Earnings Call: Q2 2021

Feb 5, 2021

Good day, everyone, and welcome to the Estee Lauder Companies Fiscal 2021 Second 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. Call. Hello. On today's call are Fabrizio Freda, President and Chief Executive Officer and Tracy Travis, Executive Vice President and Chief Financial Officer. Quarter. 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 call 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 and all organic results exclude the impact of acquisitions. You can find reconciliations between GAAP and non GAAP measures in our press release and on the Investors section of our site. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third party platforms. It also includes estimated sales of our products through our retailers' website. During the Q and 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 Fabrizio. Thank you, Jamie, and hello, everyone. Let me first wish that each of you are in good health and that your families are well. Our hearts continue to be with those impacted by COVID-nineteen and our focus remains 1st and foremost on the health and safety of our employees, their families and our consumers. Call. To our employees, you have lifted us up from caring for the physical and emotional well-being of colleagues to making hand sanitizer, seeking opportunities to support charities around the world, generously contributing to the LC Clear Employee Relief Fund and so much more. In December, the company made an additional donation to the employees fund and we continue to make progress on our citizenship and social impact commitments. Call. Our employees' agility and creativity empower the company to deliver the exceptional results we announced today. Q2 in fiscal year 2021, sales rose 3%, a 12 point positive swing from the decline of 9% in the Q1. Impressively, 10 brands grew, led by the double digit growth from Estee Lauder and La Mer as well as great performance from Jo Malone London. Le Labo and Frederic Malle also rose double digits. We focus our investment decisions on engines of growth, while employing strict cost discipline in other areas, delivering strong double digit adjusted diluted earnings per share growth. In the quarter, we faced increasingly complexity from the pandemic, yet still delivered results that exceeded our record second half quarter of fiscal year 2020, when sales grew the strongest in 20 years in our seasonally largest quarter. Our multiple engines of growth strategy continued to prove its value, enabling us to pivot with agility in this challenging moment. We successfully activated efforts behind the growth engines of skincare, fragrance, Asia Pacific, travel retail in Asia and global online. 2019. Our skincare category performed extraordinarily. Its accelerating growth reflected Strong and locally relevant innovation, successful hero strategies, compelling ingredient narratives and deeper consumer relationships enabled by sophisticated data and analytics. Growth of our high repeat hero products was broad based across subcategories from cleansers to watery lotions, serum, eye care and moisturizers. 2019. Our skincare business has continued to go from strength to strength, bolstered by the peace of mind call of the ritual of skincare as an expression of self care. From entry prestige through luxury. Our brands excelled in skincare. Many brands contributed demonstrating the breadth of our performance. Doctor. Jart provided incremental sales from our double digit organic growth with its appealing derma brand positioning. The Estee Lauder brand once again delivered double digit growth across several of its hero franchises in skincare. Its new advanced Nat repair serum was a powerful force. Thanks to its new formula, a luxurious, more sustainable glass bottle. The serum delivered a healthy fit to advanced night repair eye and these 2 hero products benefited from their synergies and desirable sets. The brand's revitalizing Supreme franchise accelerated Significantly gaining momentum with its hero moisturizer. La Mer leadership in luxury skincare grew as consumers demand for its iconic products with powerful proven efficacy soared. Here, 2 serum was a vibrant subcategory. It's new deconcentrate was a big contributor to growth, amplifying strengths of heroes like Creme de la Mer and the treatment lotion. The new Genes Sans Dela Mer concentrated night bulb performed exceptionally well, driving the brand's ultra Luxury Franchise to New Highs. Clinique returned to growth, lifted by skincare as its hero franchises that are focused on hard to solve skincare problems like acne and dark spot thrived. Even better clinical interrupter is now firmly established as a core performance of the brand and continues to deliver significant growth. It was complemented by an acceleration in the brand's 3 step product and transformation lines. Our luxury and artisanal fragrances captivated consumer desires call for Tom Ford Beauty, Jo Malone London, L'ilabou, Frederic Malle and Kilian Paris, innovations and iconic products where both highly sold. These brands all delivered stellar online sales growth along with improving brick and mortar sales in Certain Markets. Jumalon London and Le Labo home products continue to flourish as consumer crave the sense to elevate the sanctuary of their homes. Our global online channel delivered outstanding double digit sales growth, significantly accelerated from the previous quarter and driven by every region. Growth was robust across the board as brand.com, 3rd party platforms, pure players and retailer.com doors all contributed meaningfully. Our go to market strategies Driving Strong Consumer Acquisition and Retention. We continue to enhance our brand sites with high touch services. These strategies these strategic investments are elevating The consumer experience from convenience buying to enriched shopping, complete with useful tools, targeted recommendation and expert advice. Across our brands, we are uniquely virtual try on is proving to be incredibly powerful, driving over twice the engagement as well as higher conversion and retention rates. In the quarter, we added virtual try on to more sites around the world. Quarter. The number of sessions nearly doubled from the prior quarter, reflecting both the expansion to additional sites as well as Big uptick in activity on brand size they had previously launched it. Video chat is also proving to be very impactful. In North America, conversion of live chat session is nearly 4 times higher than average conversion in the market. Video chart usage accelerated during the holiday season as our skilled beauty advisor offered useful in site and customized education to consumers driving much higher basket site than average. Our brands are increasingly offering other engaging virtual services and experiences. Two examples are found on clinique.com. Clinique Reality, the brand's skin diagnostic tool instructs the consumer in a highly personalized manner, driving notably strong conversion rates. And Clinique Skin School addresses the growing demand for credible education in an entertaining format with a new focus on real time interactions. Skin School brilliantly integrates live chat and trend based programming with the brand expert consultants. Call. We continue to pursue high touch innovation online as evidenced by the Estee Lauder brand new AI driven product recommendations based on real time consumer behavior and past preferences that we are piloting in North America. We anticipate This dynamic merchandising holds great promise and are excited to scale in this year for Estee Lauder as well for other brands. We are welcoming new consumers on our brand sites by also successfully driving repeat, enabled in part by our loyalty programs. In the first half of fiscal year twenty twenty one, the number of loyalty programs members who both rose strong double digits, driven by triple digit growth of international loyalty program members. In so many ways, we are building different relationship with our consumables. Our brands delivered excellent results for Tmall 11/11 Global Shopping Festival, leveraging the latest live streaming technology and capabilities to generate product discovery. For 11/11, The Estee Lauder brand moved into the number one rank in beauty. La Mer notched number 1 rank in luxury beauty. M. A. C. Was the number one prestige makeup brand and Jo Malone Landau was the leader in fragrance. We have long believed in the compelling growth prospects of online and have been investing in it for more than 2 decades. Call. At the onset of COVID-nineteen, we nearly doubled our rate of online investment, including accelerating our consumer facing investment, live virtual try on, social selling, omni channel or loyalty programs. We're also increasing our investment in our digital infrastructure and fulfillment network to meet the much higher traffic and demand. Call. In addition to these capital investments, we continue to optimize our advertising investment in digital channels as well as invest in our great online talent domestically and our headquarters in New York and in our local markets around the world. Among the regions, Asia Pacific delivered the strongest sequential improvement with sales growth accelerating from 7% to 27%. Mainland China prospered, while Korea and several smaller markets contributed organically. Day. In Mainland China, momentum in brick and mortar carried into the quarter, with sales again growing double digit. Online accelerated significantly elevated by a remarkable eleveneleven event. Nearly every brand grew as across the brands we reached more consumers. Thanks to locally relevant innovation, Hero Products, Rich Storytelling and Successful Influencer and Activations, as well as dedication and creativity of the local team in China. Travel Retail grew single digits organically, driven by strong results in Asia, particularly in Hainan, 2019 as we fulfilled the desires of the traveling Chinese consumers with ideal merchandising. Traffic to Hainan continue to rebound and the duty free annual partial limit had increased 3 fold there in July, providing a favorable benefit in the quarter as consumers sought to spend to the new annual limit before year end. Conversion was also a strong driver owing retail, which newly offered live streaming. Across channels, demand from Chinese consumers accelerated, especially in skincare and fragrance. The long term growth opportunity we foresee in the dynamic Asia Pacific region are abundant. Over the last 15 months, Despite the challenges of the pandemic, we made 3 significant investment commitments as we strive call to best meet the desires of Chinese and Asian consumers. In late 2019, we acquired Korean based skincare brands Doctor. Josh. While in early 2020, we committed to build an end to end innovation center in Shanghai. Today, I'm pleased to confirm we are building a state of art manufacturing facility near Tokyo. We are on track to open our Shanghai Innovation Center in spring 2022. This will increase our local capabilities in product design and formulation. We are also strengthening our consumer insight and trend analytics in this vibrant market. We broke ground in our new manufacturing facility near Tokyo, which is to be operational in late 2022. It will be enable us to better meet demand with high standards of sustainability and safety and will be designed to promote flexible and leading edge working environment. Across our engines, innovation contributed significantly in the 2nd quarter ahead of our goals driven by focus on fewer, bigger and better hero innovations. We have and enticing pipeline of new product launches for the remainder of our fiscal year. Already pricing in Asia and is also highly relevant for consumers of all skin tones around the world with its even better skin muster surge 100 hour with an exclusive aloe vera bioferment that provide hydration that goes 10 layers deep into skin surface and also last 100 hours even after you wash your face. In makeup, Clinique launched even better clinical serum foundation, a weightless liquid foundation with 24 hours wear, Good for skin ingredients to help visibly improving skin instantly and over time. Our strategic focus and investment in our ESG goals remain of utmost importance for us and our key stakeholders, and we continue to advance our work in the quarter. Let me share a few examples in climate, sustainable ingredients in packaging and inclusion and diversity for the many areas of our recent progress. We are pleased to have joined CDP's 20 20 Climate A List, having been awarded the highest score of A. In January, Aveda proudly announced that its products are vegan. As a mission driven brand, this was a natural step for Aveda, a brand that continuously works to reduce its environmental impact while also responding to the fast growing consumer trends. Our brands are employing more innovative and sustainable packaging as they launch new products, while also improving the packaging of existing products. The 2 new clinic products which I just described are 2 such example of innovation launching in more sustainable package. To continue to invest in and advance our diverse talent, we created a sponsorship program 20 and equitable access to leadership training, mentorship and career development opportunities. In closing, call. We delivered excellent performance amid the pandemic, leveraging the strength of our multiple engines of growth strategy, hero products and robust innovation. We did this while leaving our values as we increasingly embedded ESG in everything we do, focusing on safety and well-being of our employees, making progress on our environmental goals and acting on our racial equity commitments. We also invested in technology and data call for new capabilities to support accelerating growth drivers. These accomplishments and actions give us confidence that we are well positioned to continue to drive recovery and return to our long term growth targets after the period of recovery. Call. I'm incredibly grateful to our employees whose grace and fortitude are making us a better company throughout this very difficult moment. Quarter. While the role ahead will still be challenging, together we can be optimistic that brighter days are coming. Call. I wish each one of you good health. And now I will turn the call over to Tracy. Fiscal 2019. Thank you, Fabrizio, and I certainly echo your comments regarding our wonderful employees. 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. Quarter. Our net sales rose 3% in the 2nd quarter. The COVID-nineteen pandemic continued to pressure traffic in our brick and mortar distribution, but sales declines in stores were entirely offset by strong growth across our online channels and in travel retail in Asia. The December 2019 acquisition of Doctor. Jart added approximately 3 points to net sales growth. Quarter. Sales performed above our expectations in large part reflecting the outstanding execution during the annual Tmall 11/11 Shopping festival, as well as the many activations our brands deployed during key shopping events like Black Friday and Cyber Week. Quarter. In addition to the acceleration and growth we saw in skin care, fragrance sales were strong in the quarter and home fragrance continued to resonate during the pandemic. 2019. Our gross margin increased 10 basis points compared to last year's Q2. Fiscal year. Favorable channel mix was driven by the growth in our online sales and also reflects lower costs for testers in our brick and mortar distribution. Quarter. From a category perspective, the acceleration of sales in skin care also benefited gross margin. The positive mix was quarter, partially offset by higher obsolescence and a negative currency impact. Operating expenses improved by 160 basis points as a percent of sales, reflecting both the strength of our sales leverage during key shopping moments and our cost containment measures. 2019. Many of our COVID related cost containment measures remained in place during the quarter and contributed to our improved profitability, call, along with the benefits of our Leading Beauty Forward initiative. Lower selling costs and other in store promotion costs quarter. Also reflected the mix shift of our business from brick and mortar to online as well as some remaining government subsidies in certain countries. Given the challenged environment, we continue to experience periodic door closures. Partially offsetting the cost favorability was higher investment behind our strategic priorities, including China, online and digital technology, 2019 as well as the inclusion of Doctor. Jart expenses this year. As a result, our operating margin rose 170 basis points to 24.3%, a significant accomplishment during this important holiday quarter, considering the record results achieved in the year ago period. Our effective tax rate for the quarter came in at 15.9%. The lower tax rate for the quarter was primarily due to the recognition of a one time retroactive benefit related to recently finalized GILTI U. S. Tax regulations. We now expect our effective tax rate for the year to be approximately 20%, reflecting this development. Diluted EPS of $2.61 increased 24% compared to the prior year. EPS was higher than expected due primarily to the combination of strong performance during the key shopping moments in the quarter and the lower tax rate, while maintaining strict cost management. This performance is truly a testament to our team's ability to navigate the business through the difficult macro environment. 2019. Our plans under the post COVID business acceleration program are progressing. Through the past 6 months, we have taken charges of $46,000,000 primarily to close underperforming freestanding retail stores in our EMEA region and in employee related costs as we realign resources to support our online business and our digital capabilities. As the program continues in the second half, We expect to continue to rationalize our retail footprint, primarily in Western markets. Additionally, call. We took an $81,000,000 impairment charge for our Glamblo brand, reflecting the COVID related disruption of the brand's growth plans and lower than expected growth from its planned geographic expansion. During the first half of our fiscal year, quarter. We generated $1,980,000,000 in net cash flows from operating activities, which was substantially above the prior year due primarily to improvements in working capital management. Accounts payable increased reflecting timing related items that also support our second half growth plans. And accounts receivable reflected the rapid growth in our direct to consumer business and a 5 day improvement and DSO. We invested $250,000,000 in capital expenditures to support key investment areas like production capacity and technology. Conversely, we spent far less on counters and stores due to lower traffic and brick and mortar doors. Call. We ended December with $5,500,000,000 in cash and cash equivalents just above our total debt. Date. With the strength of our cash position, our free cash flow generation, and our confidence in our business drivers as we recover, we expect to reinstate share repurchases and maintain our dividend during the second half of our fiscal year. Quarter. So now let's turn to our outlook. We are obviously encouraged by the sequential improvement we saw in every region as we continue to manage through the effects of the pandemic. While cases of COVID-nineteen and new variants are surging again in some markets, 2017. Resulting in renewed door closures, restrictions and lockdowns. We are optimistic that once the vaccines reach enough of the global population, 2019. Nonetheless, we had not assumed a second wave. Quarter. Therefore, the more accelerated global recovery we originally anticipated in our second half has clearly been delayed. So while we are pleased with our performance in the first half, the prolonged uncertainty with respect to the pace and timing of the recovery makes it still difficult Q4 results to provide sales and EPS guidance for the full year. We do continue to expect sequential quarterly sales growth improvement as comparisons to the prior year ease and the global recovery unfolds. The inclusion 6 months of incremental sales from the acquisition of Doctor. Jart, which benefited our growth in the first half, adds 2 percentage points to sales growth quarter for the full fiscal year. As you know, several of our retail customers are liquidating or reducing their store footprints. Notably, Lord and Taylor, Stage Stores and Devenans are liquidating and Macy's, Nordstrom and DuGlass have announced store reductions. Call. Additionally, we expect to close certain freestanding stores in North America and EMEA now that the holidays are behind us. In aggregate, The lost sales represent between 1% 2% of our total full year sales, and we do expect to recapture a portion of those sales in other locations and online. While we will continue to execute our cost savings programs, call. It is important to recognize that some of the temporary cost measures we took last year will be returning in the coming months. Call. The principal areas of returning costs include some additional advertising, promotion and point of sale employee costs, 2019, which were all meaningfully reduced during the time that retail doors were closed last year, as well as duration of certain temporary pay reductions we took. Travel and retail consulting costs are expected to ramp up more slowly. Costs will also increase as offices reopen and our facilities continue to implement enhanced safety protocols. Date. We will incur incremental spending for our new Asian manufacturing plant and innovation center. And as we continue to signs of consumers' willingness to resume their normal activities, including return to stores, we plan to invest incrementally 2019 as we normally did pre pandemic in our Q4 to strongly support our launch programs and to begin to reaccelerate our makeup business in the upcoming fiscal year. Looking at the near term, for the Q3, we expect sales to rise between 10% 11% in constant currency. We have a terrific lineup of product offerings and activations for the Lunar New Year, and we expect continued strong online sales. Date. You may recall that we had an exceptional January last year. We have lapped the purchase of Doctor. Jart at the beginning of our Q3 and the brand is now part of our organic growth. Currency is expected to be accretive by approximately 3 percentage points. 3rd quarter EPS is expected to be between $1.10 1 $0.20 reflecting the sales outlook and a careful balance between cost containment measures and investment in key growth areas such as online and technology. And currency is expected to add $0.03 to EPS. We remain optimistic that the pandemic will be controlled and out of home activities will resume under a new normal. With a solid first half behind us, we have proven we can deliver in the context fiscal 2019. Thank you, everyone, and welcome to the Estee Lauder Company's fiscal and invest in the capabilities needed to sustain our growth over the long term. The resiliency of our business during this time fiscal 2019. And the passion and dedication of our teams reinforce our confidence in our strategy and the continuation of our ability to deliver long term sustainable growth. And that concludes our prepared remarks. We'll be happy to take your questions at this time. To ensure everyone can ask their questions, we will limit each person to one question. Time permitting, we will return you for additional questions. And our first question is going to come from the line of Dara Mohsenian with Morgan Stanley. Call. Hey, good morning, guys. Good morning. So I just I want to focus on top line, quarter. Clearly, very strong performance in skincare and e commerce during COVID. Can you just talk about the sustainability of that strength in each of those areas as we move to a post COVID environment, as well as what some of your key strategies might be to maintain momentum post COVID. And then on the makeup side, that's obviously been a laggard area for obvious reasons. How quickly do you think category growth recovers in makeup post COVID? And what's your outlook there? Thanks. Okay. So first of all, the key drivers for us, let's go 1 by 1. Skincare, call. Very sustainable. The consumers are always more and more enthusiastic for skincare. We have An amazing pipeline innovation for the future years. And the strengths of Asia and particularly of China is in term of mix one of the biggest builder of skincare because the penetration of skincare, the penetration of beauty in for skincare in Asia is very, very high. So, we assume the skincare trends will continue after COVID. The other driver China and the potential of China as we explained very well in our Investor Day It's for the long term. The Chinese consumer, the demographic are right, the potential of The smaller cities at Tier 3 and Tier 4 cities will continue to grow. The power of online and the offline distribution will continue to be very strong. In TR, imagine that the TR growth today, TTI results are mainly driven by Asia and particularly by the domestic travel acceleration within China. So in the future, The domestic travel acceleration within China will continue, but the international travel will be reinstated. And so this will be a further And most importantly, as you know, our drivers tend to be accretive in profitability. So that will create resources over time. The lager is the brick and mortar particularly in the West. Now this obviously in the short term is an issue because there is lack of traffic and the lack of traffic has created issues of productivity. But call. Also on this one, we are working for rebuilding this for the long term. And so what is a drag today, a big drag on what is about 1 third of our business is still in brick and mortar in the West. And so if you imagine that the traffic post COVID will come back that There are all the retailer closures that Tracy summarized, which are happening that will reduce the amount of stores which will not be sustainable in the long term and our business acceleration program, which is really putting back rightsizing, if you want all the channels for us rebuilding productivity over time. And so the combination of traffic, closures and business acceleration program is our answer to in the long term after coffee being able to make also brick and mortar In summary, on the continuous trends post COVID of our drivers, new accelerated drivers, And we are working to make also what is a drag in the short term rebuilt as a positive long term channel, which is the brick and mortar in the West. In term of makeup, it was last part of your question. Our makeup is very much driven by user educations. So use education meaning going to the office, going out for dinner, having a party, etcetera. So clearly, the makeup category growth will be associated with the post recovery, and we will be ready for that. Our point of view is that when The usage occasion will go back into the life of people. The recovery will be fast and steep. And so we are ready for that. Now if when do we assume this will happen? Frankly, the answer is difficult to answer the same way Tracy explained is difficult to answer call. In the fall of 2021, we could see a beginning of certain usage location to be reestablished because of this makeup growth will follow back in our opinion starting from the moment particularly. Great. Thanks. That's helpful. You're welcome. And our next question is going to come from the line of Lauren Lieberman with Barclays. Great. Thanks. Good morning. I was curious if we could talk a little bit about e commerce development in Western Europe in particular, call. Because I think what sort of hidden, if you will, in the numbers and you work through contribution from travel, retail and so on is that Western Europe, while still down, of course, was down, I think, a lot less than has been the case thus far through the pandemic. You mentioned the Cyber Week kind of shopping dynamic in Western Europe, but my sense is that that is a channel that had been somewhat less developed quarter. Historically, so I'd love to hear more about how that built up and thinking about kind of stickiness of that behavior going ahead, particularly in a quarter or 2 where there aren't big shopping events that are typical for that market. Thanks. Yes. So first of all, the online business has done very well this quarter, plus 60% globally and is interesting, we are growing double or triple digit in every brand, every region, every channel, a meaningful channel, brand.com, retail.com, third party platform, pure plays. And so Western Europe is the same. Western Europe is growing depending by market, double digit or triple digit in online. And obviously, the holiday season It's been because of the lockdown as you know in Western Europe particularly COVID was pretty high in November December because of this the brick and mortar We are closed in countries like the U. K. As an example. December was a super difficult month. And so there was no the regular Christmas holidays in brick and mortar and obviously U. K. Was not the only place. And so because of this, We were able to pivot to online in an extraordinary way. I think we our teams have done a magnificent work in taking care of our consumer online when they were because of your prudent behavior for COVID not going to the brick and mortar. And what we have seen That this works in many, many cases, meaning at the end the consumers, certain categories were working because of meaning the consumer didn't do without their preferred La Mer cream or their preferred Advanced Norepinephrine or whatever. And so we got a lot of selling via the online channel, but also that we are able to speak to their gifting habits and we created gifting opportunities and delivery model for gifting etcetera. So there was a lot of activity in invention in this area. Now this online in general, I believe the online We'll continue to be very strong also in the long term and this acceleration will continue also post COVID. And one of the reason for that, which is particularly true in Western Europe is that the new online focus Created brought online more than created new consumers, including more mature consumers. Online, particularly in Europe, was really dedicated to millennial younger consumers, while during COVID, more mature consumers came online and they are liking date and they are becoming loyal. And so they will also post COVID have a bigger percentage of their shopping online than before. On top of this, if you think that we are adding high touch services online, so what were the services that in before were available in brick and mortar? Quarter. Now gradually, but they are also available online. And we've been able to scale this at the speed of light. Just to give you A number to understand our ability to scale new ideas is today, this will try on coverage. Imagine that and that was it was not even close to that 6 months ago. And so the consumer responded to that quarter. And this is driving also in Western Europe, a lot of online and probably sustainable and more loyalty online gross different group of consumers. So online had a big role in Western Europe in quarter 2 and will continue to have a bigger and growing quarter overtime in the next years. And our next question is going to come from the line of Erinn Murphy with Piper Sandler. 'twenty one. Great. Thanks. Good morning. I guess my question is around the landscape here in North America. We've seen some pretty unique partnerships inks recently with Kohl's and Fora and Ulta and Target. Do you expect to participate in these partnerships? I know historically math hasn't been that appealing, but maybe with the Ulta Target quarter. Would some of your brands make sense? And then I guess secondly, if you think about the post behavior of consumer or quarter. How comfortable are you with the entirety of this brand portfolio today with divestitures ever make sense? Thank you. Sorry, I didn't understand the second question. I will confirm, are we with? Yes. Are there any brands, I'm thinking of the makeup portfolio that you would ever consider divesting on the other side of the pandemic. I'm just curious on your comfort with the entirety of the portfolio today. Date. Okay. So, the first answer is, yes, we are working with our partners in discussing the Ulta target and the Coles Sephora opportunities. As you said, as part of your question, this will depend on which brands in our portfolio by brand to these activities and this could be a driver of future acceleration or recovery in North America as well. Importantly, to underline these two opportunities are both brick and mortar and online. And so obviously, it will be very important also to being able to manage the online part of that opportunity. In terms of the portfolio of brands, we continuously look at our portfolio. We look at our portfolio for efficiency. And we are opened and we've done this already in the past to rationalization decisions in our portfolio, meaning closing brands that for a good reason do not cannot sustain the long term investments and we continue looking Strategic Apps. So this is a continuous process. And during coding, this is continuing. Great. Thank you. And our next question is going to come from the line of Rupesh Parikh with Oppenheimer. Call. Good morning. Thanks for taking my question and congrats on a nice quarter. So Fabrizio, I had a question just on your China business. I was curious what you're seeing right now in the makeup category in China? Yes. The makeup category in China is stronger than makeup in the other regions because, as I say, responded to broader social occasions and usage occasion, but it's still declining. So is not different than the rest of the world, China, meaning skincare is very, very strong, fragrance quarter. When you think of the explanation I just gave before that makeup is completely correlated to the occasion of usage In China, because of the good control of COVID and because of the occasions like business offices are opened, People are shopping more regularly, brick and mortar shopping is more present in most of the cities. Because of these more occasions, makeup is in better shape, but still is the lagger between the categories. And mostly in China, I would say, from our consumer understanding is because of mask wearing, meaning China because there is very disciplined mask wearing and mask wearing also is a reason for less use of Jomacap. So Stronger than the rest of the world, but still not as strong as it will be after COVID and post COVID where we assume there will be or expect there will be a strong recovery of makeup also in China. Great. Thank you. 2019. Our next question is going to come from the line of Nik Modi with RBC. Call. Yes. Good morning, everyone. Fabrizio, I wanted to go back on the online discussions. You guys have done such a great job with analytics and understanding kind of consumer behavior. And given how much migration has occurred online, I'm just curious what your data and research and analytics are saying about the stickiness. Call. For instance, you talk about these very mature consumers in the developed markets migrating online. How sticky do you think that behavior will be? Call. I think that will be an important kind of discussion going forward given the margin differential between online and some of the other channels. Thank you. Call. Yes. No, it's a very good question. And again, our point of view, this will be very sticky, because the People are shopping online and obviously some of them are shopping online because the brick and mortar we are closed for sure in the case of Luxury. Call. But the but they're liking it, and we see all the statistics, all the data telling us that they are enjoying this space. For example, quarter. Our loyalty programs are working better and better, and we have more loyalty program as we discussed, and they're Getting expanded and the level of loyalty is going up and the repurchase rate, meaning they're coming back is going up. Then we see conversions very strong and traffic increasing. And there are ways where the conversion will be driven and will be maintained after the most important of the investment we are doing In order to maintain conversion also after COVID is the high touch services transfer online. So the chat with the consultants, the virtual try on, the live streaming opportunities, the use of our particularly the brand.com in this case also as media platform because we see that the time That the consumer are spending online is increasing dramatically because when they have the virtual try on service, the possibility to talk to a consultant as they spend more time. At this time, it's time of exposure to all our equity messages. So this is media value. This is really media value, meaning we have more than half a 1000000000 consumers coming On our side every year more in this moment. And then imagine that they stay 9 minutes and they stay if we had to buy media to speak to 500,000,000 consumers for 9 minutes, this will be a huge cost, while this in place is an added benefit of our selling operation. So, there is a lot of value in these high touch services. What they will do is they will increase differentiation call for the services and will maintain or possibly further increase conversion after quarter. And then finally, we'll increase the value of our online as media value. And so this is a very positive view for the long term. Obviously, I we believe that there is a lot of consumer that will continue to shop also in brick Mortar after COVID. There is no one consumer that is only online or only brick and mortar. I believe the consumer will love the omni channel experience. By the way, after COVID, they will be anxious to get again the brick and mortar experience. So they will come back. And that's why we are building around This reality, this expectation, a much better omni channel platform where the consumer will be able to choose the percentage of purchase of time, of experience online and how much they want in brick and mortar, and they will navigate among the 2 channels in new ways. I believe the companies that will have brands, that will have a good omni channel model in the future will have a competitive advantage. Excellent. Thank you. You're welcome. Our next question will come from the line of Olivia Tong with Bank of America. Great. Thanks. Good morning. First is just a clarification. Tracy, I believe you said that you were adding additional production capacity. So just curious categories, what regions you're looking at for that? And then my question is really around the margin progression, especially given this quarter. I think that's the highest quarterly operating margin you've achieved as a public company. So realizing, of course, that there's a lot of normal expenditures that aren't happening right now. Quarter. But as you think about second half, long term, are there things you've learned over the course of almost 12 months now call. On areas you can come back cut back on spend more permanently or there are areas where you have to just push even harder? And As you think about specifically for Q3, what's planned in Q3 to because while you're looking for margin expansion, It looks like it would only imply about similar to what you achieved in fiscal Q2 despite COVID obviously now entering the base. Thank you. Call. Okay, Olivia, no thanks for the question. So regarding our production capacity, as you've seen from our results over the last couple of quarters, clearly, where we are in have been in need and have been investing in terms of production capacity is in skincare. And we have invested in North America, we've invested in Europe. And as you heard us announce this morning in our prepared remarks, we are also investing in a new facility in Asia to support primarily skincare, and there will be some makeup, primarily foundation as we're thinking right now in Asia. So very much having capacity closer to where our strongest demand growth is, will be a real benefit to us quarter. And we're looking we're certainly looking forward to that. As it relates to the margin, I mean, I would as I said in my prepared remarks, Olivia. We had done an excellent job of controlling costs last year once the pandemic hit. Many of those cost controls were temporary controls. When you think about the management salary reductions, some of the rent abatements that we got, headcount, T and E, etcetera. So in terms of the learning going forward, clearly, There are some areas of, I would say, more discretionary costs as we emerge out of the pandemic that we will continue to control. But the long term sustainable cost controls really come from our cost saving programs. That's where the permanent more sustainable cost takeout comes from. So that's the reason why you're seeing if you think about what we said last year in terms of our cost programs and the significant amount of management that we did in the 3rd and the 4th quarter to control cost Given the fact that all of our brick and mortar doors over the course of the past ended up closing, that some of those costs certainly will be back in the second half, in the third and the fourth quarter. Call. But we will continue to manage costs in a disciplined way as we have up to this point. Thank you. Our next question is going to come from the line of Chris Carey with Wells Fargo Securities. Hi, good morning. Good morning. So I just wanted to follow-up on quarter. The operating margin question, I think it's important. EMEA, strongest margin we've seen, fragrances, I think strongest margin we've seen. And if I'm just hearing the answer to that question, it sounds like, look, there was There's been a lot of efforts around cost savings, but certainly there's a channel dynamic as well. With EMEA online doubling, and certainly you've seen strength in skincare and and Asia. And so I am just wondering how much the margin improvement actually might be more sustainable time from a product or channel mix standpoint. Thanks. Well, yes, I mean, absolutely, we have tailwinds as it relates to margin given both our category mix growth, as well as our channel mix growth. We do have obviously a fairly large footprint of brick and mortar call. Right now, given where traffic is, is a bit of a drag on our margin performance. And obviously, we're addressing that and we will see Once the pandemic is behind us and traffic returns, how fast it returns and in the meantime, obviously, quarter. We're taking some actions, but we are very comfortable that we have margin progression ahead of us once the pandemic is behind us in a more sustainable way, especially given the tailwinds that we have to your point, Chris. Okay. Thank you. Our next question will come from the line of Michael Binetti with Credit Suisse. Hey, guys. Thanks for taking our questions here. I do want to follow that, Tracy, at the Analyst Day, you walked us to margin that was well into the high teens with what you knew on the business there. As we look around at some of the businesses that I would say are probably the closest in comparison to yours. We see some with let's start with the 2 on the operating margin. Obviously, you've made the structural changes that a few of the other analysts run through, but you're going to end up in a bigger travel business, a bigger digital business, a bigger China business, closing some stores that were a drag. I mean, do you see Over the very long term, 5 to 10 years, can this business move into the 20s on margin? Quarter. It's again, you said over the very long term. So look, I would say that certainly that is something that we are targeting given all of our again, given the tailwinds in terms of channel growth and category growth might change, obviously makeup might and we believe makeup will covering. We're certainly going to support it to recover and the margins will improve on makeup as well. Makeup actually is the category that has the biggest penetration of freestanding stores and brick and mortar. So it is a category that is particularly challenged from a margin standpoint in this environment. But certainly, Michael, everything that we are doing from a business management standpoint and from a cost management standpoint would get us in that North Star of 20%. Quarter. And Fabrice, if I could follow that. You've seen some really strong growth and Hainan has come up a bit in the last two calls. We see some new regulations even as recently as this week. Government is going to allow consumers to ship goods home versus physical pickup in the past. So it seems like there's more and more friction coming out of that process A lot of square footage is going to be added there. Does Hainan Island change your travel retail business call. Even after global economies reopened, does it change your outlook on travel and the Chinese domestic consumer? 2019. Yes. Now, as I said before, our travel retail business in the short term is really driven call by Asia in general and China domestic in particular within China domestic, Hainan is the star and is driven call by the new traffic and by the increased conversion and by the quantities purchased because of the regulations that you just explained and by the development of retail. So those are all very important long term strength of the channel which is developing. Now when the normal travel will maybe it will never be normal exactly, but the new normal travel will be reinstated after COVID. And you add To this progress of the domestic travel in China, the international travel in America and Europe within the rest of Asia And the Chinese consumer will go back traveling the world. And that's obviously their desire, one of the biggest aspiration if you to the consumer and look to the consumer, appearance and research for the long term. So when there will be a combination of reinstated international travel with the stronger domestic travel model that has been developed during this period. This will make TR still one of the most important long term channels of opportunity, full of opportunities. And again, the biggest opportunity remain technically driving conversion. So the conversion of travelers into buyers and the retail. So the possibility of buying also without queuing in a store for a long time where you need to take a plane and things like that. Those two elements are big drivers of the future of Travel Retail independently from the short term management of the crisis. And in term of the China overall business, we do monitor Chinese consumer. We spoke to it last time. This time, our Chinese business between quarter 1 and quarter 2 is basically double the level of growth our China Mainland business. Our TR business is also accelerated but not as strong as the China mainland business, which was driven by amazing online events like 11.11 during the November period. And so the combination of the development of online within China, the fact that brick and mortar in China double digit in quarter 2 was growing double digits showing the potential of brick and mortar when COVID is more managed will be more manageable. And then travel retail continues to do very well. And so quarter. When we look also to our total Chinese consumer consumption, bringing all together what is domestic travel retail and Mainland China, we still see an acceleration in total from quarter 1 to quarter 2. And so we believe this is a very, very strong call. Every single one of our partners been able to do good business with us for the long term. That's our goal and we are working on Thank you so much. And we have time for one final question. And our last question is going to come from the line of Mark Astrachan with Stifel. Yes. Thanks and good morning, everybody. Maybe just one follow-up and one other question. So just 2019. On online, where did that settle as a percentage of beauty category sales post pandemic? And how do you think about retention of those incremental consumers on retailer.comversusyourownbrand.com, I assume higher for you all. And then just quickly, Holistically and thinking about your guidance on a go forward basis, are big events like 618 and 1111 becoming more quarter. Important in driving your business, meaning that the June quarter might be a little bit bigger than historical levels, same thing for the December quarter. And does that partly 2019 kind of why we saw somewhat weaker September quarter guidance and I think maybe people had expected the time the same for the March quarter today. Thank you. Call. Go ahead, Dorit. Tracy, you can go. I'll take this. Yes. Let me talk about the key shopping moments. Quarter. Absolutely, particularly in the holiday period. As you recall, last year in Q2, we had a 16% growth in The Q4 6.18 is a little bit quite a bit actually less meaningful to the quarter than certainly 11, 11, 11, but we are seeing concentration in some of those events. And certainly, that beat in terms of our expectation on sales really flowed through to the bottom line in the second quarter. On the brand.com, I mean, the different Online has different channels. They are brand.com, retail.com, pure play and third party platform, Which we define as the Tmall model. And so these channels have different level of developments by countries And this is the results of consumer preferences and historical development of the channel. So it's not that call. We are driving all of them and particularly we work with our retail partners very closely to drive their retail.com, which She's most of the times doing very well, particularly in this period, but also for the long term. So for example, in China, retail.com is very limited and while brand.com and most importantly third party platform model is the most developed, while in the U. S. Retail.com is very, very strong and we see a lot of great development 2017 in the retail.com of our key partners. And this also serves in this moment as a mitigating factor to the brick and mortar issues of productivity that we have discussed before. So, we will continue to develop each one of these channels and is the consumer deciding where to go. And obviously, we partnered with each one of our retail partners to do the best possible job in every channel. Thank you. If you were unable to join for the entire call, play back will be available at 1 pm Eastern Time today through February 19. To hear a recording of the call, please dial 855 8,592,056. Passcode ID number is 1,000,000,000,000,000,000,000,000 that concludes the Estee Lauder conference call. I would like to thank you all for your participation, and I wish you all a good day. Thank you.