EL
#Thank you, Dennis, and good morning, everyone
Our company delivered an excellent performance in the third quarter
Our business accelerated, driven by many brands, channels and markets that experienced strong momentum
In constant currency, our sales rose 9% and adjusted diluted earnings per share increased 28%, both of which exceeded our expectations
The outperformance was generated from stronger organic sales growth, largely in China in travel retail channel; a better-than-expected performance of our newest brands, Too Faced and BECCA, as well as disciplined expense management
When fiscal 2017 began, we said our sales were expected to accelerate every quarter, culminating in a robust second half
As we look to the fourth quarter, our sales growth should increase farther, enabling us to deliver our financial and sales target for the full year and position us for a strong start in fiscal year 2018. Our success this quarter came despite continued external macro headwinds in certain areas
, foot traffic continued to decline in brick-and-mortar department stores, our largest domestic channel
And Macy's closed 68 stores, as expected
In certain other countries, we faced difficult economic or political climates, particularly in the Middle East, Turkey and Latin America
And the continued strength of the dollar impacted our reported results
Globally, we encountered stiff competition from both established and upstart brands
The fact that we have achieved a strong performance against this backdrop speaks to our successful strategy, which is anchored by our increasingly diversified business model and multiple engines of growth
We also are benefiting from our choice to stay focused on a dynamic prestige industry that has been growing steadily for many years and continues to grow faster than many other household and personal care centers
As global prestige beauty undergoes rapid change, we are embracing new opportunities, accelerating penetration of the fastest-growing channels, reallocating resources to the leading business drivers and pivoting for the future in our industry
Consumers' appetite for beauty products is intensifying, particularly in the luxury arena and in makeup, which fuel outstanding growth in our high-end brands and continued double-digit growth in our makeup category
In addition, we enjoyed superb growth in the fastest-growing beauty channels, with travel retail, online and specialty multi, each rising strong double-digits
By geography, we grew strong double digits in certain emerging markets, notably China
Altogether, we generated higher sales in every region and in our three largest product categories, fueled by an acceleration of our hero products, new product innovation and increased social media presence, new digital initiatives and greater penetration in the fastest high-growth channels
At the same time, we continued investing in priority areas and capabilities and our Leading Beauty Forward initiative
Our diverse portfolio of brands continues to be a strategic advantage
We leveraged each brand in the most appropriate prestige distribution channels to target different consumer segments
This approach yielded outstanding results for our luxury brands including Tom Ford, La Mer and Jo Malone
Each generated double-digit sales growth in constant currency in every region
La Mer's new hydrating serum and brightening mask were well received and benefit from an increase in travel in Chinese consumers around the world
The brand gained share in Asia-Pacific and maintained its leading position in luxury skin care there
Among our largest brands, Estée Lauder achieved the solid growth globally for the second consecutive quarter, with higher sales in skin care, makeup and fragrances
The brand was well positioned to capitalize on increased travel and consumption from Chinese consumers, which favorably impacted its business in travel retail, the UK, and Asian markets and lifted its skin care sales
Estée Lauder's makeup category excelled in Asia-Pacific with increases in face, lip and eye products
The Estée Lauder brand continued to support its two key hero franchises, Advanced Night Repair and Double Wear, with new products combined with more effective marketing and communication
The investment paid off
The two highly desirable product lines reached the new consumer, posted positive growth in every region and increased double digit for the fiscal year-to-date
Around the world, Double Wear is the best-selling prestige foundation in many markets such as the U.K
and attracts consumers across generation to the brand, including millennials
We have successfully created a new growth engine with our luxury and artisanal fragrance brands and they continued to advance strongly, while at the same time improve the profitability of the entire fragrance category
Jo Malone and Tom Ford accelerated rapidly, particularly in travel retail and we also see great potential for our newer fragrance brands, Le Labo, Frédéric Malle and By Kilian
This is the first full quarter that reflected a contribution of our newest brands, Too Faced and BECCA and their sales exceeded our expectations
We also started to extend their presence internationally
Adding these brands to our portfolio accelerated our penetration in both makeup and in the fast-growing specialty multichannel and increases our reach with millennial consumers
Indeed, many of our brands are expanding in fast growing channels to reach new consumer
Since today, they have wider choices of where to shop for prestige beauty products
In this regard, we are excited our M
A
brand will launch this month in Ulta Beauty, one of the fastest growing specialty multi-retailers in the United States
Ulta's consumer are devoted beauty enthusiasts and have been requesting the brand
will first be available on ulta
com starting next year, followed by about 25 stores beginning in June, with more than 100 doors planned by the end of December
The locations will feature dedicated M
makeup artists in a boutique-like setting, allowing M
to provide it exceptional artistry services
Expanding into specialty multi globally is integral to M
C's strategies to grow its consumer base, continue to raise awareness, become more accessible and drive incremental sales
is the number-one prestige makeup brand worldwide, it is in less than 3,000 doors, a fraction of the location of most of its direct competitors, in some cases, in even less than 15%
continues to make great inroads in specialty multi internationally
In Brazil, for example, M
is the leading brand on sephora
com and will open in some of the retailers' top brick-and-mortar stores this August
is increasing consumer reach by opening more doors with Douglas, as well as other specialty multi retailers including KICKS in Sweden
Our Estée Lauder brand launched in Ulta last fall in 30 doors and successfully tapped into a new audience
During the first three months, more than 40% of consumers who bought its products were new to the brand
And over 65% of the new makeup consumers were millennials
With strong sales results, Estée Lauder plans to roll out to more Ulta stores
Clinique's experience in Ulta has been terrific and it is building on its business there with more in-store boutiques
By the end of fiscal 2017, our three largest brands will have strategically expanded their consumer reach in the U.S
specialty-multi channel
Several of our other brands have achieved strong sales in the U.S
, specialty multi, including GLAMGLOW, Smashbox, Tom Ford in Sephora and Darphin in Bluemercury
During the quarter, we launched Jo Malone and La Mer into a few key Sephora doors, including its largest one that recently opened in Manhattan, and also on sephora
Initial response has been terrific
Both brands are recruiting new consumers from these efforts
Internationally, our business has also performed well in many specialty multi retailers, including Mecca, Boots, Douglas and (11:18)
More specialty multi retailers are entering Korea, and Clinique and Origins have expanded their consumer reach to some of these new locations
Clinique and M
has launched in specialty multi in Thailand with fantastic results
We had outstanding results in travel retail, led by our business in Asia-Pacific
Our vibrant retail sales showed the strongest quarterly growth in over three years and far outpaced passenger traffic growth in the quarter
Sales increase in every product category
Makeup sales surged, led by M
, Tom Ford, and several other brands
Higher skin care sales were driven by Estée Lauder and La Mer in the greater number of Chinese and other Asian travelers
And in fragrance, which still leads total beauty sales in the channel, we achieved the superior results and share growth, led by Jo Malone and Tom Ford
We believe there will be strong demand among consumers for our newer luxury and artisanal fragrance brands in travel retail as we roll them out, enabling us to further penetrate the channel's most important category
We also continue to expand the availability of our other brands that aren't widely distributed in travel retail, and brought more brands into more high potential airports
Our sales from our e-commerce channels continue to grow at an exceptional pace, up 30% globally, more than twice the growth of e-commerce in general
Sales rose double-digits across brand, retailers, and third-party sites, and also grew double digit in every region, driven largely by increased traffic, order size, and conversion
Mobile-driven sales rose significantly and are now a larger portion of our total mix
We entered Hong Kong, a new market for our online business, with a brand size from GLAMGLOW
And in China, our online sales soared, led by our brands on Tmall
plans to launch on Tmall this quarter, which should provide more fuel for our China business and allow M
to reach new shoppers in smaller Chinese cities who don't have access to its products in brick-and-mortar stores
Globally, we continue to successfully launch additional brands online in more markets
Department stores are striving to provide consumers with strong experiences they can't get anywhere else
International department stores remain strong, particularly in Europe and China
We continue to work our – with our U.S
department stores to create in-store and omni-channel excitement and innovate with product, services, merchandising, and education
We are devoting additional resources to the top doors and promoting in-store events on retailers' websites where, as I just mentioned, our business had been brisk
Research shows the consumer who shop both in-store and online spend more than those who buy in just one channel
We are being proactive with department stores to design strategies to reinvigorate traffic, while addressing productivity challenges in brick-and-mortar
Now, let me turn to our recent and upcoming innovations
Across our brands, we are focused on the biggest global opportunities, which in Clinique's case means its core products, like moisturizers
Its initial launch of Fresh Pressed serum and cleanser with concentrate Vitamin C was a global hit that garnered terrific attention and demand, and validated the brand's strength to leverage the initial success with a more extensive rollout in the coming months
The serum is used with the brand's moisturizers, which increases their sales as well
Fresh Pressed helped drive improving retail trends for Clinique in China and travel retail
In another move to strengthen its position in moisturizers, Clinique just introduced a supercharged hydrating formula of Moisture Surge, developed from proprietary (15:45) technology that is expected to elevate the best-selling franchise
Clinique marketing will focus on the instant benefits of Moisture Surge, which has been growing in most markets
Estée Lauder will begin introducing Advanced Night Repair Eye Concentrate Matrix in July
This product, which contains innovative technology based on scientific breakthrough research, repairs the visible signs of aging on eyes to make eyes look refreshed, and features a custom designed massage applicator
It is one of the brand's highest scoring products in testing with consumers
For example, after four weeks of usage, almost 90% of women said their eyes looked more youthful
It will be supported by a 360-degree campaign, based on strong insights from consumers around the world
In makeup, we are very excited about Estée Lauder Double Wear Cushion Compact for Asian market, which will be supported by strong investment in China, and Pure Color Love lipstick, a global launch that is aimed at younger consumers
M•A•C new Next to Nothing sheer Face Color is a lightweight foundation that makes skin glow
It is being supported with a major social media campaign that is already helping fuel M•A•C sales this quarter
In fragrance, Jo Malone launched Star Magnolia cologne, which is expected to have wide appeal, and Tom Ford created SOLE DI POSITANO, which evokes my fragrant (17:28) Italian coast
With the help of our Leading Beauty Forward initiative, we continue to reallocate resources faster, and cut cost deeper, to invest in talent and capabilities that will drive our business in today evolving beauty landscape
This includes social media, digital technologies, retail operations, and analytical expertise
To help leverage both new and existing brands, our brands continue to increase their social media activity and capabilities to engage consumers across numerous digital platforms using influencers, brand ambassadors, and other compelling voices and technologies
For example, Smashbox collaborated with a popular influencer to help promote its Cover Shot Eye Palette, and the collection became one of the brand's largest launch ever
And in China, the Estée Lauder brand significantly lifted its makeup sales by leveraging a combination of in-store and social media campaigns
This kind of digital content created by influencers and third-parties is measured in terms of earned media value
In the third quarter, M•A•C remained the second largest beauty brand among prestige and mass makeup players in earned media value in the U.S
, as measured by Tribe Dynamics
M•A•C has improved its earned media value share in makeup in each of the last three quarters
Our brands are also creating inventive digital experience for consumers
For example, a cutting edge technology used by Estée Lauder and Smashbox lets consumers virtually apply different lipstick shades, either in real-time or in (19:16)
Our performance this quarter further demonstrated our company strategy, built on multiple engines of growth and leading to agile resource reallocation, when need, is sustainable and working
Our company has the most desirable portfolio of prestige brands in the industry
And we are (19:38) to strategically deploy them brand across fastest-growing channels and consumer segments around the world
Importantly, we have the highest quality workforce with extremely capable people committed to our company's success
At the same time, we are reducing costs, redesigned for better sales growth leverage, and reallocating our resources to make priority investment in the most attractive areas that are expected to drive our growth in both the fourth quarter and next year
As a successful high growth company in a growing industry, we have continued to increase our global share in prestige beauty
And as we enter our fourth quarter, we are further building momentum to deliver another year of strong profitable growth
Now, I will turn the call over to <UNK>
So the growth is very, very strong in these two brands
So, it's very strong double-digit growth in each one of the two brands and in every segment they're operating
And what is driving the success is actually same-door sales is a success, which is driven mainly by same-door sales and for the moment, a very small initial distribution deployment
These two brands are really strong and consumer demand is exceptional
And their recent launches are among the most successful launches in the entire marketplace
And on top of that, for us, the great news are that they attract really new consumers that in the past we were attracting less, particularly Too Faced attract more younger consumers in our portfolio which is great extra business for the company overall
And importantly, they have dramatically increased our penetration in Specialty Multi in the U.S
And this will continue internationally, which is a very important objective because as you all know, the Specialty Multi-Channel globally is one of the fastest growing channels in our sector
I'll start with answering the ULTA question
So Clinique is very successful in the ULTA channel
And what we have learned is that when Clinique is exposed with all the strengths of the core (32:42) portfolio and the strengths of services to a good growing traffic, the brand responds very, very well
And Clinique is growing both makeup and skin care aggressively in every ULTA door in which the brand is deployed
In terms of what we can learn for M•A•C – by the way, as I said in my prepared remarks, we plan to increase gradually the number of Clinique doors in ULTA in agreement with our retail partner
And, as far as the learning for M•A•C, absolutely we have learned a lot for perfecting our upcoming M•A•C execution; also from the Clinique experience
In particular, we have learned the importance of the service aspect, of making sure that the brand is deployed with all the necessarily SKU, assortment SKU, and decorations of the SKUs to the consumer, is the concept of a curated assortment that really fit the consumer, which has been a big learning that will be absolutely applied to every one of our brands
The good news, that is true for Clinique based on your question, but is true for every other – our three big brands
We really attract new consumers and a lot of millennial consumers
So the cannibalization is very, very limited
This consumer, our consumer that were not shopping in the brands before in a large majority, or they were lapsed brand users, because they were not anymore going in channels that – where the brands today are distributed
So the large majority of the business is net extra business
So on the total M•A•C growth, no
We're not seeing a big change
Overall, it's still between 4% and 5%; probably closer to 4% in this moment than to 5%, but still in the range
And – but what we have seen a change – we see a change continuously is where the growth is coming from
And the growth is coming from – by category – is coming more from makeup than in the past, as you know
And by recently, in this quarter, the growth is again coming from Asia more than in the previous quarters
And then, certain emerging markets have been more challenged than in the past, like, I don't know, Brazil or Turkey, obviously, and a few others
And so, we see a variation where the growth come from
But what is interesting is actually the total growth is still between 4% and 5%
So, let me start from this last question, is – no, is what I said
You should not model it differently; is 25 by June and then 100, and you can assume that the 100 will be equally split, because it's a matter of capability opening
And the opening will be more aggressive as of September, obviously, because of organization and capability things
But this is the total number that we're planning for at the moment
What was the?
Ah, the earned media value of M•A•C
So what was driving the improvement of the earned media value of M•A•C is, first of all, the M•A•C activation of many more influencers
And the activation also of M•A•C makeup artist has influenced themselves, which is a unique model created by the M•A•C brand
Meaning M•A•C is, obviously, activity is external influencer, (39:17), but also, many of the very valuable makeup artists of M•A•C influence themselves
And being enabled by a lot of great quality asset to support to do this job around the world, and particularly in the U.S
The other thing is, activity in this, is M•A•C is back launching hero products
And as you know, a lot of these media value is driven by exciting new products
For example, Next to Nothing launch, which I mentioned in my prepared remark, is an activity which is creating a lot of conversation in the social media arena, which is helping support the brand
We believe this strength will continue
The M•A•C brand is very active among the various changes they're leading in the U.S
market and internationally in increasing the numbers of hero products that will be passed of their deployed portfolio of innovation
So, let me start from this line
I think we said it in prepared remark and everywhere we comment on this new distribution
The new distribution is bringing new customers
And so we have absolute evidence
That's why we have tested our way first with 30 doors, then in certain areas internationally, the same
We have done this very gradually with a lot of attention
And there is – the large majority of consumers are new to the brands
This is true for new distribution, both online in specialty and this is true for a lot of our new innovation which is focused on segments where we have strategic opportunities or strategic gaps
And that's actually been the big strength
And the other information we – that I have already shared but I want to further clarify it is that the large majority of these new consumers are millennials
And that's true in all these things that we have
We have year-end data that comport all these learnings and then based on this data, we made decision on distribution evolutions around the world
And then in term of profit dilution of the new distribution, M•A•C is very dependent from traffic
And so if we – where we are able to create good sales per door, M•A•C is a profitable brand
And so our priority is to stay focused on really making M•A•C a good brand with great sales per door in every single distribution channel and that will make M•A•C – will keep M•A•C as a very profitable brand
And in term of the overall dynamic, I want again to clarify the – M•A•C exposure to, in this moment, the declining brick-and-mortar department store traffic is the key issue we are trying to solve
M•A•C has enormous demand and attention from consumers
It's a very desirable brand
Wherever M•A•C is exposed to traffic, it's performing well
And that's the key issue we are trying to work on
As we said, we have many international pockets where M•A•C is booming
And we need to address the U.S
issue as we have discussed
And I hope you see many of the pivoting activity that we are doing to achieve this goal as fast as possible
Our growth algorithm is 6% to 8% and we are obviously on this trend
And the key point is this industry is not a zero-sum game
All the big companies are growing
And depending by quarter and by year, some are growing a bit less or a bit more, but we all are growing
So the key point is that there is a strong category growth and there is space to grow for a lot of big companies
And they believe that small brands are diluting the growth of big companies is clearly not demonstrated by the facts, because big companies are growing, are growing their brands and enriching their portfolios
If there are some smaller brands which are doing very well, some of them get acquired by the big companies when they have the right rate of return
And so I believe actually this is an environment where many big companies can grow and can grow at the same time in this amazing part of the industry which is prestige beauty
Now, what do I attribute in the short-term in the last six months, nine months? Our growth be below some of our competitor is frankly 80% U.S
department store traffic
We are the company which has the highest exposure in percentage of our business and in our big brands to U.S
department store traffic
And then there are other – many, many other areas of the world where frankly we are growing faster than many other companies
And the last point I want to make, we are building market share
So in a market we continue to grow 4% to 5%, we continue to grow market share
This was evident also in the recent Unimonitor (52:02) report for 2016 calendar and is obviously proven by these first quarter numbers where we are growing in constant currency 9% versus the market which is probably closer to 4%
So we keep growing market share
We keep growing well in all over the world and we do have an issue to solve – to address, which is that U.S
department store traffic and our high penetration of this channel
And we are pivoting to reinforce this channel and at the same time diversify our business in the needed way
Okay
So let's start again
M•A•C is – there've been some recent research issued that M•A•C is the number one brand loved by teenagers in this market in the U.S
, and just been published a research on this
All our consumer data showed that M•A•C is among the preferred brands among the millennials and, frankly, all generations
So M•A•C is a business built to be really very sensitive to traffic
And that's the key thing we need to do
The brand is in excellent shape, very desirable
And as I said, to demonstrate this, there are markets around the world where the brand this quarter has been growing 40% or 45%, despite the competition being the same
And so it's a very specific opportunity
Said that, there is definitely a lot of new competition, and every big brand has to face this new competition
On this, I would like to make an – to do an observation
What we see in the data is that this increasing competition, done by an ever-increasing number of brands, is an increasing competition in the momental (55:06) trial
That is, we don't see increasing competition in the area of loyalty and in the area of retention and repeat, which where the profit is
Let me explain this
We have, for example, in all our big brands, take Estée Lauder with Advanced Night Repair, take M•A•C with Studio Fix, the big hero products in this moment are getting more success and increased repeat, despite the increased competition
What is tougher is to get the attention at the trial moment, because of the many small brands , there's more activity out there (55:42)
But I would like you to think that the trial moment is not the profitable moment
Trial is an investment
Repeat is a profit
And so at the end, the profitable brands are still the big brands with great hero product, great repeat, and not many small brands that generate a lot of noise on trial, because unless they get the repeat, they will not be sustainable
And so, we are very focused on a sustainable, long-term profitability strategy for our brands, and that's the way we are addressing the issue at M•A•C and the opportunity for all our brands
So, the second question was specialty-multi, which is an opportunity for many of our brands, and I mentioned many of them in my prepared remarks, exactly to give you maximum exposure to all the pivoting we're doing
Instead of repeating them, I would like just to clarify one point
Every brand has a unique distribution strategy in the Estée Lauder Company portfolio
So, we don't do things by channel
We do things by brand
So, there are brands which are designed to win well in specialty, brands which are designed to be in multiple channels, and brands that are designed to be more exclusive in a certain channel type
And our broad portfolio brands give us the possibility to play this growing multichannel portfolio globally in an excellent strategic way
The last question was on online, and yes, we see a very different pattern in purchases online
Purchases online tend to be younger and tend to be, frankly, very profitable, because consumers are very loyal when they get into it
There's a lot of good repeat
But most importantly, the online sales allow us to reach consumers that sometimes we cannot reach with brick and mortar
This is particularly true in emerging markets
I just gave the good example of China, where a good launch of M•A•C in Tmall that will happen this quarter, we know, by all our analysis, that will expose millions of Chinese consumers in cities of Tier 3 or Tier 4, that today cannot buy the brand, to be able to buy the brand
This is true for many other brands in our portfolio, and many of our online activities around the world
Okay
I'll start from the Lauder and Clinique question, and <UNK> will take over
So, first of all, Lauder is growing, so it's not stabilized
Lauder has been growing in a very exciting way, in my opinion, this quarter
And this is the second quarter in a row where the Lauder brand is growing globally
What is driving that is successful innovation that is hitting new consumers, combined with an amazing work on relaunching hero products, and that's the key point
I mean, Double Wear is a fantastic foundation product that millions of consumers around the world love
But still, there are millions of consumer that never tried this product
And so, the ability of the brand to continue win with winning hero products is the key learning, and this is working very well
And, for example, we have learned that Double Wear in specialty-multi attracts Millennials, despite being a foundation that's been there for many years, and being a fantastic product for many years, attract new Millennials to the brand better than maybe specific Millennial launches targeted to Millennial
So we are now ready to leverage these new discoveries on Lauder and continue the acceleration
The third thing which is helping the Lauder brand is that the Lauder brand is more exposed, positively exposed, to the Chinese consumers and to the Asian dynamics than the Clinique brand, for example
The Clinique brand in the country is more exposed to U.S
department store than any other brand in our portfolio together with M•A•C U.S
But globally, Clinique is more exposed in total
So the key point is that Lauder benefited from the comeback of growth in Asia and it being part of one of the brands, driving the comeback of skin care in Asia
And so the research of Asia, Asia skin care is obviously helping the Lauder brand and in our opinion will continue to grow – to support the growth of the Lauder brand
The learning for Clinique are the same, is more hero products, more activity on innovation that on top of building specific new products, build existing hero products, the Pressed Fresh Vitamin C launch is an example of that
Vitamin C is a new product per se, but at the same time create regimen with existing moisturizer of Clinique and so sell and build hero products and we have tested these successfully in the last year
The art of learning for Clinique is that also Clinique need to accelerate the entrance in growing channels
So also Clinique is further accelerating the expansion in the successful specialty multi-channels where it's playing and online
And so we will continue to do that and, sorry, the last thing on Clinique is the makeup
Clinique is also working to further activate their makeup innovation and activities in fiscal year 2018 that should further boost the brand
