Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Estée Lauder Companies Inc. (NYSE:EL)

June 11, 2013 5:15 am ET

Executives

Cedric Prouvé - Group President of International Operations

Tracey Thomas Travis - Chief Financial Officer, Executive Vice President, Member of Corporate Risk Management Committee, Member of Fiduciary Investment Committee and Member of Investment Development Committee

Unknown Analyst

All right. We're going to get started with Estée Lauder. It's my great pleasure to invite Estée Lauder's management team back to the conference after a couple of year hiatus. We're going to start with Cedric Prouvé, who is the President of Estée Lauder's International business. Thanks, Cedric.

Cedric Prouvé

All right. So good morning, everyone. It's a real pleasure to be with you this morning and to share our accomplishments and our future opportunities. I just want to -- before I start, I just want to remind you that some of our remarks will contain forward-looking statements.

Historically, the Estée Lauder Companies has been a high-growth company. This is our strength and our strategy will continue to leverage this going forward. We are a global leader in prestige beauty, with sales expected to exceed $10 billion this year, thanks to our ongoing focus on sustainable, profitable growth.

Since our strategy began in 2009, we have made tremendous progress and believe that our 30 brands are well positioned for continuous long-term growth. We have a rich portfolio of world-class aspirational brands. Along the prestige spectrum, our brands range from entry level, like Clinique and M.A.C., up to premium luxury with La Mer and Tom Ford. They also appeal to different sensibilities. Estée Lauder attracts consumers of varying ages and ethnicities; Origins and Aveda emphasize their natural ingredients; and Smashbox and Clinique attract younger consumers. We believe that no company has a more comprehensive prestige portfolio of brands today.

We are the largest global beauty company focused solely on prestige, which is the fastest-growing segment of global beauty and the preferred consumer experience in many markets. Our creativity delivers high-quality breakthrough products, aspirational brands and High-Touch services in channels fully dedicated to me time, what we call me time. Our prestige model includes education, customization, and a personal experience. When you buy products at M.A.C., our makeup artist instructs you how to apply them to achieve different looks.

In terms of customization, a trained Clinique consultant advises the consumer on the right treatment for her skin concerns. The $100 billion industry at retail expanded by 3% to 4% annual in the past decade, and is forecasted to rise at least that much over the next 10 years. Our share is approximately 15%, and our goal is to keep growing at least 1% faster than the industry. Over the past 4 years actually, we have grown about 2x faster than our industry.

Several demographic trends support continued industry growth. The first comes from emerging markets, of course, where more women are entering the middle class and enjoying higher disposable income. We've had robust sales gains in many of these markets, including China, Brazil and the Middle East. Another factor is the aging of the world's population, which creates greater demand for many of our products, particularly antiaging skin care and foundations.

Prestige beauty account for 30% of total beauty globally, so there's enormous opportunity to win over millions of new consumers from mass channels and brands. Thanks, in part, to our brand's outstanding new products and effective advertising, we've attracted consumers to our counters and contributed to global prestige beauty sales, outpacing mass in many global markets, including the United States, China, Italy, and Germany, as you can see here.

Our terrific growth during the last 4 years is due to success for many part of our business. We've delivered constant innovations across our products and services and doubled our advertising spending, which has full consumer to our counters and website. That has helped increase brand awareness, as has the expansion of our freestanding stores, which currently number more than 1,000 around the world. We've also increased our e- and m-commerce sites from about 30 in 2009 to nearly, 200 today; and in the same span, more than doubled our online sales. We are nearing completion of our multiyear strategic modernization initiative, or SMI, and have nearly 75% of our global sales SAP enabled today. The last major wave is scheduled for July 2014.

In our first 63 years through fiscal 2009, sales grew to $7.3 billion. Since then in less than 4 year's time, we've added about half that much again. Since 2009, operating profits have tripled and operating margin climbed from 7% to an estimated 15% in fiscal 2013. Our winning strategy has produced a powerful financial performance.

As we look ahead, we are guided by our 10-year strategic compass, which identifies the biggest and fastest-growing opportunities, shaping the beauty industry. We intend to stay ahead of prestige by focusing our creativity and our technology on these best opportunities.

Building on our stellar track record, we're designing a promising future. We are pursuing high-growth channels and markets, focusing on key product categories, then leveraging our creativity and innovation to create superb products and High-Touch services. We continue to modernize and sharpen our capabilities and eliminate non-value added cost that we can internally invest in our growth drivers.

Every year, we refine our strategy to hone in on the most promising areas. We look at different markets within each region to find the best opportunities for growth. Our focus has been on emerging market consumers, high-growth distribution channels, exemplary innovation and creating locally relevant products, services and communications. We are the leading prestige beauty company across all key categories in the United States. We have 3 of the top 10 prestige brand and our share is more than twice that of the next largest company in the country. But even with this ceiling [ph] position, we see solid opportunities for growth. By converting consumers for mass, marketing to different ethnicities and looking at different regions as distinct opportunities. Consumer behavior, ethnic backgrounds, competitors and channel activity differ by subcategory and by region in the United States. Each subregion has terrific growth potential and rivals the size of many of our international affiliates. For instance, the company sales in the Pacific region are comparable to the size of our business in Japan. The coastal regions are large, fast growing and multicultural, while the middle of the United States is less diverse. The U.S. regions that have the greatest growth potential also happen to be the most ethnically diverse with more than 1/3 of the consumers, non-Caucasian.

Our region spend in Europe, the Middle East & Africa is also diverse and covers more than 60 countries. We have an estimated share of over 25% in prestige skin care and makeup combined. In the last 3 years, we've gained share in Western Europe and in emerging markets. And we are outperforming prestige beauty in difficult economies in Southern Europe. To maintain our momentum, we will strengthen our local relevance and innovation and continue to develop effective advertising, especially in TV and digital, which is critical in markets dominated by self-assisted service.

In the past 3 years, we've increased our ad spending by more than 50%, primarily on skin care and makeup franchises, which has made our products stand out from the competition. Asia/Pacific is our fastest-growing region and much of our attention, of course, is centered on China, which represents about 30% of the region's sales. The Asian beauty consumer is focused on skin care and face products, one of our strength and a continuing priority. Our R&D centers in Tokyo and Shanghai are innovating in these areas and emphasizing products that are locally relevant.

We believe our strong regional capabilities in product development, High-Touch service and retail expertise, aspirational brands, positions us to capture a greater share of prestige beauty in Asia/Pacific. Some of the strongest growth is coming, of course, from emerging markets. And we've enjoyed robust sales gains in many of these countries, including China, Brazil and Turkey. We continue to see white-space opportunities and great potential coming from the Middle East, Africa, the CIS markets, where the prestige segment is still rather small. There is a growing middle-class consumer, a young population, and we have the opportunity to recruit from that.

Our M.A.C. brand recently expanded its presence in sub-Saharan Africa by opening stores in Nigeria, Botswana and Zambia. China is our most important emerging market, and we keep capturing new consumers by entering new cities, opening more doors and bringing more brands online through our e- and m-commerce. During the last 3 years, our business in China has grown by an average of 33% annually, enabling us to gain share. We have 14 brands in the country, and none is most successful than Estée Lauder, which has become the number 1 prestige beauty brand in the country in its distribution.

China's middle class is estimated at 300 million people. And with growing disposable incomes, more Chinese are traveling. Today, about 42 million Chinese travel internationally, a number that we -- this is expected to more than doubled in just a few years. Consumers who live in emerging markets has fueled our growth in recent years, but we've learned that they also make many purchases outside of their home country. So we track their shopping patterns around frequent traveled corridors and provide many opportunities and a similar experience wherever they choose to shop.

So in other major engine driving our sales is our focus on the most dynamic of distribution channels. Our travel retail business helps build and reinforce the equity of all of our brands. We are already the number 1 company in the skincare and makeup globally in this channel. This year, worldwide travelers will take more than 1 billion international flights, and traffic is expected to grow by about 4%. There's also terrific opportunity to convert more travelers into shoppers. Currently, less than 15% buy beauty products in airport stores. We believe that through our marketing and brand assortments, a greater number of travelers will become buyers, leading to incremental sales.

In fiscal 2012, our travel retail sales exceeded $1 billion for the first time, having doubled in just 3 years. We're taking our brands into more travel retail stores, aggressively advertising in busy airports and marketing to consumers even before they pack their bags. We should help fuel future growth.

Another strong catalog of distribution is the e- and m-commerce sites we have in over 20 countries. As a leader in online beauty, we're investing to improve our brand's High-Touch experience, marketing tools and technology across various digital platforms. Our e- and m-commerce sales have more than doubled in the last 4 years, representing a compound annual growth rate of 24%. This year, we expect our online business to account for 5% of total company revenue.

Our High-Touch service model is a point of differentiation from mass. We tailor our service depending on the channel, and this personal experience generates loyalty and higher sales. In department stores, for example, our brand continue to evolve their spaces and the personal experience they offer in order to stay fresh and appeal to a broad array of consumers. Clinique's unique Experience Bar is part of an open-set environment where consumers can decide how they want to shop. Another fast-growing channel for us is specialty, multi. And these retailers are becoming a significant force, particularly among younger consumers. Certain of our brands are expanding in this chain, which is widening our prestige distribution footprint. Smashbox and Bumble and bumble, for instance, give us a strong presence in Sephora, and they tailor their product assortments, their merchandising and communications to this store format. As Sephora expands in Latin America and Asia, we will strategically expand in new stores with them.

In other European perfumeries, we've introduced new skin care and makeup navigation system and strengthened our service through more robust education programs. Our freestanding retail stores are an integral part of our long-term strategy and an excellent way to express brand equity and connects with consumers. M.A.C. recently opened a futuristic-looking flagship on the Champs-Elysées, here in Paris, giving the brand tremendous visibility. It is expected to become one of M.A.C's largest stores in the world in terms of sales volume. Actually, I urge you to visit and maybe buy a couple of products. Freestanding stores also help us give, help give us an immediate retail entrée when there is no existing prestige retail in places like Brazil, India, and Africa.

Innovation will continue to be a cornerstone of our growth. Skin care remains the top priority, and our brands constantly innovate to create must-have products that consumers cannot live without. Globally, we are the #2 company in prestige skin care, and Estée Lauder and Clinique are among the top 4 brands. Clinique recently introduced Moisture Surge CC Cream, which stands for color correcting. CC Cream's have become popular products worldwide following the strong demand for BB cream. Clinique's version has innovative technology that works to correct numerous skin concerns.

Estée Lauder new Advanced Night Repair Eye Serum is the latest entry in its highly successful ANR [ph] franchise. These are 2 examples of the outstanding products created by our global R&D teams. We have exceptional pipeline of products that we believe will continue to fuel strong skincare growth for years to come.

Makeup is another key category, and we like to surprise and delight our consumers by creating fun, exciting and unexpected products along with makeup artistry skills. Our brands leverage fashion themes and create new trends, shoes, products and packaging. All these characteristics create a buzz, drive traffic to stores and keep consumers coming back for more.

Over the past several years, we've demonstrated our ability to succeed in our 2 largest categories, skincare and makeup with desirable products, cutting-edge innovations and excellent service. Now, we are turning our attention to fragrance, where we expect to be more competitive. In the past few years, we have deliberately trimmed our fragrance business, reducing our promotional activities and making it more profitable to great success. Now, we're well positioned to grow profitably again in that category. We are focusing our attention on the upper areas of the pyramid where the fastest growth is occurring right now. We expect an acceleration of ultra-prestige brands where we have a very strong position. This area represents approximately 11% of the prestige fragrance mix in Europe and 18% in France. And it's growing double digits. Tom Ford has successfully established a new tier of luxury fragrance at a premium price -- at a premium price point for us, generating distinct aspirational value among male and female customers.

Essenza di Zegna is a collection of fine -- 5 finely crafted fragrances for men. And Jo Malone is an experiential brand that bridges prestige fragrance with lifestyle branding. It offers High-Touch service with a unique art of fragrance combining and gift giving.

Our Aramis and Designer Fragrance division has reinforced its portfolio around a consistent group of designer brands, from high end to entry level prestige sold across various distribution models. It is starting to shift from a portfolio geared to North America to one with brands resonating in Europe, Asia and Latin America. EMEA is the most important region for fragrance, where it represents more than 50% of the category mix. If you're strong in Europe, you're also strong -- a strong fragrance player in travel retail and elsewhere. Now, Zegna's Uomo, stands for man, has started just now, a global rollout, and we expect it to boost the category. Here now is our commercial, which was sent in Capri and supports the launch.

[Presentation]

So for our core brand, Estée Lauder and Clinique to be global players, they must play, not only in skincare and makeup, but also in fragrance. Fragrance is part of Estée Lauder's heritage, and Beautiful and Pleasures continue to be best-selling global scents. Recently, the brand announced the September launch of Modern Muse, its first new major fragrance in a decade. It will be backed by an extensive 360-degree marketing campaign, which we expect would attract many new consumers.

Looking at the anticipated growth in prestige fragrance over the next 4 years, the region with the biggest growth is expected to be, actually the Middle East & Africa. From 2011 and 2012, this market grew nearly 18% in ultra prestige fragrances, more than any other regions. To capture this growth, we introduced good fragrances to appeal to local preferences. Within each region, there's a certain formula that wins in fragrance, which is why we tailor our own approach. There's opportunity in Western Europe and North America with the ultra-prestige category; in Latin America, with designer prestige fragrances; and in China, with the beauty brands fragrances.

So in sum, our intent is to continue on a high-growth track with strong fundamentals and a vision to appeal to all women and cultures. We are capitalizing on positive global trends, and we'll continue our winning strategy. So now, I'd like to invite Tracey, who will discuss our financials.

Tracey Thomas Travis

Thank you, Cedric, and good morning, everyone. Cedric just shared with you our strategy for future sales and profit growth. Our restructuring and resizing activities end this year, and through these efforts as well as others, we have created a company with greater structural efficiency and flexibility and positioned ourselves to create additional shareholder value in the years ahead. We will do this by continuing to focus our resources behind our critical-growth enablers, areas, such as digital marketing, consumer insights, product innovation and talent development. And we are in the final stages of investing behind our strategic modernization initiatives, what we call SMI, including the implementation of our enterprise-wide IT system, which should enable us to better leverage the scale of our growing complex business through the strengthening of our infrastructure. We expect this combination of enhanced capabilities and focused resources on our greatest opportunities will provide continued steady profit growth for us in the future.

Last month, we reported our fiscal 2013 third quarter and year-to-date financial results. Sales for the 9 months rose 5% in constant currency, a solid performance given the macro challenges we have experienced in both Southern Europe, as well as in Korea. Operating margin reached 17.9%, an 80 basis point increase. Our earnings per share rose 15%, and we increased total cash distributed to our shareholders both in terms of share repurchases and dividend. We also reported on the earnings call that for the full fiscal year, we are forecasting constant currency sales growth of 6%, operating margin improvement, which should yield a solid EPS growth of 13% to 15%. As we have stated previously, we continue to deliver strong mid to high-single digit top line growth, which will allow us to continue to outpace the anticipated global prestige beauty growth market. This level of sales growth should also give us the flexibility to reinvest appropriately in new opportunities and drive margin expansion through greater productivity and leverage. We expect our sales growth will be driven by the continued increasing disposable income of our global consumer base, a robust innovation pipeline that Cedric talked to you about earlier, geographic expansion and continued acceleration of the fastest-growing prestige distribution channels, such as e- and m-commerce, specialty multi and freestanding stores.

Over the past 4 years, we have doubled our operating margin by leveraging top line growth, improving our category mix and implementing cost savings program. Cost of goods opportunities and organizational restructuring provided savings for us initially, while pricing and other cost-savings efforts are providing an enhanced level of benefits in more recent years. These cumulative benefits have allowed us to reinvest those savings into additional growth drivers, such as TV advertising and build capabilities in the marketing areas I mentioned to you previously as well as in our IT systems, while also increasing profitability and returning cash to shareholders.

As it relates to advertising, this is an area where we are already deriving benefits from enhanced investment capabilities, and we expect to yield more benefits in the next few years. In fiscal 2012, we spent nearly $2.5 billion in advertising, merchandising and sampling, our largest expense category at 25.3% of sales. We are investing more in pole advertising, TV and digital, that further builds our brand equity for all of our brand portfolio and drive the awareness of our products and their benefits. In the future, we expect to enhance the use of consumer insights to continue to target our spending more effectively, engage consumers more impactfully through enhanced content in our messaging and utilize advanced tracking and measurement tools to enhance the return on investment from our spending.

All of the initiatives Cedric and I have outlined for you today should support our continued margin progression, and combined with our sales expectations, should continue to drive double-digit earnings growth. As our operating results have steadily improved, we have reinvested a portion of our increasing operating cash flow back into the business through capital spending to support counters, new stores and our enhanced IT systems. And we continue to opportunistically assess potential acquisitions that could further enhance our growth objectives. The last major acquisition the company did was Smashbox in 2011.

The remainder of our free cash flow has been primarily returned to shareholders through a combination of both share repurchases and dividends. In fiscal 2013, our board approved an increase in our authorization to purchase an additional 40 million shares of stock. The board also approved a 37% increase in our dividend to $0.72 per share annually. Over the 4-year period, our dividend raise has increased 162%.

Our efforts in enhancing our profitability in investment criteria have resulted in a steady and continuous improvement in return on invested capital. Indeed, our results are currently best in class among our peer group. Our combination of world-class brands and world-class capabilities allow us to create a best-in-class company for our customers, our employees and our shareholders. Best in class to us means continuing to anticipate our global consumers' aspirations, reach them where they want to have a premier service experience with premium products and continue to exceed their expectations, delivering value to our customers in both products and services, plus improved executional efficiency should allow us to continue to deliver exceptional value to our shareholders.

And now, Cedric and I will be happy to take any questions you have.

Question-and-Answer Session

Unknown Analyst

So if I could just start with a question about the destocking levels, do you think we're largely done with that, especially here in Europe? Or how much longer you think we have to suffer through some of that activity?

Cedric Prouvé

Yes, I think in terms of destocking, absolutely, we had a little bit of that on the travel retail channel as well this year and the beginning of the fiscal year. And now we know we're caught up in terms of our net selling versus sell-through. And in Asia, in general, we don't carry a lot of stock in trade, so it's -- the big factor is Europe. And right now, I think we're pretty much done with -- we're tracking the macro trends.

Unknown Analyst

It's also done in Europe, because wasn't that an issue also a few quarters ago -- Russia, sorry.

Cedric Prouvé

No. Russia is a different issue. It's a relationship with one of our biggest trading partners, where [indiscernible].

Unknown Analyst

[Indiscernible] in terms of our -- on your fragrance division, can you please comment on how much it's weight has decreased in terms of group sales in the past 3, 4 years? And in terms of profitability, I believe it's diluted to operating margin, but can you give us some numbers on the gross margin, maybe it's in line with group leverage? And yes, these are the questions.

Tracey Thomas Travis

So as Cedric mentioned, we have deemphasized growth in the fragrance division over the last couple of years. We actually have had a few fragrance groups that have grown, ala [ph] Tom Ford and Jo Malone. And they've had actually quite a bit of success this year. But certainly, our designer fragrance portfolio has declined. And Estée Lauder and Clinique fragrances has been relatively steady, a little bit of decline as well. We have focused over those last or the past few years in terms of improving the margin performance of our fragrance portfolios. So through 3 quarters, we are at about 12% in terms of margin, and that is an improvement not on an apples-to-apples basis, full year versus year-to-date of about 2% many years ago. So it's been a tremendous amount of improvement in terms of the margin. We believe that the efforts that we've taken in terms of the fragrance division, combined with the success of Tom Ford and Jo Malone and some of the new launches that Cedric shared with you that we have planned for next year, give us the momentum to start to grow this category again. As Cedric mentioned, it's very important for the travel retail business to have a strong, robust portfolio of fragrances, which we believe now we do with the complement of our classic fragrances, as well as some of the newer fragrances. It's also important for Europe, given the heavy perfumery market in Europe as you all know.

Unknown Analyst

Sorry, to just go right back to fragrance, and then also a second question on e-commerce. So Tracey, from a -- I understand maybe some of the strategic needs to get fragrance back growing again. It helps with the 6% to 8%, maybe it gives you increased importance with some of your channel partners. But from a financial return perspective, you'll still end the year at roughly around 8.5% within that segment. You don't own really the IP, it's really the designer partners that you're working with that you're building their IP. So you're putting capital behind a business that you don't really have, end of the day, value in. So is it accretive to margins, or how are you look from a longer term -- or returns, I'm sorry, accretive returns? How are you looking at it from a financial perspective and a longer-term tcf [ph] perspective to put more capital behind that segment?

Tracey Thomas Travis

So no, it's a great question. We have a broad portfolio of fragrances that we certainly do have the designer fragrance portfolio. We also have Estée Lauder, Clinique, as well as Jo Malone fragrances, which we are not designer fragrances. And we, in fact, own. So our growth strategies will be in both of those areas. We are certainly looking at fragrance to have a higher return on invested capital. From a margin standpoint, it will remain lower margin than skin care, which is our highest margin category, but we expect it to be accretive in terms of profit growth for us.

Unknown Analyst

And when you get returns, in excess of 24% or 30% on net capital, or are those investments within the fragrance division?

Tracey Thomas Travis

Over a period of time, yes. So as you know, when you launch a new fragrance, certainly, there is an upfront investment. And if you have a successful launch and have repeat purchases, the investment is less going forward. And so over a period of time, yes, I think we would expect it to deliver high return on invested capital.

Cedric Prouvé

[indiscernible]

Tracey Thomas Travis

Yes, absolutely.

Unknown Analyst

And [indiscernible] I think you've said that e-comm is 5% of your total sales. I was curious in terms of the replenishment opportunity there, it's growing, but it always seems to be a huge opportunity, but yet not quite fully realized. Is the issue for its replenishment in building the replenishment, getting the database in the customer profiles? Or is it just consumer adoption just simply is a bit more measured, or how would you characterize replenishment with an e-commerce, and what's going on with that segment there?

Cedric Prouvé

I think it's a -- there are multiple, multiple parameters in the development of online. Actually, it's not a homogeneous channel for us. There's a combination of marketing size for us and digital activity and then our own e-commerce platforms, m-commerce platforms. But actually, despite of growing piece of that business is actually retail partnerships. [indiscernible] coming to the U.S. or Boots.com in the U.K. So there are different levels at which we work with the online business. It's a question also of rolling it up progressively internationally, so we see a lot of growth has been the -- one of our fastest-growing channels overall consistently.

Unknown Analyst

One of the reasons for, let's say, the sales slowdown this year versus, let's say, previous years was also given by, perhaps, less success of some of the innovations you have done this year. What have you learned from that and how can you manage, let's say, innovation better going forward?

Tracey Thomas Travis

Sure. So we don't believe that we had less success in terms of innovation this year. We -- the market, the prestige beauty segment grew at 3%, so it slowed down this year relative to previous years. We also, as Cedric mentioned, had some softness in South Korea as well as a slow start to our travel retail business. We actually had some fairly strong innovation this year in certain products. So La Mer launched a soft cream that was very successful this year. Jo Malone launched a couple of fragrances this year and really accelerated the trajectory of that brand from a growth standpoint. We launched BB and CC creams this year in Estée Lauder and Clinique and really, the focus on Clinique. So we have had good, good innovation this year. Given that the subcategories as well as the brands that we've had that innovation in, the contribution might have been less then in prior years from a total standpoint. But we had strong innovation this year. We're pretty excited about our innovation program for next year. As Cedric shared some of it with you, there is more innovation to come for next year. So we are very comfortable with the innovation that we have going forward next year and beyond.

Unknown Analyst

I know it's a small business, but it seems like you're deemphasizing hair care. Is that because there's certain priorities in hair care, sort of in the back burner? I know it's, like I said, small, but it used to be a huge priority 5 or 6 years ago. I mean there was also a lot of acquisition activity in that business. So what has changed, is it like the way you look at the category and the profitability and the growth of that change? Or is it just, there's a lot on your plate right now?

Tracey Thomas Travis

No, actually, I'm glad you asked though because that's one of the other categories that we had a good innovation success this year with Aveda and in [indiscernible]. So we are focused less on hair care, certainly than we have been historically over the last few years on fragrance and -- I mean on skin care and makeup. Clearly, we're refocusing on efforts on fragrance. And Aveda has some good momentum, which we expect to continue when continue -- we'll look to continue to expand Aveda. We've also expanded in Europe, Bumble and bumble, and distribution, particularly in the U.K.

Cedric Prouvé

We're expanding Bumble and bumble and stepping a little bit out of the channel business. We're going into more of the retail model, so we launched an exclusive program with Boots in the U.K., for example, together with Smashbox and Ojon, which is rolling out very positively.

Tracey Thomas Travis

But we do have fewer brands, obviously, than in hair care category than in the others.

Unknown Analyst

A question in the front?

Unknown Analyst

[Indiscernible]

Cedric Prouvé

We are really working on that. Actually, it's a very interesting question, because we have -- I've showed you in the presentation, we're really developing this idea of consumer corridors in the sense that when we invest in emerging markets, we actually capture a lot of revenue outside of their home country. So it's a question we are actually working on right now. I wouldn't tell you that we are that sophisticated, but we're developing almost like P&L by consumer nationalities, so we can track what is the ripple effect of investing in Brazil or investing in Russia or in China and what we should -- we see -- we know, for example, in some of the key department stores around us here in Paris, Estée Lauder right now is one of the top-selling brands because of the Chinese impact. So this is something we're going to measure.

Unknown Analyst

It's more like here, but...

Cedric Prouvé

Well, we don't -- I don't have exact numbers to give you, but we are working on ratios right now. So we know, for example, for the Estée Lauder brand per se, for every $1 we generate in China, we probably generate about $1.80 or $2 outside of China with Chinese -- and we know it's a big factor, for example, with M.A.C. in Brazil. Our top stores -- actually, I'd mentioned the M.A.C. store we just opened on the Champs-Elysées and we know that already we are reaching about 25% to 30% mix of Brazilian tourists in that store. So it's pretty impactful.

Unknown Analyst

So how about in some markets like in Latin America, where there's freight-restrictive import duties on products. Would you ever consider doing more local market reduction or to achieve in the brand and then...

Cedric Prouvé

I'm sure you're talking about Brazil, I mean...

Unknown Analyst

Yes.

Cedric Prouvé

Mostly Brazil -- we actually made in Brazil test really well by doing -- when you say made in Brazil, they expect Brazilian prices. So we're actually look at it -- we're looking at it. We've done a couple of experiments in fragrance. We don't think it's economically feasible yet for skincare and makeup.

Unknown Analyst

We're very focused in terms of our production facilities.

Unknown Analyst

There's some question at the back there.

Unknown Analyst

Just on the travel retail business, you said it was 15% of sales and doubled in the last 3 years. Has that come from more people buying products? I think you said it's now 15% of people, who buy our products, all the average ticket size and going forwards, which would you expect to be the bigger driver of growth?

Cedric Prouvé

I'm sorry. Can you repeat the question, I'm sorry?

Unknown Analyst

Yes, sorry, the travel retail business, 15% of sales, doubled in 3 years, is that for more people buying products that's driven the growth or the average ticket size, which will be the bigger contributor going forward?

Cedric Prouvé

Well, I mean I would say the biggest driver of growth has been the evolution of the source-emerging markets like China. So we see a lot of traffic growing from these emerging markets from China, from Brazil, from Middle East. It's also the fact that we're rolling out our portfolio of brands. So more -- I mentioned in the presentation, we're rolling out more brands in more stores. It's also -- into our retail, there's a very interesting dynamic, which I also mentioned in the presentation is that very few, actually, passengers, only 15% of them actually buy. And even though most of you travel, I'm sure you go through the store, the conversion is not that high, so we're working on an equation where we raise awareness with the airports. We advertise to make sure that people know our brands are at the airport. That's why once they're in the store, we convert them into a transaction via better merchandising, better service, better presence. And then we also improve the quality of these transactions by actually hiking up the items for transaction and the quality of that transaction. So when you multiply all these factors, that will lead the transition into growth. So we are growing a lot faster than traffic actually. Revenue's growing faster than traffic.

Unknown Analyst

You mentioned acquisitions and the last one was a couple of years ago. Can you talk briefly about your priorities for acquisitions in terms of product line, geography, size, et cetera?

Tracey Thomas Travis

So our priorities are really within the 4 categories that we compete in, and in particular, skin care and makeup from a priority standpoint. We certainly are aware of everything that is available from a market standpoint. We look at synergistically whether it can add to our portfolio of roughly 30 brands, or if there is an opportunity within the beauty space, can it be accomplished within our existing brand portfolio, so that's really how we assess it from an accretive standpoint. We do look also at geography, and whether or not there could be an opportunity for expansion within a geography with a certain brand in a region, but have not obviously identified any yet that we pursued.

Cedric Prouvé

Again, just add a comment is that channel as what is important. So Smashbox actually was a very interesting channel [ph] player for us. It allowed us to be in specialty multi where some of these consumers actually don't go into department stores.

Unknown Analyst

Just one last one, Tracey. What -- 2 years from now, I think there's going to be this massive cash windfall, right? Because the CapEx goes down, all the SAP investments go away and then the working capital helps. I shouldn't -- a [indiscernible] could taste a little better than that. But it seems like there's going to be -- you only have enough cash in the balance sheet and then it seems like 18 months to 2 years, cash flow accelerates dramatically -- I shouldn't say windfall. So is there going to be a change in the way you kind of view the capital structure, returning cash to shareholders or just maybe a change in the mindset that management has?

Tracey Thomas Travis

So I wouldn't say it will be a massive reduction in CapEx, but it certainly will be a reduction in infrastructure CapEx related to IT systems. We are also investing in an HR system, which is not part of the SMI, and that might continue for another year or so, beyond SMI. But we are, to Cedric's point, to the extent that we accelerate our investment in retail stores that will require more capital. We're refreshing our counters that requires capital as well. So we've actually had increasing levels of capital spend over the last few years. That has been high return capital for us, and we would certainly expect to make capital decisions based on high returns. As it relates to our cash distribution strategy, we evaluate that ongoingly and have an annual discussion with our board in terms of how much of our free cash flow gets distributed to shareholders. So certainly -- and we've distributed a high amount, primarily via share repurchases, but also as I mentioned in my presentation, increasing the level of dividend. And that's something that we'll continue to assess. And certainly, as free cash flow goes up, we'll consider that as well in terms of our distribution policy.

Unknown Analyst

Great. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Estée Lauder Companies Inc. Presents at DbAccess 10th Annual Global Consumer Conference, Jun-11-2013 11:15 AM
This Transcript
All Transcripts