That's why we are speaking so positively of the increased consumption per person because the consumer is using today's skin care already at levels which are comparable with U.S. and Korea, but no makeup, no fragrance, not hair care. And so the moment this category will improve, the consumption for consumers will explore. But that explosion is only available to companies with a portfolio of brands that cover all the areas of development. For companies which are monobrands or will take one segment only, obviously, the growth of middle class is equally valuable, but the growth of consumption per person is less, less reachable. And so that's why we are really well positioned to leverage the best, the future growth of China. The last thing I want to say on the evolution of the Chinese consumer is the interest for innovation. It's a consumer that has the propensity to try new things, experiment, which is among the highest of the world. And that's why we have brought all our innovation programs globally to now we are at the capacity of 25% to 30% new product launched every year, which are new. Just to give you a reference, which I talk in the past, when we started with the strategy 10 years ago, we were at 7%. Our R&D could be 7% of new products sold in a year, and the company was half of the size of today. Today, the company is more than double the size at the time, and we are at 25%, 30%. So an enormous R&D capability and productivity that is perfectly fitting the way the consumer, the Chinese -- and frankly, every consumer, but particularly the Chinese consumer is really growing and developing in the world of beauty, of luxury beauty. So that's the -- maybe the big insight. And maybe the last insight I want to speak about the consumer is by age. If you think of China -- today, actually, think of the West, U.S. as an example. The majority of the consumption and majority of the wealth to have this consumption is in women and men 50 plus. So what we call the ageless segment. They are very good users of our products, and they have the wealth to buy them when they want in the large majority of cases. The -- in China, the majority of the consumption is 20-30, 30-40 because the more ageless consumers or the other group, frankly, have not lived during their youth in a period where they could either afford or that this was interesting enough as a category. So the China profile by age of consumption is very different from the West today. It's much younger. Now what does this mean? That when you do the compass and you discover that the women that today are 30, will be 50, 20 years from now. That therefore, these women will be very heavy users. So you take the consumption by age, and you project it 10 years, and then you have a doubling or tripling of consumption in the more aging consumers that today doesn't exist. And that's the other way to cut the pie to understand why the overall growth is unstoppable. Because when you look at it with Compass projection, from any angle you look at it, there is growth opportunities.

And Fabrizio, if I could just double down on what you said. We have a very clear view of the consumer segments in China and which channels they're shopping in and how we best serve them and how they will evolve. So a very granular perspective operationally to translate the strategy.

Genuinely fascinating. You touched upon the innovation success and how you've gone from 7% to 25% to 30%. I wonder -- we get a lot of questions about the investor perception of underinvestment in R&D as a percentage of your revenues relative to some of your big, international beauty peers. And yet, as you say, you have been incredibly successful with the innovations that you have launched. So is there a secret source to why your R&D seems to be so much more productive than everybody else's? And should we be even more excited about this now that you have this big, new Shanghai R&D center, presumably about to launch later this year, the cities reopening?

Yes, I'm very excited about the new R&D center in Shanghai, and I'll come to this in a second. And so I hope you would be as well. But the -- so what is the figure. So first of all, I think you should read the composition of the R&D investment to understand the choices. So we have internal R&D and external R&D. External R&D, meaning R&D that comes from partnering externally. Skin care, it's very internal. Foundation of face in makeup is very internal. But color in makeup has a lot of external support. Fragrances. As you know, there are fragrance houses. They do a lot of the work there. And in hair care, some of our competitors are deep in, we are in a very high, luxury, natural area of investment, which is our strength, but it's a very specific area. By the way, is a choice because we believe that area is the fastest growing and the most promising with the highest return. However, it's a choice of focus that we have in hair care. So if you take our investment, it's very deep in skin care, very deep in face and very deep but focused in hair care and very externally integrated for color and fragrances, then you understand that the efficiency of our R&D spending comes also from clear choices and focus. Second key important point is the fact that the secret sauce is not only R&D. I know you look. But the secret sauce is what we call product development. The way we organize is very unique. In every brand, there is a president of the brand. There is a creative director, which is the soul of the equity of the brand, and there is a product developer, meaning a creative product developer. Somebody has the experience to invent new, amazing products and is connected to research development to get this done. But the idea doesn't come from research and development. The idea comes from creative product development connected to research and development. That unique model, which we have fostered in the last years, when you see this 3 angle, where president of the brand normally is the leader that can lead from the financial direction of the brand to the equity to the consumer, so is the leader of the overall. And then you have a creative director that creates the equity, so give meaning, purpose to the brand. And then you have a product developer, which is at the core of the brand, and creates the product of the future, analyze the consumers, get the data, understand the trends, anticipate the trends, develop the product. And an R&D which is at the service of all these brand-focused product developers that invent the future, you realize the secret of the power of innovation. It's basically our R&D is not only focused, as I explained before, but is also leveraged in an amazing way by a bunch of people, which are, in reality, creative product developers. And that's the secret sauce, and it's not too secret because it's known, but definitely is the sauce. By the way, if it was a secret, it's not secret anymore now, but it's definitely the sauce that is creating productivity.

And Shanghai?

And Shanghai, you're right. Shanghai is -- first of all, we were ready to open this summer. Let's see now with the COVID recovery, but we'll be, hopefully, few months away from opening this amazing R&D center. Now this R&D center is giving us, first of all, the ability to be much locally -- much more locally relevant. Imagine a center where we can develop product working with the Chinese consumers, working with the university there, working with other external partners, particularly in China is very strong ingredient culture, local ingredient culture, which is extraordinary. And having all these product developers now, which are in the brands, having not only the R&D in New York [indiscernible] but having the R&D in China as well to create and ideate and use all the knowledge of your local content, all of this. Then imagine the ability of increasing quality of claims, because we don't claim things based on market to be very clear. We claim things based on clinical studies. We are closer to a pharmaceutical company than to a marketing company in that sense. So imagine the clinical studies done in China, in the correct way, on the Chinese skin. And so all the claims of what our amazing formulation can do become completely locally relevant, but also a much more efficient cost. Because doing clinical studies in China from London is not as efficient as doing it in China, which are also creating a model. So huge savings in ability to better claim, more relevant claim. So better innovation, better relevant claims. And finally, you can imagine that, as I said before, particularly in skin care, this center becomes a global center. Because there, we will learn, we will develop things that then will travel the world. The best example of this already, I think, referred to it during the quarterly call -- the last quarterly call, is the La Mer Treatment Lotion. Basically, for the one of you which are familiar, a water lotion is a product is a moisturizing first-step product, which is super popular in Asia, in general, particularly in China, Japan, but super popular in Asia. And it's very little usage in the rest of the world. Now we are -- this is definitely developed with the Chinese consumer, and the La Mer Treatment Lotion now is one of our most popular launches also in Europe, in America, et cetera, and is all coming from having learned why there is space in the routine of every woman around the world of this extraordinary Asian routine. So our R&D center will become the base for globalizing Asian routines in the rest of the world that, as I said, in skin care is the right time to do it. Because Asian skin care is the most sophisticated skin care of the world.

Perfect. What's next after China?

Finally. Sorry. Say it?

What is next after China?

I thought that you want to get off of China.

I can...

You can take that. Okay.

So one of the things -- and also during the Investor Day, this was presented, is the other emerging markets from a geography perspective. And whilst -- when you look at every emerging market by itself, other emerging markets like Middle East, like India, like Brazil, they're relatively small versus China. If you take them together, it's actually a mighty growth engine going forward. And so we're working and working with the teams across the different regions on this emerging market strategy. And the interesting thing is that we have developed a model very much based on China actually, on the China evolution, of penetrating these markets, not anymore in the old way with brick-and-mortar where you had to -- it took a long time, right, in the old growth to build brick-and-mortar distribution. But now we're really leapfrogging and reaching the consumer who's online. So in India, for example, over the last couple of years, 4 years ago, India online penetration was, if I remember it correctly, a single digit, maybe 5%. It's now going on 50%. And so this consumer reach enables us also, to Fabrizio earlier point, to keep the productivity in brick-and-mortar. So it's really an amazing model that we have developed many other elements to it, but really very much based on the China learnings. So it pick ups on the emerging markets from a geographical perspective.

How do you facilitate that kind of knowledge sharing, Peter, in your new job from the Chinese expertise to helping those, I suppose, into other ones.

Now that's a super good question. One of the key challenges actually global corporations have, right, are the knowledge sharing. I'll give you a good example maybe from the COVID times because it's very top of my head. Actually, at the beginning of COVID, China was the first market, obviously, to close down with the virus. But luckily only for a short period of time at the time in 2020. But what the China team did, they were very, very entrepreneurial. So what they did, they basically invented a new business model, which we call social selling. So they took their consultants in the department stores, who basically -- there was no traffic, partially shut down and actually established this online WeChat model to sell directly to the consumers at home and then deliver it through our online capability. And this is something we actually developed then across the world in this -- that this model basically traveled across the world. And we established a global working group on this across the different regions and developed a playbook, how do you do social selling and a completely new business model that didn't exist basically 2.5 years ago. And now it's actually a significant part of what we do, not just from COVID times, but also ongoing going forward.

And how long did it take? I think it's extraordinary how fast you guys did that.

About 6 weeks, yes.

Amazing. So we've got about 6 minutes left, and I want to squeeze in about 20 more questions.

Any question without China in it?

Exactly. So let's move to the U.S., and I've got a question from the audience and another question for me. So you talk about the U.S. being an engine of growth. What gives you that confidence that it can be that where it maybe struggled to be that pre-pandemic?

Yes. No, a lot of things have changed in our U.S. business in the last years. And frankly, we took advantage of the COVID period to reshape the profile of the growth and the profile of the P&L opportunity. And I think now we are in a much better position. That's why I say that today, U.S. is ready to become another significant engines of growth for the future. Let me explain what are the driver of change. First of all, our distribution profile has changed. We were, for years, so strong in a segment that was declining of distribution. It was mainly department stores. And particularly in the segment that was attracting less young people, that was difficult to grow the total when one segment, which is so big, is declining. So over time, gradually, we have rebalanced the distribution shape of the company. So first of all, today, we still are strong in department store, but our key department store partners today are more solid in the brick-and-mortar, and they particularly developed a big online business. So our department store base today, in our opinion, is more solid as potential to grow with us and has particularly high potential to grow the online part much better than in the past. But then we have also much more presence and much bigger percentage of the business today in the specialty multi, ULTA, Sephora, particularly. And we have invested in -- start having a very good start in the ULTA Target and Sephora Kohl's directions where, particularly in the ULTA Target, there is a lot of new consumers coming from mass, which are entering prestige, which is one of our key growth strategies. Because the growth of the market is composed by new consumers and in luxury that come from mass in many cases. This has started again. If you see the last years, in the U.S., prestige has been growing more than mass, a moment of stop of this during COVID. And then now again, this is continuing, which shows how consumers keep coming. Obviously, the ULTA Target particularly execution is very good in creating these new consumers for us. And so that's a good thing. Then we have developed online now to about 1/3 of the company, including brand.com. Our freestanding store have become much more productive in this post-COVID. They did suffer during COVID, but now becoming more productive. Also because now they are omnichannel, so linked to the brand.com side. And so the combination of the increase of our direct-to-consumer business, freestanding store plus brand.com, is solid, profitable and importantly, give us huge access to data than in the past we didn't have. Interestingly, we always had much more data in Asia than U.S. Now U.S. is improving our data availability, first of all, thanks to the partnership with some of our retailers. But also because of a direct-to-consumer access, which is improving and is fundamental to get the information to operate more accordingly. Then from a consumer standpoint, we had to penetrate more the growing groups of Latinas and Afro-American consumers. And we have done this, and now we have much better penetration of this group. And then by geographical, we were East Coast, West Coast, strong company, less strong in the middle. Now we are much better balanced, and we are much stronger in places like Texas or Florida, which, as you know, they are also strong growth markets in this moment for beauty. So overall, better position with the consumers, better position from a distribution standpoint, better position in a direct-to-consumer access for data relevancy. Then we have done better -- we have better access in marketing. For example, like many others, we are not original in that, but our success in platforms like TikTok is extraordinary in this moment. So we are now leveraging the evolving media platforms much better than in the past, making our return on advertising much better than in the past, which is important for the long-term growth also in the U.S. Last is the portfolio brands. Different from China that was described before, where I explained that the high-end luxury is actually the most -- the fastest-growing segment of the market. In U.S. is different. It's always been, by the way, the entry price point of prestige is the most more solid part of the luxury group. In other words, brands La Mer and Lauder, you mentioned in China. In U.S., MAC and Clinique are much more important. And so in the U.S., the development of MAC and Clinique in this moment is really promising. And for the U.S. business, those 2 brands are very important. And so the innovation program and the development of those 2 brands is, again, in the right direction, which is part also the portfolio be in the right direction. Last point, we did an important acquisition for the U.S. for the West. Also, U.K. is very strong. Which is DECIEM. If you think that the brand, The Ordinary, is the #4 brand in skin care in the U.S. We just added this to our portfolio and is growing market share as we speak. And The Ordinary is the #4 in value. But given the business model and the unit price model, is among the top 2 brands in unit. So it's an extraordinary acquisition for improvement of skin care in the U.S. So all these elements combined why I say the U.S. today is in a much better position to be a very long-term, sustainable growth engines, to be added to the international growth engines that Peter had just illustrated and now Peter is leading.

Perfect. Look, I think that multiple engines of growth is a great place for us to leave it. So Fabrizio, Peter, thank you very much for joining us. And everybody in the audience, thank you as well.

Thank you very much.

Thank you.