Earnings Call: Q1 2019

Oct 31, 2018

Good day, everyone, and welcome to the S. A. Lauder Companies Fiscal 2019 First 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 Tracy 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 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, changes to the provisional amounts related to the recently enacted U. S. Tax law, the new accounting standard for revenue recognition and other adjustments disclosed in our press release. 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 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, Rainy, and good morning, everyone. Our fiscal year is off to an excellent start as our multiple engine of growth once again drove double digit sales and earnings per share gains, reflecting strength across our categories, brands, markets and channels. Strong double digit advances in many areas of our business enhanced by targeted investments drove comparable sales growth of 11%, our 6th consecutive quarter with a double digit increase. We leveraged our strong top line growth and benefited from ongoing disciplined cost management fueled by our Leading Beauty Forward initiative, which led to diluted earnings per share climbing more than twice that rate, up 24%. With these strong results and confidence in our ability to execute effectively, we are raising our EPS guidance for the year. We now expect EPS growth of 10% to 12% in constant currency on sales growth of 7% to 8%, which is at the top of our long term sales goal. The macro environment was particularly challenging this quarter with the initial impact of tariffs in Europe and China, a softer UK beauty market stemming from concerns about Brexit and the closure of department store doors including Bon Ton in the U. S. And House of Fraser's in the U. K. Despite these factors and overall volatility, we not only delivered our sales and financial targets, we exceeded them. Our success was widespread throughout our business and driven by the strengths of our diverse brand portfolio, innovation and growth engines in every region and channel. Many brands grew double digits, including 3 of our 4 biggest brands Estee Lauder, MAC and La Mer, reconfirming the power and desirability of strong established brands. Many markets delivered robust growth. In the Asia region, China, Hong Kong, Japan and every country Southeast Asia advanced by double digit. In China, our sales accelerated. Consumer demand for our products was also vibrant in our other emerging markets excluding China. Importantly, our retail sales growth in the United States turned positive and global e commerce and travel retail posted significant increases. A sharper focus on strategic innovation drove our brand growth, particularly in the most popular hero franchises. Deeper analytical insights are giving us a greater understanding of consumer needs by market and amplifying our innovation power. We developed high quality products for targeted consumer groups and a diversity of skin types that attracted new consumers and achieved strong repurchase rates. We supported our innovations with increased digital advertising and influencer attention that enhanced storytelling led to higher awareness, traffic and sales. Our strong innovation program is a sustainable growth engine that is broad based, flowing across all our brands and geographies. In skincare, our Estee Lauder brands Eurofranchises drove impressive growth. The brand's advanced night repair franchise increased nearly 50% globally, fueled by new Superstars Euro product. In Asia Pacific, sales of the new iGel soared. La Mer was a star in our portfolio. Its sales climbed double digits in every region on strong demand for luxury skincare and new launches, including its treatment lotion hydrating mask, which boosted its global mask business. The brand is number 1 in luxury skincare in North America and in the UK, again the share in both markets also reflecting loyalty from devoted consumers. Clinique skincare business grew globally, supported by new innovation and established favorites. To accelerate one of its key product lines, Clinique launched a unique hydrating jelly in its dramatically different moisturizer franchise. Initial sales are exceeding our projections. Clinique also modernized its historical ingredient philosophy, making it more relevant for today consumers. We are also excited about a new Clinique skincare innovation that we launched in December and can be personalized for each consumers' needs. Another brand with strong global skincare sales was Origins, thanks to its moisturizer and hero products. Origin is riding the growing wave of interest in natural beauty products and with its strong positioning is leveraging demand with new innovations. Innovation and creativity in Macat contributed to Mac's success in the quarter. Its global growth was led by its international business and reflected its focus on bigger innovation with more impact. Its new Powder Kiss lipstick brought renewed attention to the brand coveted lipstick collections. It was developed by M. A. C. Artist backstage and launched during fashion week in New York and Milan. Estee Lauder brand also achieved excellent growth in makeup. Sales of its Double Wear foundation, its biggest makeup franchise increased more than 20% aided by shade extension and a new product in the line. As it continues to serve and appeal to all skin types worldwide with a broad range of shades and formats. 2 Phase retail sales in North America rose sharply, driven by new shades of Born This Way Foundation and Super Coverage Concealer. 2 Phase gained share in the U. S. And its better than sex mascara continue to be the best selling prestige mascara in the market. In Fragrance, launches from several of our luxury and artisanal brands resonated with consumers, including Tom Ford Beauty's ombre leather and a range of scents from By Kilian called My Kind of Love that was created for specialty multi in North America and Western Europe. Estee Lauder introduced Beautiful Belle in advance of the holiday season. Combined sales from brands we have acquired over the past few years rose significantly. We are expanding their target consumer reach by entering new markets, further penetrating equity building channels, while at the same time developing new products and integrating them into our operations. Our pioneer digital strategy continues to support our brands in many ways. In terms of e commerce, all three platforms brand.com, retail.com and third party sites advanced sharply. Our 200 brand sites generated double digit sales growth and also have become powerful equity building vehicles. Our brand sites alone attracted nearly 90,000,000 global visits in the quarter, making them also highly valuable media assets. For perspective, we estimate that those consumer visits were worth $250,000,000 in advertising equivalent, demonstrating effective and efficient new ways that our brands have to engage with consumers worldwide. We continue to expand our brands on 3rd party platforms. We successfully launched Jo Malone on Tmall in China and 5 more brands on ASOS in the U. K, a destination that attracts millennials. Another rapidly growing areas was our global travel retail business, which continued its fast pace, driven by broad based growth across brands and countries. 8 of our top 10 brands grew double digits at retail in the channel and many key travel retail markets further accelerated growth, including the UK, Italy, Germany and Turkey. This success contributed to our strong double digit retail and net sales growth, far outpacing the 6% rise in international passenger traffic. Travel has increased among many consumer groups, including Russians, Middle Eastern, Chinese and Nigerians, helping to increase demand in the channel. Our travel retail channel also benefited from successful launches, effective marketing and exclusive products. We expanded distribution for our artisanal fragrance brands, which is helping to increase our share in the European region in travel retail. We are making good progress on increasing passenger conversion with new programs. We believe that our Travel Retail business will continue to benefit in the long term from favorable fundamentals, including growing passenger traffic, increased conversion of passenger to shopper and a broader equity building distribution of our new brands. Emerging markets excluding China were also strong growth drivers, advancing double digits, with the biggest gains in the Middle East, Russia, India, Turkey and Southeast Asia. Finally, we are pleased that our North America results were also encouraging. Our overall retail sales in the U. S. Turned positive. If we exclude Bon Ton, this was the fastest growth rate in the more than 2 years. Our push into fast growing channels is continued to have a bigger impact. Specialty multi and online, especially retail dotcom grew rapidly. In addition, we improved our business with our department store customers. We expect a solid holiday season as we roll out exciting programs as Stelloda's blockbuster promotion hits counters and online sites in the U. S. Tomorrow. And our brands have created compelling sets and innovation that we believe will drive traffic. The risk of moderation of prestige beauty growth in China, particularly in the second half of our fiscal year is included in our full year guidance to reflect the possible volatility stemming from the current geopolitical and economical environment. However, I want to be clear that we have not seen any slowdown. And luxury cosmetic historically have been less sensitive to the variability of economic trends because they are an affordable luxury. In fact, our net sales in China this quarter further accelerated and our strong double digit growth came from many drivers. Our brands like Dolls sales were robust. We gained share in our department store distribution and sales in specialty multi, freestanding store and online grew even faster. Our e commerce business reached consumers in the many cities where we had no brick and mortar distribution, leveraging our efficient model. In addition, we achieved double digit growth across every brand and every product category. Our efforts to diversify our business have been successful as our makeup and fragrance growth surpassed skincare growth. Importantly, our repurchase rates are strong, illustrating the equity of our brands and consumer appreciations for our products. We have a long term focus in China. We have invested there for 2 decades. It's an important part of our long term emerging market strategy and we plan to continue growing market share and serve our Chinese consumer with the highest quality products. We continue to be encouraged by attractive long term demographic and economic trends in China as millions of new consumers enter the market. The rising middle class aspires to luxury and today millennials and Gen Z consumers will have much more disposable income than past generations, particularly as more women enter the workforce. We believe demand for beauty in China and other emerging markets will continue to rise over the long term. In summary, we achieved terrific progress this quarter. Most brands grew and 3 of our largest climbed double digits including MAC, which has gained more traction. Retail sales in the U. S. Turned positive, generating encouraging business improvement. Many countries had higher sales and emerging markets were strong overall. Our business in the Middle East, which had been depressed, started improving. Sales in China accelerated. Global online and travel retail continued to increase sharply. Our innovations created stronger hero franchises and attracted new consumers. With these strong results to start the year, we are confident about our near and long term prospects. Our diverse brand portfolio, strong innovation pipeline and vast global reach supported by local insights and analytics should continue to fuel our success. We have the flexibility to invest where we see the best growth opportunities and are confident in the ability of our leadership team and talented employees to execute our strategy with excellence. We are well positioned to outperform Global Prestige Beauty, deliver strong sales gains and generate double digit growth in EPS this year and over the long term. Now I will turn the call over to Tracy. Thank you, Fabrizio, and good morning, everyone. First, I will review our fiscal 2019 Q1 financial results and then cover our expectations for the Q2 and for the full year. My commentary today excludes the impact of restructuring and other charges and adjustments, including those related to our Leading Beauty Forward initiative and the recent U. S. Tax legislation. All net sales growth numbers are in constant currency and comparable accounting methods unless otherwise stated. As a reminder, we adopted the new accounting standard for revenue recognition, ASC 606, this fiscal year on a modified retrospective basis. For the Q1, the impact decreased our sales growth by 2 percentage points, our operating profit growth by 5 points and our EPS by 0 point 0 $6 Net sales for the Q1 were up 11% with virtually all regions and product categories contributing to growth. From a geographic standpoint, our Asia Pacific region led net sales growth this quarter. Sales rose 29% and most markets saw double digit increases. Sales in China and Hong Kong rose very strong double digits with broad based growth across brands, categories and channels. Prestige Beauty growth in department stores in China continued to grow more than 20% and we gained share, while sales in specialty multi and online more than doubled. Our strong growth extended beyond China and Hong Kong. We also achieved excellent sales growth in Japan, where we experienced growth across all channels, including department stores, specialty multi and online. Taiwan and Malaysia were also up double digits, and we had single digit growth in Australia. Net sales in our Europe, the Middle East and Africa region rose 16%, driven by strong double digit increases in our global travel retail business and emerging markets in the region. All three geographic regions within Travel Retail grew, led by quarters across Asia. Strong Lightdoor growth drove the majority of the increase and was supplemented by additional points of sale, particularly for our less distributed brands. Our emerging markets growth in the region was led by the Middle East, Turkey, Russia and India. The Middle East had significant net sales growth following the reset that we did last year, but the underlying retail trend continues to be challenging, reflective of the area's economic situation. In Western Europe, Italy remained a bright spot, while lower consumer sentiment in the U. K. Pressured brick and mortar retailers. This was seen most acutely in House of Fraser, one of our largest department store customers in the U. K, as they reorganize under new ownership. Our online business in the U. K. Continued to grow double digits. In other Western European markets, our business was relatively flat, in line with prestige beauty in the area. Net sales in the Americas declined 2%. North America continued to achieve double digit growth in specialty multi retail and in online, all of online, which offsets declines in mid tier department stores and freestanding stores. Excluding prior year sales to Bon Ton, our sales in North America increased slightly, better reflecting the retail improvement Fabrizio mentioned. Latin American sales declined as a tough environment in Brazil and Mexico overshadowed strong growth in the Andean countries. Skin Care continued to lead product category growth this quarter. Net sales grew 21% with strong contributions from the innovations previously within Hero franchises in the Estee Lauder, Clinique and La Mer brands. Net sales in makeup grew 6%, led by strong innovations and launches in foundation and lip from Estee Lauder and MAC. Sales of Fragrances rose 2% as gains in luxury and artisanal brands were partially offset by declines in designer fragrances and Estee Lauder. La La Belle launched its city exclusives fragrance set up line, continued its strong comp door growth and expanded its targeted consumer reach. Our hair care sales rose 7%, primarily driven by Aveda's strong innovation and its acceleration of online sales. Our gross margin declined 100 and 60 basis points compared to the Q1 of last year due primarily to the impact of new accounting standards, which negatively impacted our gross margin by 2 20 basis points through the reclassification of samples, testers and collateral to cost of goods from operating expenses. This decline was partially offset by favorable skincare category mix and pricing of 100 basis points. Operating expenses as a result operating expenses as a percent of sales improved 250 basis points, largely due to the 180 basis point impact of the new accounting standard for revenue recognition. For the remainder of expenses, we continue to reallocate expenses smartly to drive the business with flexibility, fueled by savings from our Leading Beauty Forward initiative. Lower selling, general and administrative expenses improved our expense margin by 2 10 basis points, allowing us to invest more in advertising behind strong innovation to fuel growth. We continue to optimize our marketing mix to maximize returns on investment across all areas. We have found that our increase in digital advertising broadly has been highly effective with a return on investment that is meaningfully higher than traditional media. Operating income rose 13% and operating margin increased by 90 basis points. Excluding the impact of the new accounting standard, operating income rose 18% and operating margin increased 140 basis points. Our effective tax rate this quarter was 20.9%, primarily reflecting the lower U. S. Statutory rate and favorable geographic mix of earnings. Diluted EPS of $1.41 increased 17% compared to the prior year and grew 19% in constant currency. Earnings per share for the quarter included $0.02 of unfavorable currency translation, diluted EPS excluding the impact of the accounting change was 1.47 dollars an increase of 22% compared to the prior year or 24% in constant currency. EPS was higher than expected due to the stronger sales growth and a favorable tax rate. During the quarter, we utilized $119,000,000 in net cash flows from operating activities, which was below the prior year due primarily to timing differences in shipments and receivables, and we invested $128,000,000 in capital expenditures. We used $530,000,000 to repurchase 3,800,000 shares of our stock and paid $141,000,000 in dividends. We also announced this morning a 13% increase in our quarterly dividend to $0.43 per share and an increase in our share repurchase authorization by 40,000,000 shares. Now let's turn to our outlook for next year and the full year next quarter and the full year. We've obviously had a solid start to the 1st the fiscal year, but we recognize that a variety of macro risks, including pre Brexit sentiments and post Brexit potential implications, political instability in many areas around the world and soft economies in certain markets create an ongoing level of uncertainty in many parts of our business. As you know, we adopted the new revenue recognition accounting standard beginning this fiscal year and the guidance we are providing today reflects the impact of the new method, which reduces our sales and EPS growth due to deferral of recognition of certain revenue and associated profit related to some promotional activity. We have also bridged to the comparable growth expectations we have for the business for ease of comparing comparable business performance. For the year, we remain comfortable with our sales growth expectation of 7% to 8% in constant currency and excluding the impact of the new accounting standard. This does assume some moderation of growth in China and travel retail in the second half, reflecting the current geopolitical and economic risks. It also reflects the previously announced door closings of certain department store locations in the U. S. And the U. K. Currency translation is expected to negatively affect reported sales growth by 2 percentage points, reflecting weighted average rates of 1.17 for the euro, 1.31 for the pound and 6.8 $7 for the won for the fiscal year. And the new accounting standard is expected to negatively affect reported growth by 1 percentage point. We now expect our effective tax rate to be approximately 23%. We are raising our EPS expectations to a range of 4.73 $4.82 before restructuring and other charges. This includes the impact of known tariffs globally, including the planned increase in China in January, as well as approximately $0.20 of dilution from currency translation and $0.02 dilution from the new accounting standard. In constant currency and with comparable accounting, we expect EPS to rise by 10% to 12%. For the Q2, net sales are expected to increase approximately 8% to 9% in constant currency and using comparable accounting. Currency translation and the accounting change are each expected to negatively impact growth by 2 percentage points. Therefore, we expect reported net sales to grow between 4% 5%. EPS is forecasted between $1.47 $1.50 before restructuring charges. This includes about $0.03 dilution from currency and $0.11 dilution from the new accounting standard. With a strong start to the fiscal year and with our Q1 behind us, we are focused on delivering another successful full year of solid top line growth, margin expansion and double digit EPS increases, thereby generating strong returns for our shareholders. And that concludes our prepared remarks. We'll be happy to take your questions at this time. The floor is now open for Our first question today comes from Dara Sinan, Morgan Stanley. So Fabrizio, you were pretty clear that the fiscal 2019 guidance now assumes more onerous external assumptions in China and travel retail, given the external environment despite the internal momentum. I was hoping you could also take that out to more of sort of a longer term basis as you look out over the next few years. And A, maybe just on a backwards looking basis, give us some historical context for how much of the top line momentum in these two areas have been driven by macros more recently in the last couple of years versus more enduring factors just to help us conceptualize the macro risk? And B, going forward, can you talk a little bit about how you can proactively manage or adapt your strategies in those two areas, or even maybe at the corporate level elsewhere in the organization if the macro pressure materialize, particularly given the inventory swings in China and travel retail historically, which can often exacerbate a retail sales slowdown. So again, that's sort of beyond fiscal 2019 as you look longer term. Thanks. Yes, it's a long question. Let me start from the 2019 part of your question, which was the second part and then I'll address the long term. So we have recognized that given the external environment, there is a risk, the China TR moderate growth and there is a risk of tariffs. So we have frankly already recognized that risk in the August guidance. However, we have prudently growth the protection of our estimate from that risk this time because obviously we didn't pass all the bid of quarter 1 on, which increase our protection of this risk to materialize. If this risk does not materialize, obviously, we have the opportunity to do better and that's the way we look at it. And we have also internal flexibility to answer more directly your question to move funds and resources to the most appropriate growth opportunity depending on what we see. And we have with our leadership team organized ourselves to be ready to allocate resources depending on the situation externally and depending on the rate of return of our innovation and our initiatives. So that's the way we are organized. In terms of the long term is we frankly believe that the China market will continue to be a market that will grow at double digit over the long term. And this is going to be driven, as I said in my prepared remarks, by many external factor, meaning demographics, growth of middle class, women work, young generation, purchasing powers and the amazing, amazing interest for luxury beauty in the Chinese consumers that will not change. It will not be changing because of economic trends, maybe variable or volatile because of economic trends in the short term or because of tariff implication or any other aspect, but will not change in our opinion for the long term. So we are assuming that a double digit growth of China at travel retail will be part of our long term potential in term of growth. But also we have demonstrated in these quarters that to reach a 6% to 8% growth for the long term, we do not need a over delivery of China travel retail. We are just implying travel retail in China to continue what we define a normalized long term growth. And we will be able to deliver our long term 6% to 8%. And the many other engines of growth are also helping that. Last data point, if you take our email results that you exclude UK short term issues for Brexit as Tracy underlined that you exclude the TR positive impact, ULS we have plus 7% growth, which is exactly in the middle of our long term 6% to 8% just to make the point. Our next question comes from Lauren Lieberman, Barclays. Thanks. Good morning. Good morning. Was hoping you could talk a little bit about MAC. So MAC being called out for double digit performance. I know Middle East was a big part of it, so some of it's probably refilling sort of reset you've done in the Middle East and the route to market. Can you just talk about performance for Mac in the U. S. Both online separate from mid tier department stores, what you're seeing in terms of you've talked about hero products, bigger innovation. What is it strategically that's driving some change in that business? Thanks. Yes. Thank you. Mac is improving sequentially its performance. This is definitely in the quarter, in the short term as the positive implication to restocking the Middle East and to the improvements of the trend in the Middle East for Mac is very important. But also to speak about the negatives, there is the negative that Brazil is another important market for Mac, which was not very active in this quarter. So there are positive and negative also internationally. The drivers start becoming many, many China continue to be a great driver. Asia in total continue to be a great driver. TR continue to be a great driver and many other emerging markets and markets in Europe. Italy, for example, that we have mentioned as for the overall business is one of the best performing markets for market. And to your question, we continue to see There will be a slight delay in today's conference. Please hold. Could you check if Lorna is back? Hello? It's Anthony, you may proceed. Okay. Lauren? Yes. Okay. Yes. So I think you were yes, we talked about Brazil, right, emerging markets, Italy. I was speaking about so you dropped when I was speaking that there was the positive in the Middle East, the U. L. Light, but was also some negative like Brazil is not yet back, but obviously also for external environment situation. But I was also mentioning the positives for market where China, TR, every single Asian market, Italy. And I was speaking about the improvements in the U. S, in specialty multi, in online. And I was saying that these improvements are also generated by a more focused innovation plan with fewer initiatives bigger and focus on the key drivers and I made the example of lipstick, but we have also a big example in foundation and an exciting innovation plan in front of us. So MAC is an improvement trend in the U. S. And continues its solid performance overall internationally. Our next question comes from Michael Binetti, Credit Suisse. Hey, guys. Thanks. Great quarter. I have my congrats. Thank you. Tracy, would you mind adding any kind of is there any kind of numbers you could add around how much you guys adjusted guidance related to the tariffs and the more conservative assumption around China and travel global? Basically, when we gave guidance in August, we included the known announced guidance at that time that we knew were going to be impacting us. And so that was tariff related to the EU and some preliminary tariffs in China. Subsequently, it has become more certain at least that or at least we believe that we may experience higher tariffs in January. So some of the embedded in the guidance in the second half from an EPS standpoint is the inclusion of that increase in tariffs. We do, as we said on the last call, 30% of our product in China comes from the U. S. The balance comes from our factories around the rest of the globe. So that's generally what the exposure is. We also export products out of China, primarily raw materials and components, and so we do get a duty drawback on that. Okay. Just following up then, I think some of your competitors have mentioned seeing the beauty category accelerating globally, And then there has been some comments on strengthening trends behind premiumization. As I look through your guidance, I know you guys always try to make sure you're on the conservative side of where you see the category headed. But it seems like those two dynamics in particular, with the global growth accelerating and then premiumization would potentially be an outsized benefit for you given your exposure. Can you speak to anything you're seeing related to I guess you kept your outlook for the category the same, but I didn't really hear any commentary on premiumization, how you see those two trends? So I'll take this one. In premiumization, absolutely we see that as you see in our but again your question is about guidance. So the guidance I'll comment to the guide in a second. But in terms of the results we see today, we see the market of beauty remaining very strong. Our estimate is 5% to 6% for the year, which assume in this 5% to 6% a little slowdown in the 2nd semester, in all the markets that we have data about. And in all the markets that we have data about. And most importantly, we see consumer continue to trading up and going toward luxury skincare, basically toward quality product and quality experience is. And we see the overall luxury experience which includes service and customization to be more and more preferred by consumer. And we believe this is a long term trend. And the fact that we are a company completely focused on prestige, we believe is a strong competitive advantage for the long term because on all our brand, we are delivering the premiumization benefits that the consumer is looking for. Your second part to the question was more specifically in the guidance. No, on the contrary in the guidance as you've seen, we do not assume the market to accelerate the premium position to accelerate in the 2nd semester. Actually, we assume a moderation of this phenomenon for the next short term, for the January, June period, not necessary Our next question comes from Bonnie Herzog with Wells Fargo. Thank you. Good morning. Good morning. Good morning. I had a question on your makeup business. Operating income declined as did margins. So you called out stepped up spending behind 2 face. So I was hoping you could drill down a little further on this to give us a sense of I guess where you're at with this spending And then maybe how much your makeup business would be performing excluding the spending? And then hoping to get a sense of how much longer the spending levels might be or stay elevated behind 2 faced? And then finally, more importantly, what kind of lift you're seeing right now, if any, or really what your expectations are? Thanks. Yes. So regarding makeup, we did have we called out as well some declines in our Smash Box business. But the 2 faced investment, the 2 faced had quite a few large launches this quarter. They launched their Born This Way Foundation with extended shades, concealer, their 2 d Fruity line as well launched this quarter. So they had quarter to quarter, it's very difficult to look at our results from a spending standpoint because we are so launch and innovation driven. And if it's a bigger launch 1 quarter than the next, you'll see perhaps outsized spending and depending on when that spending happens in the quarter. So I would expect that our makeup operating margins will improve throughout the balance of the year and you'll see more normalization there. Our next question is from Robert Ottenstein, Evercore ISI. Great. Thank you very much and terrific quarter. You're obviously doing a really nice job on some of the larger, of the of the contribution of innovation to those brands and e commerce and if it's possible, obviously, they're connected, but I was wondering if it's possible to kind of tease out the impact of both of those factors? Thank you. Yes. So first of all, on all these brands and frankly on every brand, the impact of e commerce is very positive. As we explained, we have brand sites, retail.com and overall platforms like Tmall. We are growing in each one of these three segments very strongly, double digits and particularly on platform a very strong double digit and also in retail.com a very strong double digit. And we expect this downtrend to continue because also we are creating great experiences online in all these platforms and the consumer is more and more interested. We are very strong and we have been investing for years in this area. So we consider our e commerce business strengths and something we can continue to leverage be at the forefront of the industry with it. In terms of the contribution of innovation, as I touched in my prepared remarks, we are really taking innovation to the next level. Our innovation today is much more focused on the right opportunities, on the right consumer targets, on the right benefits. Thanks to a major work we have done in the last couple of years on adding analytics and more sophisticated analytics to our way to determine how to innovate and to focus our marketing plan after we have produced the innovation. And we see the results of this. Personally, I believe that a big part of our acceleration on the B brands is driven by the quality of our innovation and by the ability to focus innovation on the areas of biggest return. Finally, we are really focused on product quality. That's why at the end, we speak about prestige and premiumization is about qualitization in my opinion. And the consumer are going more and more toward high quality product. Our product are superb quality as we see from the repurchase rates of our consumer. So innovation needs to be pushed with trial, but after the trial what really makes the innovation success is how many consumer come back more and more to buy the product that we measure with our repurchase rates. And we have a strong repurchase rate and obviously profitability is driven by repurchase. Investments are driven by trial. So we always keep in mind this difference. And the only thing I'll add to this and this doesn't directly address your question, but just a reminder that for our overall company, our increase from pricing and distribution has been roughly the same in the 2% to 3% for distribution, 2 percent pricing. Everything else is innovation and comp door sales. So the big acceleration that we've seen, which certainly includes the performance in China and travel retail, but also online, has been in really in that category, which is very, very strong and very, very healthy for us. So I mean it sounds like you've got a very nice, for lack of a better word, formula working that has had that is gaining traction. It seems to be gaining some traction in Clinique. Would that be fair? And how would you look at the mix between the innovation, the e commerce in terms of getting Clinique even to a higher sales trajectory? Yes. Thank you for this question. Actually, yes, we do expect Clinique to get a lot of acceleration definitely from online that's already happening and will continue to happen more. But as I mentioned, particularly from innovation, I believe Clinique is one of the best innovation programs in this moment in front of us. And I said there will be a new launch of Clinique, which is very important in December, which is very exciting in the area of skincare. And there is more innovation to come plus the ingredient story of Clinique has been taken to the next level and this also is having an initial encouraging impact on consumers. So we are in a situation where 3 of our biggest brands are already growing double digits in which MAC is gradually improving his soft point, which has been U. S. And UK and in a situation where Clinique, we believe has the potential for the total fiscal year to go back to growth as well. And so we our ambition is to finish this fiscal year with all our top four brands on a growth trajectory. Our next question comes from Wendy Nicholson, Citi. Hi. Could you talk about the trends in the specialty multi business in the U. S? I think for the last few quarters, we've heard you talk about strong double digit growth and it has clearly slowed a little bit in this quarter. Is that just a function of Smashbox weakness? And can you update us on kind of where you are? I know you don't want to tell us exactly how many Ulta doors Mac is in, but kind of where you are maybe inning wise, are you in the 3rd inning of distribution expansion for Mac into Ulta Doors? Or just how much more runway is there for new door expansion in specialty multi? Thanks. Scott, you're aware. Multi. We continue to grow and this continue to be one of our key drivers. And we are at the point already, we communicated that last quarter where the benefit of specialty multi start to being substantial. So having a significant impact on our growth in the quarter, that's very positive. Now there's been some slowdown on Smashbox for sure as you mentioned and that's obviously a slowdown of the results of growth. But the other brands really in specialty moustie did very, very well and there is no other sign of slowdown. Actually, I would say most of them are on a clear accelerating trend And there is more potential for distribution. Yes, on Mac in Ulta, there is more potential for more doors, That is not only about MAC, there is more potential for many of our small and medium sized brands that have the opportunity to further accelerate distribution in this area. And as you know, we had also some distribution in online and that's like doors of brands like Jo Malone and La Mer, which are also performing very well on the high end consumers that shop in this channel. So overall, we are positive and we believe this story can continue to build over time. Our next question is from Nik Modi, RBC Capital Markets. Yes, thank you. Good morning, everyone. So I just wanted to stick on the topic of innovation. Fabrizio, maybe you can just talk about some of these new product launches you referenced in terms of the personalized skincare product and just some context around if you've tested it, what kind of demographics does it appeal to? And then maybe you can also talk about the Clinique 72 Hour moisturizer and kind of how you think about that product relative to how it's maybe tested or your hopes and desires for that franchise? Thank you. Yes. So on the innovation on Clinique, which is customized to every consumer, I prefer not to comment more. We are in the process of announcing it to the various retailers around the world and so will be soon official and will be launched in December. But basically is the kind of innovation our analytics are giving us, meaning innovation that is not only a great product quality that provide interesting and relevant benefits, a responding to a new desire, doing it in a way which is unexpected and different. And that's the quality of innovation I'm speaking about. We always had great quality products. We always had the ability to create interesting benefits, but we are now learning how to do it in a way which is much more customized, more differentiated and anticipating new consumer desires in a world where the consumer is more and more at the center of the attention and leading the process. In terms of the other innovation, the Monster Surge, which is the clinic 72 hours benefit product you had mentioned is doing very, very well. It's one of the key driver of the success in skincare of Clinique and is the result of extraordinary technical innovation where the level of moisturization is extremely strong and very appreciated by the consumer included into a formula with a very special texture that we know as high level of appreciation by the consumer around the world. So it's strong, it's doing well and we believe has potential to do even better in the future. We'll continue to drive it. Another example is the launch of Geli, which I mentioned, which is basically taking the core franchise of moisturization of Clinique and giving it a different form and this jelly form by the way our analytics showed us that was absolutely preferred by a certain group of consumer, particularly young consumers. And so with the goal of rejuvenating of making younger that is historical franchise or Clinique, we have chosen a form, a texture and a model of benefit that we knew was preferred by this group of consumer and in fact the results are coming. So it's about applying our historical innovation strengths to better analytical understanding of the opportunities. And thanks to this creating much higher rate of returns of our innovation scheme. Our next question is from Linda Bolton Weiser, D. A. Davidson. Thank you. So when we talk to investors about your strong trends and growth and innovation and everything you've been talking about, one of the pushbacks we get is that we are getting potentially close to the end of the cycle and some investors actually think we will get a recession in the next 18 to 24 months. So can you talk about, in the past, you had invested quite heavily through the cycle and especially in a downturn, you continue to invest behind your brands. Can you talk about is there anything different in the structure of your business or the mix of your business this cycle that would potentially mute the decline in your earnings that we saw in past downturns? Thanks. Yes. So I'll start. One of the big differences quite honestly is Leading Beauty Forward. And so the efforts that we have taken to take more fixed cost out of the business to structure self differently, to invest behind faster growing areas. We actually have more flexibility in our cost base, which you hear us talk about quite often. And in terms of investing behind when markets are strong and when innovation is strong, but also pulling back when there is a downturn or to your point if a recession were to occur. So I think structurally the company is much, much stronger today than it was a few years ago because of all of the work that we've done in programs like Leading Beauty Forward to really reorganize our expense base and invest behind areas that really drive the growth of the business. And so to the point of Tracey, of the finance, basically we have higher variable costs and lower fixed costs and we are more flexible and we have great cash. And so the ability to go through recessions with cash assuming this had to happen. But I was also to touch on the part on the consumer. To be clear, we have a portfolio of brands. That really go from the entry price point of prestige to the luxury. And so we have seen during the recession, our ability is also to push more the brands which are at the entry price point and to leverage them. And today we are much more capable of doing that. We have a much richer portfolio across the several price points. The other thing which has changed is that please let's not forget that prestige cosmetic are affordable luxury. And there is the famous thing that Levon and Loda said many years ago about the lipstick index, which is when there is a recession, we even buy more lipsticks, not yes, not less. For the simple thing that is affordable luxury in a moment where maybe other luxuries is not the right priority for families or for people. And so we believe that we can leverage much better than in the past, the concept of the lipstick index. Our next question comes from Mark Astrachan, Stifel. Thanks and good morning everybody. One housekeeping question, one follow-up on the Clinique line. Tracy, is there any benefit anticipated in the Q2 guidance from selling ahead of the tariffs? And then just on Clinique broadly, I guess maybe to put the question in a different way. Why has the brand not resonated with consumers in recent years? And I guess the question is the innovation sounds pretty exciting. But from a brand standpoint, how much of it is the brand itself where there's a lot more competition for a dermatologically correct skincare makeup brand today versus maybe 10 or 15 years ago? And then how do you think about spend or innovation around kind of modernizing it versus just running the business kind of as it is with lesser growth than you've seen in recent years versus history? So let me start on the tariff question. We are seeing obviously incredibly strong growth in China. So we have not been building up related to the tariffs. We've really been flowing inventory as we have it to support the slow or the very fast sales trends. So we don't have a big inventory buildup in China where that would cause the moderation or the slowdown that we're speaking about in the second half. As it relates to Clinique and I'll let Fabrizio add on to this as well. One of the things that we mentioned in the last call that I would just remind you of is Clinique has been one of the brands that's been disproportionately affected by some of the retailer dislocation that's happened, particularly in North America, in Canada and in the U. S, because they were so strong in those businesses. So and the same in the U. K. As well, we're seeing that impact with Clinique. So they have been disproportionately affected by that. The innovation in recent years has been quite strong and certainly there's been a lot more competition in the space. I always say great brands attract great competition and certainly our brand portfolio has done that. So the innovation as Fabrizio mentioned that Clinique is coming out with is informed by Insights, the competitive environment, what consumers are looking for today and being done in a clinic way. And so we are very encouraged by early signs that we've seen on some of the products launched starting with Moisture Surge and certainly the jelly that Fabrizio spoke about and the upcoming innovation that will begin to be phased out in December on the new product line, which is quite exciting. And just want to add that the clinic team, which is probably listening to the call, will be very happy about your question because they could not agree more that they are working very hard on the modernization of the brand. They modernize the allergy tested fragrance free position of the brand with the new purity statement. They're modernizing their stores. They're modernizing their packaging. We spoke already about the innovation. There's been a lot of progress on Clinique and we frankly, you would see already more of this progress into the number if was not for the fact that for example Bon Ton closure is the large majority impacting Clinique. The House of Fraser softness in the UK is for the large majority impacting Clinique. So Clinique has been the most impacted, not necessarily by the consumer, not liking the brand, but really from the dislocation of the distribution reality around the world. And the work they are doing on modernization of the brand start working well and we believe will give soon better and better results. Our next question is from Erinn Murphy, Piper Jaffray. Great, thanks. Good morning and let me add my congratulations. Maybe just a segue from a lot of the comments on Clinique. But when you take a step back and just think about the natural beauty trend, how much of your portfolio today really lends itself to this macro trend? And then going forward, how are you weighing the opportunity to invest behind this trend in your existing portfolio today versus looking at M and A? Yes, in our portfolio, first of all, the purity concept is actually the cleaning concept. As I said today is called in many different ways called clean natural effect. But so the brand that is now stepping up to leverage this trend in a unique clinic way is actually clinic. The other brands are obviously Origins, which is, as I said in my prepared remarks, exactly in the middle of that and in fact is having exciting results and excited results because it's leveraging this trend and because it's doing great innovation exactly on that trend Like the very recent launch of the Origin lipstick line in the U. S, which is a super exciting flower based line that leverage even in lipstick, the natural trends that personally I believe would be very, very interesting for the consumer worldwide. And then we have Aveda. Aveda is in the middle of this since always since ever, not only Aveda adds to the natural element to be leveraged, the sustainability element as well that is a very strong preferred millennials point of view today. So Clinique, Origi and Aveda are the obvious question that we are using these brands to further leverage these trends. And on your question on M and A, we always look at the M and A possibilities around the world and if there will be opportunity in these areas obviously we will consider them. That concludes today's question and answer session. Today through November 14. To hear a recording of the call, please dial 855-859-2056, passcode number 4,946,739. That concludes today's SA Water conference call. I would like to thank you all for your participation and wish you all a good day.