Estée Lauder Companies Inc. Q4 2010 Earnings Call Transcript

Estée Lauder Companies Inc. Q4 2010 Earnings Call Transcript
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Estée Lauder Companies Inc. (EL)

Q4 2010 Earnings Call

August 12, 2010 9:30 AM ET

Executives

Dennis D’Andrea – Vice President, Investor Relations

Fabrizio Freda – President and CEO

Rick Kunes – Executive Vice President and CFO

Greg Polcer – EVP, Global Supply Chain

Analysts

Alice Longley – Buckingham Research

Wendy Nicholson – Citi Investment Research

Andrew Sawyer – Goldman Sachs

Nik Modi – UBS

John Faucher – JPMorgan

Bill Schmidt – Deutsche Bank

Linda Bolton-Weiser – Caris & Company

Chris Ferrara – Bank of America/Merrill Lynch

Ali Dibadj – Sanford C. Bernstein

Lauren Lieberman – Barclays Capital

Joe Altobello – Oppenheimer

Mark Astrachan – Stifel Nicolaus

Connie Maneaty – BMO Capital Markets

Victoria Colin – Atlantic Equities

Presentation

Operator

Good day, everyone. And welcome to the Estée Lauder Companies Fiscal 2010 Year End Conference Call. Today’s call is being recorded and webcast.

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For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dennis D’Andrea. Please go ahead, sir.

Dennis D

Andrea

Good morning, everyone. On today’s call are Fabrizio Freda, President and Chief Executive Officer; and Rick Kunes, Executive Vice President and Chief Financial Officer. Also with us is Greg Polcer, Executive Vice President, Global Supply Chain, beside from his responsibility for the entire supply chain, Greg oversees our SMI program and Co-Chairs the project management team with Rick, which is responsible for our savings program.

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. You can also find a reconciliation between GAAP and non-GAAP results in our press release and in the Investor section of our website.

With that, I’ll turn the call over to Fabrizio.

Fabrizio Freda

Good morning. Thank you for joining our fiscal 2010 year end conference call. My remarks this morning, I will discuss the company achievements during the past year and how we intend to continue our momentum in fiscal 2011. My first year as Chief Executive Officer, I’m extremely gratified that our company performance was outstanding in so many respects.

Last year, we laid out our plans and you will see that we have delivered and in most instances exceeded our goals. Our first major accomplishment was successfully launching our four-year strategy and we made excellent progress. We accounted our strategy is sound and sustainable. Our senior management team and entire organization are aligned behind it and our initial results show we are winning.

In addition, our performance was strong. Many financial measurements hit all-time highs. This is even more extraordinary considering that our results were achieved during one of the most difficult economic times.

We also made great strides evolving our organization and strengthening our capabilities to build our brands, fully leverage our innovation and improve profitability. But it is important to note that even as the company reorganized and changed its processes we held on to our core family values and historical strengths, creativity and interpretation speeded are ingrained in our heritage and culture.

Now, let me highlight some specific financial results. These numbers are before charges for restructuring and the retirement of some debt. We announced this morning that full year sales were $7.81 billion, up 7% from the year before. Earnings per share were the highest ever at $2.75, nearly double last year results.

Many other financial metrics also set records, including net sales in global skin care, the Asia region and our travel retail businesses. Cost of sales at a low of 23.3%. Operating margin increases of $420 basis points returning of $552 million. Cash flow from operation of $957 million and inventory of solid improvement.

The backbone of our strategy is to be more competitive against share by growing sales at least 1% ahead of global prestige beauty every year. By increasing our share in many of our largest countries in channels, including US prestige department stores, travel retail, the U.K., China, it’s clear, we have achieved that goal.

In U.S. department and specialty stores tracked by MPD, our shares standard (inaudible), excluding a prescriptive brands. The gain was led by Clinique, the biggest U.S. beauty brand, which has increased share the last two years. Being able to grow such a big brand is a major achievement. M A C, Bobbi Brown, La Mer and Origins also gained share.

In other objective we increased profits in a sustainable way. In this first year we reached an operating margin of 11.2%, a big jump from 7% in fiscal 2009. All of our costs declined as a percentage of sales, except advertising.

To further diversify we set out to generate more than 60% of our sales outside of the United States and this year we achieved already the goal, hitting 62% of total sales. Our brand has strong organic growth, expanded into more countries and opened overseas doors. Also, our travel retail business far exceeded our expectation, driven by successful conversion of travelers into buyers.

We also established broader objectives U.S. to better complete -- compete globally. In terms of product catalysts, our focus is more on skin care, particularly in Asia, again, we had a great success. In local currency our skin care sales grew 9% globally and 11% in Asia, where skin care counts for approximately 60% of our sales.

As a result of this focus, skin care is now our largest category in both sales and profits. The skin care gains were led by two high profile launches. Estée Lauder reformulated Advanced Night Repair was biggest launch in the company history and had tremendous acceptance, particularly in Asia, China and other retail. The brand recently introduced a complimentary product, Advanced Night Repair for eyes. And the two are being marketed together to continue the franchise momentum.

Thanks to an effective new formula supported by an integrated marketing campaign, encompassing TV, digital and print. Clinique new Even Better Clinical also became a hit in the U.S., U.K. and Europe. As an example, after its launch, it quickly became the best selling prestige skin care product in the highly competitive French market. It’s doing so well because it is the first beauty product whose results rival a prescription strength product for treating uneven skin tone, a universal concern that wasn’t being adequately addressed by existing products.

Our innovation also extended to our in-store services. We evolved our high-touch model at Bloomingdales where Clinique offers service as you like it including a fresh replenishment and do it yourself computer skin analysis. This concept is so successful that the brand expect to expand it to 60 more doors this year worldwide.

In terms of our regions, sales in Asia climbed 10% and five markets posted solid double-digit growth. We are also thrilled that Estée Lauder became the best selling prestige brand in each distribution in the region. We plan to accelerate our business in Asia where most economies are strong, consumer spending is growing and we have opportunities to expand distribution.

The company also set out to improve our underperforming brands in an effort to boost overall profitability. We took many steps to address different issues and as a group, this turnaround brands improved sharply.

As you are likely aware we closed Prescriptives wholesales business and did so at less cost than anticipated. We’re also leveraging some of its best assets in other brands. Based on strong consumer demand we continue to offer Prescriptives up-selling products online for now.

Our Aramis and designer fragrances division showed great improvement, a significant turnaround was driven by fewer more impactful product launches supporting its classics, improving its mix of business and distribution, tightening inventory and numerous savings in cost of goods. In up coming Tommy Hilfiger fragrance called [Loud] is expected to be a major addition to its portfolio.

In fiscal 2010, we saved $364 million from various cost saving initiatives, far greater than our original estimate of $175 to $200 million. At the same time, we continue to invest in our business and increase our advertising, merchandising and sampling costs by approximately 7%. Also, we believe we increased return on this investment by focusing on our biggest initiatives and improved media efficiencies.

We also improved our strategic modernization initiative forward by successfully implementing it across all of our North American manufacturing facilities. SMI will enable many of our future cost savings. Greg will go into more details about cost saving in SMI in few minutes.

So as you have heard, we made fantastic progress in the first year of our full year strategic journey, which is providing a solid foundation as we continue toward our goals. Our early success reinforces our vision and gives us confidence in our ability to execute our strategy with excellence.

Looking ahead, we believe we are well positioned. Global prestige beauty is predicted to return to mid single-digit growth over the long-term. Research shows that women income is expanding around the world and beauty is the category they are most likely to spend money on after food and clothing.

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