Good day everyone and welcome to The Estee Lauder Companies Fiscal 2019 Third Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Good morning. On today's call are Fabrizio Freda, President and Chief Executive Officer and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from those forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges, the net gain on liquidation of an investment in a foreign subsidiary, goodwill and other intangible asset impairments, changes in contingent consideration, the finalization of provisional charges related to the U.S. tax line active at the end of calendar 2017 and the new accounting standard for revenue recognition, which benefited our results this quarter. All net sales and EPS gross numbers are in constant currency and exclude the impact of the new revenue recognition accounting standard. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. During the Q&A session we ask that you please limit yourself to one question, so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to for Fabrizio.

Thank you, Rainey and good morning everyone. We delivered another quarter of outstanding results, thanks to strategic investment in our best opportunities combined with creativity and data-driven insight that fueled our innovations. Our double-digit constant currency growth in both sales and earning per share came from being well diversified across categories, brands, geographies and channels, our multiple engines of growth, all while staying 100% focused on prestige beauty, one of the fastest growing consumer areas worldwide. Our net sales growth accelerated to 12%. We continued to gain global share. We invested some of the savings generated from our Leading Beauty Forward initiative into targeted advertising, which helped support our increased sales and leverage our cost structure. Our diluted earnings per share rose 17%. As you recall, when we reported last quarter, we were cautious in our outlook as it related to several macroeconomic and geopolitical factors around the globe. These includes a prudent stance on the United States, given the industry slowdown in December. We also anticipated that the uncertainty surrounding Brexit would continue to dampen consumer spend in the UK. Lastly, we factored in a gradual moderation of growth in China and travel retail due to trade tensions and economy slowdown risks. While some of these risks materialized, particularly, the softness in the U.S. and the U.K. markets, slower growth in China and travel retail did not happen, which contributed to our over achievement in the third quarter. The key areas that had been driving our strong performance this year continue to be vibrant. They included; the Asia Pacific region, the skin care category, The Estee Lauder, La Mer, and Tom Ford Beauty brands and several other brands and the travel retail and online channels. In addition, most emerging markets grew, in particularly, we continue to attract and retain…

Thank you, Fabrizio, and good morning, everyone. First, I will review our fiscal 2019 third quarter financial results, and then I will discuss our expectations for the balance of the year. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of this call. All net sales growth numbers that I will discuss are in constant currency and using comparable accounting methods, unless otherwise stated. Also as a reminder, we adopted the new accounting standard for revenue recognition, ASC 606 this fiscal year on a modified retrospective basis. For the quarter, the impact increased our sales growth by 3 percentage points, our operating profit growth by 21 points and our diluted EPS by $0.27. I would encourage all of you to look at the bridges that we've included in the press release this morning, as we do have a lot of adjustments. But I will talk to the adjusted numbers as I go through the quarter results. Net sales for the third quarter rose 12% with growth in our international regions and all product categories. From a geographic standpoint, our Asia Pacific region had robust net sales growth this quarter. Net sales rose 27% with all major categories rising double-digit. More than half of the markets in the region saw double-digit growth, led by a sharp increase in China, reflecting the continued strength of prestige beauty. Nearly every one of our brands rose strong double digits in China, as did all distribution channels. Among the larger markets in the region, Hong Kong rose double digits, Japan grew high single digits, and both Korea and Australia delivered solid mid-single digit increases. Net sales in our Europe, the Middle East and Africa region rose 20%, led by strong double-digit increase in our global travel retail…

[Operator Instructions] Our first question today comes from the line of Erinn Murphy with Piper Jaffray.

Great. Thanks. Good morning. I guess I was hoping to understand a little bit more about what you've been seeing in the North American market. I mean, the down 6% was worse than I think a lot of us were expecting. So, maybe if you can unpack some of the drivers whether you're still seeing Bon-Ton, maybe it was the pressure of government shutdown? And then relatedly, could you talk a little bit more about what specifically you're seeing in the specialty multi-channel here in North America and then where are your investment as you think about Q4 kind of being driven? Thank you.

Okay. Erinn, let me start as it relates to the Americas and really the U.S. prestige beauty market. So the prestige beauty was soft in the quarter. Actually, the share results that we get suggested it was actually down in the quarter. So -- and I think it's a combination of the things that you mentioned. Obviously, we're anniversarying the tax rebates. There was a lower level of promotion, which we believe is healthy, but clearly effects sales growth in the quarter. And we saw a bit of -- from our business, we saw a bit of destocking, but our business really trended with the market in terms of the performance in the market. Specialty multi globally was up, was up about 6%, and so we are still seeing good growth from that channel. Fabrizio, if you want to add anything?

I just want to add that as you mentioned also Bon-Ton was still in our number the previous year so that's still one -- probably last quarter in which we have an impact of Bon-Ton. What I want to add is that at the end, the market was really down, the major market. There could be some part of the market -- actually in makeup that was in the non-major market, but at the end the major market and particularly brick-and-mortar was a tough quarter. Now we are pretty confident of our improvement plan in North America. And in fact, in quarter four, we are going to invest behind some exciting innovation that we believe will attract new fresh traffic. We are going to continue spending in the fast-growing channels, specialty and online particularly. We've just completed the field restructuring that will improve our ability to go-to-market. And we will start executing with excellence. The new consumer is targeting a granularity on marketing that we presented to them in the Investor Day. So, there are a lot of opportunity to first stabilize and then bring back to growth, also the U.S. market in the future.

Our next question comes from the line of Michael Binetti with Credit Suisse.

Hey, guys, congrats and thanks for all the detail here today. Let me follow Erinn's question I guess a little bit with -- it looks like in the Americas, the operating income in the quarter -- it looks like the negative number is almost fully explained by the Smashbox, decision you made on the impairment. Could you maybe give us a little bit more of your thinking on Smashbox and you've obviously taken some accounting to that to try to right-size the brand in the financials here. But what do you think the brand needs going forward? And are we getting to a point where it can stop being as much of a drag to those U.S. numbers? It looked like they're quite a bit better when we exclude that. And then separately, I was wondering if you might be able to give us a little bit more behind your comment that -- I know you said you've got some new innovation coming that drives recruitment. Can I take that to mean that in the U.S. within the negative 6%, the new customer acquisition numbers have slowed as well? Any idea what the diagnosis looking backwards is there and what the epiphany is that you think you can spend back against to help reverse those trends in the fourth quarter?

I'll start answering the second question and then we'll clarify the Smashbox thing is. No, actually, the consumer acquisition is -- what we are bringing back up, particularly young consumers and millennials. That we are making progress on most of the brands in acquiring new millennials and Gen Z consumers in the United States as well. As Tracey mentioned in this last quarter, there was a less promotionality on average and an overall lower market mean, it was just less traffic in the stores. But in term of our brands acquisition is pretty -- is improving. And as all my comments about our intention in quarter four and next year is actually to accelerate that. And we have a lot of tool, the granularity of targeting, the new innovation, the better exposed to growth channels and all the other elements we are putting -- including extra investment in advertising that we are putting in our United States turnaround plan. So we are pretty positive on the mid, long-term impact of those activities also in consumer acquisitions. On Smashbox, I want to clarify that the Smashbox is not the main reason for the decline. Smashbox is a relatively small brand in our total portfolio.

From a sales perspective, right?

Yeah.

From a profit perspective, you're right that the impairment certainly did impact the profitability of the Americas segment. But from a sales perspective, as Fabrizio mentioned, it's not the main driver.

Our next question comes from the line of Bonnie Herzog with Wells Fargo.

Thank you. Good morning. I actually wanted to touch on your skincare margins in the quarter, which were still very strong. So hoping you guys could bucket maybe some of the key drivers for us in a bit more detail and then help us understand what the contributions might have been from the fast growth in certain geographies such as Asia versus maybe improvements you're seeing in the product mix from some of your innovation? Thanks.

So let me start. Again, the margins on skin care are so strong, I would say first because the skin care category was up 25% in constant currency. So when you've got that kind of growth in the category, we see tremendous leverage across the board. That would be the first driver. Clearly, we're seeing great success as we called out in APAC and travel retail and leveraging that success in those regions, certainly helps from a margin standpoint as well. But it really when we've got a category growing at 25% that certainly justifies the kind of margin expansion that we're seeing in the skin care category. We've also had some terrific new innovations in the skin care category this year that we're quite excited about. So our innovation has continued to step up every year and this year in Estee Lauder and La Mer and Clinique, we've had terrific, terrific innovation and Origins as well. So all of our skin care brands are doing quite well, globally and certainly the strongest impact being in the Asia-Pac and travel retail region.

And the only think I want to add is that our improved focus on hero products, meaning on the main proud, the main SKUs on every brand is also driving profitability over the medium, long-term, because it creates bigger products that can be better leveraged and better optimized and this trend will continue.

Our next question comes from the line of Robert Ottenstein with Evercore ISI.

Hi, this is Javier. The question has to do again with North America, if you can help us understand the channel mix now in the U.S. with all the brands that you bought that tilt toward specialty channel. So basically if you can help us understand how important department stores is? What was the impact of Bon-Ton in the U.S., whether you can give us a sense of what was the growth in U.S. department stores ex-Bon-Ton? And also basically, how you are doing in the specialty channel? What is exposure? What is the growth rate? That will be helpful. Thank you.

Any other question?

So, Javier, department stores are still about half of the business in the U.S. And obviously, the growth that we're seeing is primarily in online and in specialty, but about half of the business is still in department stores -- little over half of the business is still, in department stores in the U.S. So still an important channel of distribution for us. The segment would have been negative without Bon-Ton. Bon-Ton was about $16 million of revenue in the quarter last year and obviously no sales this year. So that's the situation in the U.S. as it relates to the sales growth.

Yeah, and I just want to add, today, we have 75% of our business outside of the United States and we are super well diversified by channel, category, brands. And another thing I want to clarify, because I think we are definitely looking at markets like the United States, the U.K., China, and we have segmentation by geography. But if you look at our results this quarter by channel, globally every single channel has been growing. So you were asking about specialty-multi. Specialty-multi, we grew 6%, 7%. Department store globally, we're growing 2%. And TR and online and freestanding store and the way we look at, which is direct-to-consumer, which is a mix of brand dot-com and freestanding store, all growing double-digit -- at a very strong double-digit. If we look by categories, we've been growing every single categories, skin care, makeup, fragrance, hair care and within skin care as the previous question, every single subcategory of skin care like moisturizer, serums, everything is growing double-digit. In term of by brands, 80% of our brands, the exception is Smashbox and GLAMGLOW, but all our brands are growing more than double-digit, the large majority of them. So there is a lot of different engines of growth going on in our business in this moment. Segmenting the business, the way we segment it, also the way we operate it.

Our next question comes from the line of Lauren Lieberman with Barclays Capital.

Great. Thanks, good morning.

Morning.

One of the things I wanted to ask, I'm sorry because I know Fabrizio you were just now emphasizing that U.S. is 25% of the business today. But I was still curious, I'm sorry about channel mix, because the mention of the sales restructuring struck a chord with me. I think for a few years I've sort of been thinking about your investments in the U.S. is being to sort of fully support traditional brick-and-mortar, being both your freestanding stores and department stores, while at the same time investing well ahead of the revenue build in kind of specialty-multi and online in totality. And with mentioning the sales restructuring, did suggest to me that all this kind of call it newer channels have reached scale to where you can perhaps start reallocating resources in the U.S. in a way that better suits the future growth. So I want to just I guess ask, one, is that a reasonable way about thinking where we are in terms of long-term channel mix shift? And then secondly, brand performance in the U.S. within those faster growing channels and versus the channels where the traffic isn't. What's your feeling on market share performance for your brands in those faster growth channels versus the more struggling part of the market? Thanks.

You're welcome. First of all, speaking about channel mix. As I said, we are -- Tracey just mentioned, we are 50% today we are in department stores and the remaining is in the fast growing channel. So we are tilting on a better balance or diversified by channel also in the United States, that's our strategy. This will continue to be. We are now better penetrated in specialty. We are in a very strong online across different both in retail dot-com and in brand dot-com. Our freestanding store are a significant channel in the United States. And obviously, department store continue to be an important part of our business. And in some areas we are growing and some department store are making some significant progress on the business. The real difference is brick-and-mortar versus online, so the brick-and-mortar are now growing and the online is growing. Even online in department store, online in retail dot-com. So all the online is continue to accelerate and that for us is very positive, because we see good market share in this area. Our brands are very successful in this area. So your other question was, are your brands successful in these new channels? Absolutely. I would say that our brands are even more successful in the new channels. Anyway, that's true in the United States, but that's true globally. I think in the Investor Day, we demonstrated our success in new channels like online globally, Tmall, travel retail, specialty-multi globally is really happening and we are definitely capable to drive these brands. Now we have a very big portfolio of brands, so some brands are better tailored to win in specialty, other brands are better tailored to a typical more department store environment. And finally, some brands are more prone to win online, and we manage this portfolio actually also to make sure that we always match the right brand, with the right channel, and with the right consumer target. And that's an art. That is not an average behavior. It's really a segmented way in which we manage our portfolio brands. That's why portfolio brands is a big competitive brand. Last comment -- your comment of our field sales force restructured. Absolutely. It was time to restructure our investment in field, in order to match and to go in parallel with a new distribution strategy, and with the new balance of the different channels. And absolutely, this is -- as part of this plan, we are increasing the resources and the focus and importantly, the skills on the new channels, in order to make our performance also in the new channels as strong as our historical performance is and has been in department stores.

Our next question comes from the line of Steph Wissink with Jefferies.

Thanks, good morning everyone. Fabrizio, I just had a question for you on your comment on trailing 12-month launches that are 30% of sales, which I think you mentioned was the highest level. Can you give us some context of how that number has trended over the last few years? And how that connects to the advertising spend that you're doing kind of have fewer bigger launches with more focused advertising? Thank you.

Yes. This is a great strength that we've evolved in the last years. And is the fact that we have now multiple brands and every brand has its own innovation program, and the fact that we innovate in skin care and makeup and hair care and fragrances. And within every of this category, like skin care, we have very clear innovation programs by sub-category, example, moisturizer rather than masks, et cetera. So our granularity or our granular ability to look at opportunities make us now innovating across all these multiple global segments. That has increased the percentage of successful sales that we do via innovation. This strategy combined with hero product strategy, meaning, bigger innovations and fewer innovation and leveraging our historical franchises like Advanced Night Repair, [indiscernible] Clinique, the combination of those two strategy is making our innovation stronger, more abundant, and at the same time more profitable and efficient. And that's what I'm trying to say is the magic of our new innovation program. How this is linked? By the way, how was in the past? Last year was 20%, this year would be 30%, and when we started our strategy nine years ago, we were around 10%. So, we have tripled our innovation power in the last nine years. And how this -- and by the way this is indicated also by our results I believe. And how this is linked to our advertising investment is, the advertising -- what has changed with the arrival of the lot more digital advertising is that in the past we had few advertised brands. Clinique, Lauder, some fragrances and that was it. The other brands will live out of word of mouth and other activities and in store and obviously a lot of store activation. Today, every single brand is advertised. And that's what is creating also the acceleration. And so, our advertised brands -- our advertise investment today touch all our brands. And all our brands are reaching scale and levels to justify a part of their budget in advertising. And that obviously is a top-line accelerator, particularly when combined with innovation. And last, which is probably behind your question, yes, a lot of our advertising is focused on our innovation.

Our next question comes from the line of Dara Mohsenian with Morgan Stanley.

Hey, good morning, guys.

Good morning.

So, Fabrizio, it's rare to see this level of corporate top line growth that you're expected to post this year. It's even rare to see it continue in subsequent years, when you cycle more difficult comparisons. So, I'd love to hear your viewpoint on sustainability of the strong top line growth, as we look out to next year? And specifically are there any signs of a potential slowdown in some of the key momentum areas that have been driving your business? And then also, just from a longer-term perspective, can you talk about how you've managed the business this fiscal year to sort of take advantage of the top line growth, and use it to propel longer term growth as you look beyond this year? Thanks.

Yeah. The idea of growing ahead of market is definitely sustainable. We believe, we will continue to grow ahead of market and continue to build global market share. And the reason why this is a sustainable long-term view for us is assertive. Many will think I was just planning is because we are exposing our business to the fastest growth currents of the world. Thanks to Leading Beauty Forward, we have changed a lot in fixed costs and created variable OpEx. And these variable expenses, we can tailor them where the biggest opportunity at the speed of light. This was not possible in the past. So the first thing that make us sustainable that we can invest and allocate resources very fast with a lot of agility wherever the opportunity is. And so even in a world, which is more volatile and where the opportunity changes faster than in the past, we have now the agility to react with the same speed. And so this ability to match resources to opportunities is our strength. In this moment, the biggest opportunity, China, we are able and willing to invest in China in a great way. This has to change someday there will be other opportunity as we have demonstrated in the past where we will invest more. In this moment, our priority is to around the United States. We are going to invest in the United States and within the United States on the biggest opportunity, which are in the channels, by category, by channel, and by consumer segment. So this ability to granularly look at the opportunity and invest allocate resources on them is a sustainable long-term capability that we have built in our business that I believe will continue to drive our business ahead of market for many years to come. Do you want to add anything to it?

No, I mean, the only -- couple of things that I would add, Dara is clearly, if you look at our history, over the past few years, you see that the fourth quarter is our lowest operating margin quarter, and it is somewhat related to the timing of some of our big innovation, and also related to, once we have seen how innovations perform during the course of the year, we take the opportunity to invest more behind them. And that provides us, has historically -- at least our experience provided us with a strong start to the next fiscal year. As Fabrizio said, we do expect that we will continue to grow ahead of market. The market last year, based on our information, grew around 7%. As we communicated at Investor Day, we do expect that the market will settle down at some point in the 5% to 6% range. So, we do expect that growth that we've seeing, the double-digit growth over the last few years in the next few years would slow as we expect that the market would slow. But we, in all cases, believe that we will continue to grow ahead of the market.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Good morning, everyone, and congratulations on the terrific results.

Thank you.

Thank you.

As you think about your categories and just the makeup category, can you talk a little bit about how you see that progressing on the makeup side? What would change the direction of operating income there? Is there anything -- whether it's products, whether it's channels, geographies where there's a differentiation and how it's performing? Thank you.

So let me start, Dana. Obviously the makeup category is impacted by some of the challenges that we discussed with Smashbox. We are seeing the M.A.C brand pickup, but obviously the M.A.C brand had been slow in the last year or so, so that has impacted the profitability of the makeup category. And fundamentally, again, when you think about the architecture of our P&L, growth drives a lot of margin expansion. So, to the extent that we see the makeup category growing globally, which we are growing relatively in line with the makeup category, but to the extent that we see that category pickup, certainly we'll see operating margin pickup. We expect operating margin will pickup anyway, given some of the innovation that we've got planned for some of our makeup brands like Too Faced, like M.A.C and some of our other brands as well, BECCA, et cetera, in the next few quarters. So we do expect that that will an improvement. But we do have some brands struggling in the category that's dragging the operating margin down.

Yeah. And our strong brand, whether it's growing the demand, the operating margin is very, very attractive. And so it's a matter of mix of brands that we'll correct over time. But also I wanted to clarify the market of makeup, is we go up and down. I mean, now is the skin care moment. But two years ago was the makeup moment. And by the way, this is different by region. In the U.S. clearly makeup is not a growing segment in this moment. But in Asia it is the fastest growing segment. Just to be clear, makeup in China, in the last quarter grew faster than skin care. And I'm not speaking about our business only; I'm speaking about the market. And so, makeup is a very strong category with a lot of future. And, when reached certain level of growth, we'll have the same positive impact on allowing us to leverage our cost structure that skin care has.

Our next question comes from the line of Mark Astrachan with Stifel. Q – Mark Astrachan: Thanks and good morning everybody. A – Fabrizio Freda: Good morning. Q – Mark Astrachan: I wanted to revisit the U.S. again and maybe ask the question in kind of a bit of a different way. How do you think about the brands and the channel mix today? Obviously department store is still half the business. Do you think you have what it takes to improve performance as it is? Is it just -- you mentioned increasing spend, but is that enough, do you think you need to do more selectively if available to go into different brands, channels, M&A that would buy things that could help you in that? Do you think maybe expanding into more active areas, things that maybe a bit more on trend from a consumer standpoint? And then just more broadly, when do you anticipate U.S. gets back to growth? A – Fabrizio Freda: Yeah. As we said, but we believe we have a great plan, as I said. The plan is about continuing get exposing different brands through the right channel, in the right target group. As you said, by brand, certain brands are really playing well in specialty. And they're playing well with the specialty customers. Other brands are perfect for department stores. It will continue to be exposed in the majority of the department stores, which are very important channels. And all of these brands are doing fantastic online and that we are continue building their specific targeting online. The innovation and the new exciting innovation that attract consumers, is going to be a key driver, continue to be a key driver of acceleration. And the other be segmentation, the ability to speak in a granular way to different segments of consumer, including multi-ethnic consumers around the U.S. is our plan. And we believe this mix of distribution, activation, innovation and granularity of marketing and the new area of segmentation, combined with a better field sales force; better focus by channel is our answer to restart growth. Obviously, we need to assume that the market overall will start growing back again. And that's what we also expect that the market will go back to growth. And when this will happen, which we believe next fiscal year, we do have the potential to go back to growth…

Our… A – Fabrizio Freda: The last thing, sorry, I want to say. I want also to clarify that even that if that's happened, the impact in the short term on the overall trend of the total company is not very big. The real total -- the significant impact of the company is not in that turnaround from slightly declined to slight growth.

Our final question comes from the line of Olivia Tong with Bank of America. Q – Olivia Tong: Thanks, good morning. Want to talk a little bit about the operating expense, because excluding the change of the accounting impact there was quite a nice movement there. Did Leading Beauty Forward had an inflection point, because historically you've reinvested a significant portion of that, so maybe it's just timing but normally you don't flow that much of it through, so just trying to understand that a little bit better? Thank you. A – Tracey Travis: No, we did have a great quarter of leverage, Olivia, in the third quarter, you're right. And Leading Beauty Forward absolutely contributed to that. So, as we had announced previously, we actually have increased our expectations for the program given the number of programs that have been added to the Leading Beauty Forward. And it is giving us more flexibility in our expense base. So we did see more leverage in some of the areas outside of advertising and promotion than what we had expected. And so, yes, we have more flexibility. We are still investing, though, a good portion of the savings of Leading Beauty Forward. Fabrizio mentioned, digital advertising, the digital capabilities in order to be able to do digital advertising. So the talent, the technology that we are investing in, to be able to both create the digital advertising as well as investing a lot more in our analytics capability as well. So we are using some of the savings to reinvest back in the business, to build capabilities that we need to have continued growth over the next few years. And that's working out well for us in the short-term, and we believe in the long-term as well.

That concludes today's question-and-answer session. If you are unable to join the entire call, a playback will be available at 1:00 PM Eastern Time today through May 15. To hear a recording of the call, please dial 855-859-2056, passcode number 6869966. That concludes today's Estee Lauder Conference Call. I would like to thank you all for your participation. And wish you all a good day.