Good day, everyone, and welcome to The Estée Lauder Company's Fiscal 2020 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.

Thank you. 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 other reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures on our press release and on the Investors section of our website. [Operator Instructions]. And now I'll turn the call over to Fabrizio.

Thank you, Rainey, and hello, everyone. I hope you are in good health during this difficult time as the world confronts COVID-19. My heart goes out to those afflicted, and my deep gratitude goes to everyone around the world who is part of the global relief efforts. Before I discuss results and our strategies to navigate through this challenging environment, I want to first thank our employees at the Estée Lauder Companies. The care and compassion you have shown one another since the outbreak while also balancing new work routines for yourselves and caring for your families has been truly inspiring. Your creativity, a sense of collaboration, have risen to new heights as we have adapted our business from marketing to sales to manufacturing and more. Our employees have truly exemplified our belief in leadership from average share. The Estée Lauder Companies and some of its charitable foundations have made donations to help limit the spread of the virus and ease the related hardships faced by those it affected. To date, we have made donations and commitments to Doctors Without Borders, the New York City COVID-19 Response and Impact Fund, Red Cross Society of China, Shanghai Charity Foundation, Give2Asia and Community Chest of Korea. This week, we established the ELC Care Employee Relief Fund, our newest giving initiative, which will be funded through our contributions from the company, the Lauder family and our employees. It will provide immediate and critical financial release to employees whose lives have been impacted by the pandemic. Our brands have also found meaningful ways to contribute. The Estée Lauder brand donated 2 million surgical masks for frontline workers in New York, while Clinique donated 50,000 skin care products to doctor and nurses in New York City's hospitals. Aveda launched Aveda Cares, a relief program to…

Thank you, Fabrizio, and hello, everyone. COVID-19 is certainly proving to be the most significant challenge we have faced as a public company, as much of our brick-and-mortar distribution globally has been deemed nonessential during the quarter by several jurisdictions and remains closed today. We continue to do our best to support our communities and our employees while also working to mitigate the business impact during this time. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call and net sales growth numbers are in constant currency. So looking at our third quarter results. Net sales fell 10%, driven by the rapidly evolving impacts from COVID-19 that occurred throughout the quarter. As the majority of our brick-and-mortar distribution throughout the world was closed as the quarter progressed, we quickly pivoted to drive sales online. Our online growth accelerated sharply at the end of March and continued to rise in April. Sales grew in travel retail from a strong January and February before travel restrictions were enacted and skincare remained our most resilient category. The Americas region and the makeup category suffered the biggest shortfalls. The December acquisition of Dr. Jart+ added approximately 2 points of net sales growth. Our gross margin decreased 320 basis points compared to the third quarter last year due to a combination of factors. In the first 7 months of our fiscal year, we saw outstanding growth in our skincare category, much of it in Asia and in travel retail. To meet what has now been our third year of double-digit demand for our products, we supplemented our internal manufacturing capacity with additional third-party suppliers, and we incurred increased air freight to support sales growth in areas distant from our manufacturing facilities. This resulted in higher…

[Operator Instructions]. And our first question comes from Lauren Lieberman from Barclays.

Great. I wanted first to talk about -- so many questions. So I wanted first to talk about -- I have so many questions. So I wanted first to talk about travel retail and just what your data and analytics have told you over time about the sales historically through that channel. How much of it is sort of impulse? How much of it is new consumers discovering your brands? How much of it is sales that would have or could happen elsewhere like a replenishment-type sale when someone travels? Because that could inform thinking about your ability to recapture some of that sales or what degree of that sales, even assuming global travel remains suppressed for a good amount of time.

Yes. I think, first of all, your assumption is correct. Our data confirms that those are consumers that while traveling are buying, discovering or replenishing their products. So then there is business travel, where people that travel for business bring back some gifts, and obviously, this creates consumption. But in travel retail, the most successful products all over the world tend to be what we call our hero products, so the products which have high loyalty, a high repurchase rate because both as a gift and as for personal consumption, which are the 2 drivers of travel retail, people really want to buy products that they are pretty sure will either replenish their habits or create exciting gifts. In that sense, there is the possibility to recover at least part of the travel retail sales in the country of origins. And we are working on this in every country, many emerging markets, in China, in U.S., in Europe. And so there is a project to do this as much as possible. However, in this moment, to be very clear, travel retail in Europe and U.S. is basically closed. And so in the quarter 4, there is a very big issue of closures that is in the middle of the travel retail sales, which are possible in the short term. In Asia, we are seeing already amazing results when there are openings. In this moment, the travel retail within China, particularly in the Hainan island or the travel retail in Korea, the travel retail in Hong Kong, Macau, these start already coming back and is delivering good growth. We are focusing, in this case, very much more on conversion and is working. So it again is a word to tail. But the real travel retail recovery will start happening in fiscal year '21 with the gradual reopening of travel and will be probably one of the most gradual reopening in the recovery from our expectation and from our data.

And our next question comes from Steve Powers from Deutsche Bank.

Hope you're well. I guess, is it possible that you could talk a little bit more about what you saw in March relative to January, February and what you've been seeing in April across your key categories, geographies and channels? Because I think that, too, would help inform at least the near-term visibility. And I guess, relatedly, if you're able -- it sounds like you have line of sight to some belt-tightening initiatives in the fourth quarter, but I'm trying to juxtapose that against some of the near-term manufacturing and other COVID-related headwinds that you spoke to, Tracey. So just a little bit more color about what you've seen and are seeing in the moment while things are shut down.

Yes. I'll start from what we're seeing on the sales side and then let Tracey cover all the financial implications and the financial aspects. So the recovery, first of all, is very different by region because the COVID-19 issue is a different speed and a different level of depth in different markets, and some markets are already, as you know, in recovery, other markets are still in the middle of the issue. So we are managing things in a very differentiated set of way by region, by country. So what we see in this moment is that in -- still, the closures are in Europe and U.S. are 90%, 12%. If you have seen some of the data that are emerging on the situation in United States in the last week of March or the first week of April, the market was minus 70%, and the brick-and-mortar closure has a very big impact. So this -- we see the month of March, the month of April and part of month of May where closures are very big in EMEA and in North America, has been probably the worst moment for that region. And then we see a gradual recovery as the brick-and-mortar will open in these regions, meaning Europe and America. And also in Europe and America, we see already an extraordinary progress of the online. That's the key important point. On the other side, in places -- in April, in places like China, Korea, Taiwan, we see already double-digit growth. We already see the recovery being very active. And that, for us, is very encouraging because it shows that as soon as there is a recovery, as soon as there is a recovery from the consumer point of view, so when the consumer are back with the spirit of…

And Steve, to your question on the cost savings and the manufacturing variance. The way I would think about that in the fourth quarter, the $500 million to $600 million of cost savings, about 1/3 of it is related to employee actions and the other 2/3 related to other expense areas that we've stepped up in terms of our cost savings, advertising, consulting, travel, et cetera. So that's generally the split in the fourth quarter. As it relates to our gross profit margin and you saw the impact in the third quarter, we expect that we will continue to see, in the fourth quarter, the impact obviously of the tariffs and of the higher third-party sourcing costs that will impact us in the fourth quarter. In addition to that, I spoke about the under-absorption of some of our overhead and labor costs that we need to expense in the fourth quarter. So the bigger impact will be in the fourth quarter on that. So our gross profit margins will decline further in the fourth quarter related to those onetime issues related to the lower production volumes. As we increase production volumes as we emerge out of COVID-19, that will correct itself.

And our next question comes from Olivia Tong from Bank of America.

I wanted to ask you about just your sales. And I think it's fairly impressive that China was only down for the month of February and that travel retail was still up in the quarter. But the U.S. decline was pretty staggering. So as we start thinking about when Western markets start to reopen, can you talk about the differences not only in underlying demand in these key markets, but obviously, your infrastructure? Because clearly, e-commerce penetration is significantly higher in Asia than in the U.S. So can you talk about just your infrastructure? Is e-commerce better developed just in China overall? And how do you compare for that? And then just thinking later in the year, I know it's still pretty far away, but how -- what's guiding how you plan for holidays, Singles Day and things down the road as we think about the future?

So I'll start, and then Tracey will add perspective. Is -- so the penetration online actually is very strong in the United States, in the U.K. and in China. Those are the 3 markets where we have the stronger penetration online, where the market is very well-developed online. So in terms of how we see the situation in the U.S., obviously, our stabilization plan in the U.S. have been postponed by the COVID issue that emerged, so we'll take a bit more time than what we originally were hoping in -- when we had an encouraging last quarter in calendar year '19. So -- but it is because of the closures of the brick-and-mortar. In the United States, the online acceleration is outstanding as we speak. And so actually, it's very reassuring to us that the percentage of our business online will dramatically increase. Now this was already planned for the long term, but this issue has accelerated it. And as I explained in my prepared remarks, what we are seeing in the U.K., in the U.S. and in China, that the -- particularly the ageless consumer, so the consumer is about 50, 55, that, as you know, the online was the -- mainly for millennials and the new generations. But frankly, all these other consumers now are extra consumers that are using e-commerce much more in all its aspects. And we believe that this change is here to stay. And so the increase or the percentage of business online, including retail.com, so it's not only brand.com, it's retail.com, it's platforms in China and in other parts of the world, is pure plays in the U.K. So in all the online channels, there is an increase of percentage of sales that goes online. To be clear, for the long term, this is positive to us. It's very positive. Online has always been one of our key drivers, one of our profitable drivers, and most importantly, make a stronger platform for the future of omnichannel, which is the way also particularly in luxury. The distribution models will evolve on all fronts. So good development and we believe this is positive. Tracey, do you want to add perspective?

Then on our infrastructure as well as our plans for holiday, clearly, we are mindful of and watching very closely in terms of as doors open, the productivity of those doors. So certainly, both with our retail partners as well as our own freestanding stores, just making sure as doors open, that they are productive, that they are profitable. And we will, as we have over the last few years, take appropriate actions if we find that we do emerge out of this with brick-and-mortar doors that are less profitable than we would like for them to be. As it relates to holiday, at the same time, one of the things that Fabrizio, when he was speaking about online, the inference there is we are very much focused on the fact that demand remains strong. And it's really the access to our products that has become challenging in markets like in Europe as well as in the Americas. So lots of activity or programs shifting to online really to make sure that people can access our products. We also are focused on, for holiday, what we think holiday will be like. We actually are hoping that by holiday, things stabilize a bit. As I mentioned in my prepared remarks, we are mindful that there could be a recession, certainly impact, but hoping that by holiday, people are ready to shop again. So our holiday programs remain intact. The quantities may be adjusted a bit, given how much demand has come back by that time.

And our next question comes from Erinn Murphy from Piper Sandler.

And I hope you both are well as well. I guess a follow-up just to the Americas, Tracey, for you. When you think about sales down 23%, it was worse than we thought. Could you just quantify how much was truly the decline from store closures in the last 2 to 3 weeks of the quarter versus maybe pulling back on wholesale sell-in? And then bigger picture, as you think about the mix of business in the Americas, I guess, Fabrizio, you already addressed online clearly accelerating. But I'm more curious on kind of how you think about the reliance or the toggles between the department store, the specialty multi-channel as well as the freestanding stores on the other side of this crisis.

Sure. So I mean in January, as Fabrizio mentioned, we actually saw positive growth in all of our markets, including in the Americas. We actually started to see some softness towards the end of February. And to your point, the doors were not closed but certainly, it was apparent by that time that COVID-19 was starting to spread, and consumers were starting to get a bit nervous about shopping in-store and really focusing on stocking up on more essentials. And then March, we saw the biggest impact obviously with the doors closed, half of March, but really the early part of March, a tremendous decline in shopping because of the tentativeness of the consumer and really the consumer focused understandably so on health and essentials for their homes and their families.

Yes. And the other thing I want to add is, obviously, our job is also to protect our profitability. And when we saw this evolving, we started spending less already in February. And then in March, also our spending was reduced in order to mitigate the impact of the thing. So to be clear, we are anticipating the events. And so the spending was reduced, already starting gradually in February. The consumer sentiment started going down already in February. And then in March, when the closures started in United States, sales went to 0 because basically brick-and-mortar completely closed and the consumer was shocked, the retailers stopped ordering. So you need to see the month of March like a very big, deep moment. And that's why the overall number was -- or the quarter was negative. But to be clear, until January included and already was true in the last quarter of calendar '19, we were stabilizing the business and this was going on the positive trends. And again, we plan, when the market will be back, to go back to our stabilization program. In terms of what will happen, to your question on what will happen to the other part of the business, which is not online, obviously, if the percentage of online business will increase, the rest will be reduced. And so in our opinion, there will be closures, there will be a reduction of brick-and-mortar stores overall. And this will make the brick-and-mortar stores more productive and the ability to deliver experience better. So we don't see this negative -- necessarily as negatively short in the long term. It will be obviously a negative in the short term. And we see the future of freestanding store and brand.com being an omnichannel future. In this period, it's fascinating to see how consumers are learning different way to use the online, the concept of last mile, the role of the small convenience stores, meaning freestanding store versus brand.com, how the 2 combined can create new experiences. So there's going to be some interesting, and frankly, in our opinion, promising evolution of the ability to serve the consumer in a luxury environment in the future. But the transition is going to be complex, difficult. And in the transition, the biggest opportunity is the strong growth of online. And again for us, this is also a positive because we have a great infrastructure. We are very strong in brand.com, in retail.com, in platform, in pure plays, depending on which part of the world, there are -- this channel had a different percentage of the online business, but we are well covered in each one of them. And so driving this across the globe and in the United States is going to be in the transition out of COVID, the strongest opportunity.

And our next question comes from Michael Binetti from Crédit Suisse.

I guess, Fabrizio, just to follow that question in the Americas. I guess you said January is positive and February a bit slower, so March deeply negative. I guess, still to average out to negative 23%, it seems like you held some inventories that were probably ordered by the retailers in the U.S. when you saw this coming. Maybe you could comment on, as we look to reopening, what were going -- what kind of inventory levels out in the channel you see that we're going to be working with as we reopen in the U.S., I guess? And then, I guess, just go back to travel for a minute to get to the positive number. We're just looking at some of the passenger data in China. Looks like it was down maybe 70% or 80% through February. So to get your number to be positive in travel, I think you've commented to us that Chinese consumer is about half of that business before. It speaks to very big growth rates in Europe and in the U.S. for your entire business to land a positive in the quarter. I'm just wondering, I know you said it to be into fiscal '21 until we really see a bona fide recovery in travel. But it seems like you've done some things in that channel that are driving a pretty meaningful share gain in the travel locations that were open heading into this. I wonder if you could comment on any of the strategy there that you think stands out recently.

Yes. I'll start answer your travel question and then Tracey will go on the inventory and -- question. So -- but basically, you're right. I think what you were describing is what happened, but let me summarize it, is January was another extraordinary month for travel. So that's also what is in the mix. So in January, remember, January is Chinese New Year. So -- and Chinese New Year, yes, started to be impacted but still some of it happened. And so we gained market share. We were planning to do that. We had an amazing program in all the areas that were open and not only, but -- so travel was strong in the October, December period and continued to be very strong in general. Then in February, there was a slowdown obviously but travel remained open in other part of the world. And then in March, travel really was closing. So yes, in travel in the month of March was the worst month. So the mix of the 3 months explained our strong market share performance in the quarter. I believe our market share performance in travel will continue, but the market in quarter 4 will be probably the worst in travel retail because Europe and U.S. have really closed. And in Asia, as I said, there is many Asia stores which are closed. There are 3 really active areas, which is within China, the domestic travel with Hainan to reach the center, which has been reactivated at a certain percentage, not fully, but with much higher conversion from travelers to purchases. So the key point here, remember that about 10% of travel buy something. The moment travel get reduced but is open and 30%, 40% of travel buy something for several reasons, because of good marketing, because…

And as far as the inventory in the trade, in our -- with our wholesale customers, clearly with stores closed 6 to 7 weeks, I would say the early part of the door closures we saw -- we started to see a slow pickup in online. And as we indicated, it has really progressed. So certainly, our retailers, those that can share inventory between their brick-and-mortar and their online sites have been drawn down on some of the store -- inventory planned for stores on their retailer.com sites. And we've seen those progress quite nicely and sales really picking up strongly in the last 2 to 3 weeks in particular. So as doors open, we expect that from a shipment standpoint, we'll see a slow reorder from a replenishment standpoint, certainly from some of the move -- the fast movers that have moved most quickly on retailer.com sites. But as the quarter progresses, we would expect shipments to gradually strengthen throughout the quarter, and by June, really be much stronger.

And we have time for one more question. Our final question comes from the line of Dana Telsey from Telsey Advisory Group.

Glad to hear everyone's healthy and safe. With the expense reductions that you've put in place, how much of it do you think could be permanent versus transitory? And lastly, with the innovation plans underway, any shifts in timing and launches, given the current situation?

So as you know, Dana, as we've announced, we have taken some short-term cost actions to improve the liquidity situation, and we announced those in the middle of April and so those are some of the employee actions that we've taken. And then some of the other actions are also short term as it relates to advertising, really rightsizing more our advertising to the current sales trends, which will obviously pick up as our sales trends pick up. There are other areas like travel. I think we're all getting used to the ability to work from home and communicate online. And so there are other areas that are more discretionary that we certainly are looking at more permanently, having cost reductions in some of those other cost areas. So -- but it's something that, as you know, we have ongoing cost management programs in addition to the program for Leading Beauty Forward, we have other cost actions, and we take advantage of the opportunities that we see to lock in savings whenever we can.

Yes. And I just want to add to this for the long term also, what were the most -- the best drivers for our growth before the crisis are the one which are coming better stronger. That seems to be the one that will come out stronger out of the crisis. If you think that online channels globally is coming out stronger, the Chinese consumers is recovering first and stronger. Skincare is recovering first and stronger than any other part. And within makeup, face makeup, within fragrance or seasonal fragrances and within travel retail, the very efficient travel retail doors of Asia are recovering faster. So our key drivers of growth are recovering first and stronger for the long term. So said in other words, I see all the signs that the key drivers of growth will come out of this crisis stronger for the long term. And even if in the short term, we are going to be hit hard by the closures, particularly by the very understandable consumer shock in this moment in the medium, long term, we will be a stronger organization with our key long-term drivers further validated. And one of these drivers will remain innovation, to answer your last question, is on innovation. We are continuing to innovate. As I said in my prepared remarks, we are reinforcing and investing in a Shanghai center to make sure that our innovation become even more relevant to Asia and to the Asian consumers and to the Chinese consumers, particularly. And we have a focus in our innovations much more than before in this period -- in this period of transition. We are focusing our ratio on fewer and bigger innovation. We are focusing our innovation on what works better online in this transition or trying to pivot online where possible because of the closures. And we have focused our innovation on hero franchises, meaning on the franchises, which are -- that have high consumer loyalty and high consumer awareness because in this moment of transition, in the middle of the crisis and out of the COVID crisis, we clearly see the consumers are interested in the brands they trust, in the product they know. They go back first to loyalty even before very new adventures. And so we are reflecting this in our innovation plan that in this moment, I believe, is one of the strongest we have had.

Thank you. And that concludes today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1:00 p.m. Eastern Time today through May 15. To hear a recording of the call, please dial 855-859-2056, passcode 4138908. That concludes today's Estée Lauder conference call. I would like to thank you all for your participation and wish you all a good day.