Dana Telsey: Hi, good morning Fabrizio and Tracey. As you think about pricing and the new launches that you have coming, how do you think about pricing both for existing hero and new products and how it’s changing? Then as you continue to enhance the specialty multi distribution, how do you see engaging with the department stores and what that relevance–how that relevance changes? Thank you.
Tracey Travis: We have a pretty sophisticated, Dana, pricing model for new product launches, and I think we had spoken about it even under the profit recovery plan, making sure that our new product launches actually are accretive to our overall margin, so we have actually cut some of our new product launches that were planned for fiscal ’25 in order to do that, and re-looked at our innovation pipeline to make sure that what we are launching is in fact accretive. But the sophistication that goes into our new product pricing model in terms of looking at what the competitive benchmarks are relative to that particular launch, also from a market standpoint, making sure again that the new product is positioned appropriately, we look at if it’s replacing an existing franchise, measure the product and pricing differentials related to added content, added benefits, added packaging, etc., so there are a number of things that factor into it.
I think that as we mentioned, we’ve got some very exciting new product launches in the second half of this year. MAC is re-launching two of their largest franchises, Studio FX and the MAC lipstick. We’ve got Estée Lauder Re-Nutriv with SIRTIVITY that is quite exciting, really playing on the longevity focus that is accelerating in the market. Fabrizio just talked about trends – we’ve got quite a bit of trend-based but highly efficacious from a quality standpoint, products launching in the second half of the year, all of which have been priced appropriately for the benefits that they are contributing.
Fabrizio Freda: Yes, and on the different retailers, the retail channels, we obviously support every one of the retail channels, so specialty multi, department store. Every retail channel is going to be supported more and more in a tailored way, meaning tailoring to their model, to their strategy, to their specific consumer profiles, and this will be very different country by country. There are countries where certain channels grow faster than others and maybe the opposite happens in other countries, so it’s not about their preferences are changing, the strategy is about tailoring the strategy to each channel, supporting every one of our customers. At the end, the result of this is that the mix of our business in every country of the world will be focused on growth.
It will be focused and leveraging the channels that the consumer is in that specific moment we choose, or the different target of consumer we choose in every channel, so it’s about tailoring to all the opportunities wherever they are.
Operator: The next question comes from Steve Powers with Deutsche Bank. Please go ahead.
Steve Powers: Hey, thank you and good morning. Back to the profit recovery plan, I think your outlook today at the midpoint implies roughly $1.5 billion or so of operating profit in fiscal ’23, and you frame the recovery program as incremental profit from here, which assuming the benefits are all off a fiscal ’24 base, that implies $2.5 billion to $3 billion or so of operating profit in fiscal ’26, and I think that’s before considering presumed underlying growth in the business over those next couple of years.
Tracey Travis: That’s correct.
Steve Powers: Okay, great. I guess the question is how do you protect–against that objective you’re saying today, how do you protect against those incremental profits being essentially countered by incremental investments that emerge over that time, because you’re seeing the expectation for investors today that the profit comes, it’s a pretty firm objective, but how do you guard against other costs creeping into the model over the next couple of years?
Tracey Travis: It’s a great question, Steve. Look – we are certainly realistic that with regulatory changes, with what happens with inflation, there are a lot of things that we, in the base business before the profit recovery plan, need to be able to manage, and one of the things that we are working through with our organization is how do you make those choices in terms of what to invest and dis-invest in, in terms of the base business, so those are areas that we are keenly focused on as we look at just what the base progression, which you’re very familiar with what our normal progression is, outside of obviously this unusual period of post-pandemic disruption that we’ve experienced, so. We certainly have in the past been able to do that and believe that we can do it in the future as well.
We’ve also stood up a very disciplined and strong project management office in order to be able to track all of the savings that we are committing to, and also obviously with the base business, making sure that we’re meeting our normal base expectations as it relates to regular growth and margin expansion.
Fabrizio Freda: I’d just like to add one point, is that as you said, the $1.1 billion to $1.4 billion being defined as extra profitability, which means that the reinvestment part in building our brands and accelerating growth comes from more savings than what we define as extra profit, so to be fair, there will be more savings. Some of them will be reinvested in consumer-facing growth acceleration, and the $1.1 billion to $1.4 billion is our target for extra profitability, and that’s why we have been very clear on that. The investment in growth that will be done, or the extra investment in growth for the future that we want to develop capabilities for, are for consumer-facing. We are not planning to invest in many new capabilities; rather, we want to leverage the capabilities we have built in the last period in a very efficient way, so that’s the way to think, I believe, about the profit recovery plan.
Operator: Our last question today comes from Lauren Lieberman with Barclays. Please go ahead.
Lauren Lieberman: Great, thanks. Good morning. Two things I wanted to touch on. The first was just, I think during the prepared remarks, you commented that retail sales ex-China and travel retail are up mid-singles, but organic also excluding those things was down 3, so. I know you’ve spoken very explicitly about the inventory dynamics in Asia travel retail, but I was just curious about inventory dynamics outside of those markets and why that disconnect was that large. That was question one. Then question two is just on the go-forward plan around unstructured markets across Asia. Of course we all know there’s been regulatory change in China and Hainan, but you’ve spoken many times in the past, Fabrizio, about how that market tends to shift and move with the travelers and currency and all sorts of things that can impact where it’s taking place, so was curious on your thoughts about that unstructured market going forward, what you are or aren’t going to do in terms of regulating the degree of participation, because I think it has a lot to do with how we should be thinking about and modeling the absolute size of the travel retail business in dollar terms as we look out over the next several years.
Thanks.
Tracey Travis: Thanks Lauren, I’ll start with the retail and organic. You know, when we have–especially in the second quarter, obviously when we have big events like 11.11, and you have holiday and in the case–you know, for us, when those events don’t go as well as expected, obviously retailers pull back on and we pull back on some of the shipments that we have to those retailers, in order to bring things back in line, so you will see from a quarter to quarter standpoint, there may be some disconnects related to that, but it averages out over the course of a year, so we don’t have any issues in any other markets like what we have been experiencing in Asia travel retail for you all to be concerned about.
Fabrizio Freda: On the unstructured market, our focus is on travelers and travelers converting, and that is getting better and better around the world, just to be clear, apart from the China situation that we have discussed many times. In the rest of the world, there is extraordinary progress in this area, double digits, in some cases triple digits in every market of the world, so this will happen more and more, also in China, also in Korea, and also in the part which has been the slowest to recover in that direction. So first part of the answer is the focus to continue growing in travelers and continuously improving the travelers’ conversion. As we are seeing from the data of the market, the travelers has been improving very, very nicely, but the conversion of the travelers for the moment is below expectations.
The unstructured market as such is reducing, and I want to say it’s reducing also for regulations for the intentions of the government, so the retailers, so there is a trend to reduce the amount, and obviously this is also what we are doing, and so the way you should expect is that the unstructured market will be reduced, in my opinion will reduce also as a market, but will be reducing for us. It will be reducing in a gradual way as the travelers improve and increase over time.
Operator: That concludes today’s question and answer session. If you were unable to join the entire call, a playback will be available at 1:00 pm Eastern time today through February 12. To hear a recording of the call, please dial 877-344-7529, pass code 1939290. 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.
