EL - NYSE

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2023 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Hello. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey 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 and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes an noncomparable impacts of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. [Operator Instructions] And now I'll turn the call over to Fabrizio.

Thank you, Rainey, and hello to everyone. It is good to be with you today. Turning to results. For the second quarter of fiscal year 2023, organic sales fell 11% and which was within our outlook despite the incremental pressure of COVID-19 resurgence in China. Many developed and emerging markets globally outperformed our expectations to offset the COVID-related impacts of significantly reduced retail traffic as well as limited staffing in beauty adviser, in domestic China and Travel Retail in Hainan in November and December. Adjusted EPS fell 45%. While its deep decline, this was meaningfully better than our outlook, driven by both disciplined expense management and moderation of the stronger U.S. dollars. Importantly, we continue to prudently invest for growth, launching thought after innovation and increasing A&P as a percentage of sales. For fiscal year 2023, we are lowering our outlook for organic sales growth and adjusted diluted EPS primarily for 2 reasons. First, inventory levels in Hainan remains somewhat more elevated than we expected due to the disruptions in travel and in-store staffing levels in November and December. Second, the recently announced potential rollback of COVID related supportive measures in Korea Duty Free are creating a near-term transitory pressure to our business with our courier duty-free retailers. In the third quarter, it is more than offsetting the initial positive impact from the resumption of international travel by Chinese consumers as well as favorable trends in our second quarter, including outstanding performance across many developed markets in Western Europe and Asia Pacific as well as many emerging markets globally and a better-than-expected currency environment. All told, our return to growth has shifted from the third quarter to the fourth quarter, which Tracey will discuss in greater detail. We remain focused on investing in our brands including for innovation, advertising, strategic entry into new countries and expanded consumer reach to fuel our multiple engines of growth strategy. Our growth engines in the second quarter were many among categories, regions and channels, and we anticipate the gradual return of more growth engines across the second half of fiscal year 2023. Beginning with categories. Fragrance extended its long-running double-digit organic sales growth streak in the second quarter, rising 12%. We are inspired by the growth prospects still ahead for the luxury and artisanal segment of the category. As consumer [indiscernible] unique distinct and long lasting sense of the highest quality. Many of today, consumers seek to build an occasion-based collection to express on sell differently across seasons, time of the day or events. Our portfolios of Jo Malone London, Tom Ford Beauty, Le Labo, KILIAN PARIS, Editions de Parfums Frederic Malle is ideally positioned for this accelerating fundamental shift. As demand increases globally, we are excited about our plans to bring these brands to new markets and channels in the coming quarters. Innovation will also continue to be a key growth pillar. For example, Tom Ford Beauty outstanding loans or [indiscernible] in the first half will be followed by the cherry collection in the second half, building on the success of regional hero last cherry. Makeup grew organically in the Americas as well as the domestic markets EMEA in across southeast Asia in the second quarter. Our brands are indeed realized in the promise of the category [indiscernible] as professional and personal use education feed on point innovation, alluring marketing campaigns on new platforms and I think artist. MAC was a standout success. The brand growth engines were many, freestanding doors excelled, welcoming consumers with expert services delivering double-digit organic sales growth globally. Across channels, blockbuster innovation, hero products and holiday merchandise proved highly sort. Clinic further fueled makeup across subcategories led by list as the brand has created a hero franchise with [indiscernible] almost lipstick in black honey. Estee Lauder Double Wear foundation had exceptional success with Its My Shade, My Story campaign in Western Europe. Virality on TikTok drove strong new consumer acquisition and the franchise strengthened its #1 ranking foundation with prestige beauty share gains. Looking ahead, we are excited for the launch of Estee Lauder Pure Color lipstick in the second half. The brand reinvented its iconic franchise to capitalize on lipstick revival and integrate skin care benefits for lips. -- designed to flatter all skin tones across mat, cream and luster finishes the line packaging peso edge to the brand original lipstick from the 1960s. In hair care, our brands extended the category organic sales growth streak to 8 consecutive quarters. for the second half, did launch last July in Mainland China will be complemented by the brand recent entry into Travel Retail in Haina. -- as we continue investing for the vibrant growth opportunity of prestige hair care with the Chinese consumers. Moreover, Avida became a certified B Corporation, joining Le Labo in our portfolio in achieving these important third-party validation as the brand deepened its decades-long commitment to social and environmental responsibility. Skin Care organic sales fell sharply in the second quarter. There were a few headwinds with the biggest challenge being COVID-19 in travel retail in Asia and with the Chinese consumer, given the category's exposure. Amin, the top landscape for skin care, the ordinary was a striking success. Its organic sales growth accelerated from high single digit in the first quarter to strong double digits in the second quarter. The brand's hero product excelled as did the blockbuster innovation of multiple tail lash and brow serum, while the ordinary also realized outstanding performance in the specialty multichannel again, momentum for its exciting launch in India in the fourth quarter of last year. We are focused on returning skin care to growth globally with sequentially improving trends from the third quarter to the fourth quarter as a transitory pressure from travel retail abate. To that end, we have an incredibly rich innovation pipeline primed to launch. Here a few among them. Already out from MAC is its new hyper-real franchise as the brand leverage its expertise to create an artist approved skin care line of products which are purposely designed to perform also with makeup. La Air revamped motorizing soft cream arrived this month with powerful new clinical results to reverse and receive visible signs of aging. Thereafter, Clinique will bring most Sud SPS to market. extend its popular hero product to meet consumer desire for hydration and some protection with a lightweight texture that has made MotorSerge100 age and Icon. With these launches, we aim to reach new consumers demographic tapped into high-growth subsegment. Let me now turn to geographies. While the U.S. and domestic China were challenged in the second quarter with sales falling single digit organically in each market, we believe both will be growth engines in the second half. For the U.S., we are optimistic for a return to growth given sequentially improving monthly trend in each of organic sales and retail sales performance throughout the second quarter. Building on this momentum, the market is equipped with numerous growth drivers, including an exceptional innovation pipeline across brands roll out of new Clinique counters to select doors after a successful pilot of Clinique lab in [indiscernible] and launch of exclusive products by many brands in specialty-multi. We are also progressively modernizing numerous freestanding store as they are primed to be an important contributor to growth following rationalization of the footprint. Moreover, our enhanced omnichannel capabilities are also primed to contribute to growth in the U.S. as consumers who engage with our brands online and in store drive consistently higher value from upsell and cross-sell. This was especially true during holidays in the second quarter. For domestic China, we are confident in a vibrant recovery for our business following the relaxing of cove restriction. -- as the economy is well positioned to rebound and Chinese consumers are passion for prestige beauty. We entered this phase with momentum having expanded our market share of prestige but in China during the second quarter, driven by gains on all of skin care, makeup, fragrance and hair care demonstrating that this ability of our aspirational brand portfolio and the excellent go-to-market strategies of our local team. While the third quarter is set to be more variable, because of the high level of covet cases, we now anticipate even stronger organic sales growth as of the fourth quarter as recovery evolves. We expect online to continue its strengths and anticipate a gradual return to more fulsome brick-and-mortar traffic by the end of the fiscal year. Online organic sales rose single digit in the second quarter, fueled by many brands led by La Mer double-digit growth. We achieved excellent results for 11 as the Estee Lauder brand realized top ranks across platforms. Moreover, our retail sales growth in online channel meaningfully outpaced the industry in the quarter for strong prestige beauty share gains. Beyond the U.S. and China, we realized outstanding organic sales growth in many large developed and emerging markets around the world. Our local team has been executing with excellence to deliver broad-based sales gains. Western Europe, led by the U.K. prospered, while Japan and Australia contributed strongly in Asia Pacific. India, Brazil, Turkey and Malaysia are among the stars of our emerging markets with each posting strong double-digit organic sales growth led by India, rising nearly 50%. We are very encouraged with the excellent performance we are delivering in emerging markets. As these emerging markets evolve in recovery from the pandemic, we foresee compelling long-term growth opportunity arising from the expanding middle class trading up into prestige beauty. We entered this important phase of recovery from a position of strength as we hold leading prestige beauty share in many of these markets. For example, in India, Mexico, South Africa, we are the #1 rent company in both prestige makeup and skincare, while we lead in prestige makeup in Malaysia, Thailand and Turkey. Let me now turn to the strategic deal we announced in November to acquire Tom 4. This transformational luxury acquisition will make Tumor an own brand of stellate companies. enabling us to manage the brand's intellectual property and equity. Staying true to our focus as a pure play in prestige beauty. We have also reached agreements with luxury companies,

Thank you, Fabrizio, and hello, everyone. As Fabrizio mentioned, our business in the second quarter continued to be pressured by the external headwinds of COVID-related impacts, including the rising number of COVID cases in China, lower shipments of replenishment orders in the U.S. and the stronger U.S. dollar. Our second quarter organic net sales declined 11% and earnings per share decreased 49% to $1.54. We tighter expense management and a slightly improved currency impact contributed to our better-than-expected EPS results. From a geographic standpoint, organic net sales in the Americas declined 3%. The -- we saw healthy demand for our holiday offerings as consumers gravitated to our in-store and online promotions. However, we also experienced lower shipments of replenishment orders due to both retailer inventory tightening as we anticipated, and a later improvement in retail trends post-Christmas. In Latin America, organic net sales rose double digits, reflecting continued growth in nearly all markets, the evolution of recovery and makeup as consumers return to stores, and the strength of our fragrance portfolio. Organic net sales in our Europe, the Middle East and Africa region declined 17%, including the negative impact from foreign currency transactions and key international travel retail locations of 3%. The decline was driven by travel retail as expected, while growth from nearly every market in the rest of the region was strong. Our global travel retail sales were significantly pressured by the ongoing COVID-related impacts. Despite stores being opened throughout the quarter, travel to Hainan remain largely curtailed, and as a result, shipments of replenishment inventory remained low. Elsewhere, we experienced strong sales growth in Travel Retail, reflecting increased international tourism as travel restrictions in many countries lifted from the prior year. The ongoing pressures in Asia travel retail more than offset the growth we experienced in the rest of the EMEA region, including both developed and emerging markets such as the United Kingdom, France, India and Turkey. We continue to see various stages of recovery across the region that coupled with the strong resumption of tourism fueled brick-and-mortar growth during the quarter. Organic net sales in our Asia Pacific region fell 7%, primarily due to the ongoing COVID-related impacts in Greater China. This affected brick-and-mortar sales in Greater China and Dr. Jart Travel Retail in Korea. Online sales continued to grow in Mainland China due in part to the expansion of our online presence with the recent launches on JD and Joyn as well as solid performance during the 11.11 Shopping Festival. Most of the other markets in the region continued to progress in recovery as the return of brick-and-mortar traffic led to high single-digit or double-digit growth in Japan, Australia, Malaysia and the Philippines. From a category standpoint, fragrance continued to lead growth with organic net sales rising 12%. Strong holiday demand for our beautiful line of fragrances from Estee Lauder and double-digit growth from both La La bond Tom Ford Beauty propelled the category's growth in every region during the quarter. Organic net sales in hair care rose 4% and declined 3% in makeup, the latter driven primarily by the COVID restrictions in China as solid performance from both MAC and Clinique drove growth in both the Americas and in domestic markets in EMEA. Organic net sales in skin care declined 20%. This category continues to be the most affected by the COVID restrictions in China, particularly in Asia travel retail and Mainland China, where skin care accounts for a large majority of our business. Our gross margin declined 430 basis points compared to last year. The positive impacts from strategic pricing in this quarter were more than offset by inflationary pressures in our supply chain, region and category mix, and higher costs due to promotional items. Operating expenses increased 500 basis points as a percent of sales, driven primarily by the reduction in sales. This also reflects our investments in areas such as advertising, promotional activities and innovation, which increased 150 basis points compared to last year. Operating income declined 46% to $768 million, and our operating margin contracted 930 basis points to 16.6% in the quarter. During the quarter, we recorded $207 million of impairment charges related to the 3 brands, primarily reflecting lower-than-expected growth in key geographic regions and channels given the pressure on consumer demand from the impacts of COVID. Diluted EPS of $1.54 decreased 49% compared to last year. The impact from foreign currency translation and foreign currency transactions in key travel retail locations negatively impacted diluted EPS and by 5% and 4%, respectively. During the quarter, we generated $751 million in net cash flows from operating activities compared to $1.8 billion last year. The decline from last year reflects lower net income and the negative impact from changes in working capital, primarily due to the timing of payments. We invested $419 million in capital expenditures, and we returned $708 million in cash to stockholders through both dividends and share repurchases. As we expected, our first half performance was pressured by ongoing external headwinds. Let me now turn to our outlook for the remainder of fiscal 2023. For the second half of fiscal 2023, we are encouraged by the easing of COVID restrictions in China and the expected return of travelers throughout Asia and around the world once more stabilization occurs with outbound flights and visas as well as cover entry and testing requirements. In Hainan, we are starting to see increased positive signs already. as traffic level declines have moderated in recent months. However, retailer inventory levels are still somewhat elevated, reflecting the impact of the lengthy store closures as well as the rapid reduction in traffic and in-store staffing levels in November and December. And in Korea travel retail, an incremental headwind has emerged since the last outlook we provided in November. The recently announced potential rollback of COVID-related supportive measures in Korea Duty Free is creating a near-term transitory pressure to our business with our Korean duty-free retailers, which is pressuring our third quarter outlook. We now also expect more moderate net sales growth near term in our China business as the rise of Cove cases in November and December slowed expected brick-and-mortar retail traffic and social usage occasions. -- which continued in January during the pre-Lunar New Year shopping time frame. Collectively, we expect these impacts to create greater headwinds in the third quarter than we originally anticipated. As a result, we are updating our outlook to reflect a shift in the start of the travel retail recovery in Asia from the third to the fourth quarter of fiscal 2023 due to the normalization of inventory levels in Hainan, the uncertain pace of recovery of travel retail traffic in Korea and a more moderate acceleration of growth in China. The momentum from our other developed and emerging markets in EMEA and Asia Pacific in the first half is expected to continue as those markets progressively evolve in recovery. We are also cautiously optimistic and expect our North America net sales performance to improve as our retail growth trend in the region has already increased, particularly in January. -- and we have a supportive innovation pipeline planned for the second half, as Fabrizio mentioned. As it relates to our operating income, while these external headwinds have introduced a high level of volatility and that has had a meaningful impact on our financial results this fiscal year. We remain confident in the ongoing strength of prestige beauty, our business strategy and our ability to reaccelerate long-term profitable growth. We, therefore, plan to sustain the strategic investments imperative to that growth, including innovation, advertising and continued geographic expansion for many of our brands. These investments also support the continued strengthening of our multiple engines of growth as we invest in emerging markets and faster growth channels that are already progressing well in their recovery. As a result, we expect to see pressure on our operating income in the third quarter with an accelerated improvement in the fourth quarter as the sales recovery in travel retail, Mainland China, and skin care start to materialize more meaningfully. The negative impacts from foreign currency that we anticipated in our previous guidance have improved due to the recent weakening of the U.S. dollar. However, currency is still expected to be a meaningful drag our reported sales and diluted EPS growth for the third quarter and full year. Our outlook is now based on December 30 spot rates of 1.067 for the euro, 1.207 for the pound, 6.964 for the Chinese yuan and 12.63 for the Korean yuan. So with that backdrop, our guidance is as follows: we expect organic sales for our third quarter to decline 10% to 8%, primarily reflecting the pressures to our Travel Retail business that I mentioned previously. Currency translation is expected to be dilutive to reported net sales by 3 points and the impact of certain foreign currency transactions in key international travel locations is not expected to be material. The impact of sales from certain designer fragrance license exits are expected to dilute reported growth by approximately 1 point. We expect third quarter adjusted EPS of $0.37 to $0.47 for a decline between 81% to 75%. Currency translation is expected to be dilutive to EPS by $0.04, such that constant currency adjusted EPS is expected to decline between 79% to 73%. This includes the negative impact from certain foreign currency transactions and key international travel retail locations of approximately 1 percentage point. For the full year, SP27916451 assuming a reacceleration of Travel Retail [indiscernible] in the full range between down 2% to flat. Currency translation is expected to dilute reported sales growth for the full fiscal year by 4 percentage points and we expect an additional 1 point of dilution from the impact of certain foreign currency transactions in key international travel retail locations. The impact of sales from certain designer license exits are expected to dilute reported growth by approximately 1 point. We expect full year operating margin to be approximately 15.1%, a 460 basis point contraction from the prior year period primarily due to the geographical and category mix of sales and foreign currency impacts as well as the sustained investments to support recovery as previously mentioned. We now expect our full year effective tax rate to be approximately 25.5%, reflecting in part the change in our estimated geographical mix of earnings. Diluted EPS is expected to range between $4.87 and 502 before restructuring and other charges. This includes approximately $0.29 of dilution from currency translation. In constant currency, we expect EPS to fall between 29% and 27%, which includes a negative impact from foreign currency transactions and key international travel retail locations, of approximately 4 percentage points. Regarding the Tom Ford brand acquisition, we expect to complete this transaction in the fourth quarter and to fund it through a combination of cash, debt and deferred payments. In anticipation of closing this transaction, in January, we increased our commercial paper program by $2 billion. We also estimate a slight EPS dilution to the full year outlook that I just provided due to the final purchase accounting inclusive of transaction costs. While this year has undoubtedly been a perfect storm of unforeseen macro pressures on our business, and the transition to accelerated recovery has indeed been longer than we anticipated, we have navigated through the challenging environment and strengthened the company in the process, thanks to our amazing employees, our company values and our multiple engines of growth strategy. We are encouraged by the many signs of improvement in the overall environment and the progress our incredible teams have made in preparing us for a strong recovery. Our fundamentals are solid and intact, reinforced by the actions we have taken over the past few years. From the acquisition of the majority interest in [indiscernible] in fiscal 2021 to the recent announcement of our agreement to acquire the Tom Ford brand and the Balmain license agreement. We are expanding our brand portfolio at both the entry and luxury levels of prestige beauty. We've taken strategic actions to enhance our go-to-market capabilities, supply chain agility and local relevance through our new innovation, production and distribution facilities in Asia. We've enhanced our digital marketing capabilities and continue to progress on our ESG initiatives. These actions and many more demonstrate that we remain confident in the long-term sustainable profitable growth of our business. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

[Operator Instructions] Our first question today comes from Lauren Lieberman with Barclays.

I was hoping -- and this is probably more for you, Tracey. If you could walk through with us how you're I guess, the length of the supply chain works for supplying both Hainan and Mainland China currently, knowing it's shifting. Because as we think through the change forecast in demand and knowing what I believe is a pretty lengthy supply chain, how you're managing production versus shipments and if that's sort of informing why there's so much visibility seemingly on 4Q. And I guess we should see inventory spike up on your balance sheet in 3Q. Is that right?

Yes. You're correct, Lauren, that we do expect that we will -- two things. One, inventory levels are still coming down in Hainan. They are almost at the level that we would expect sales to accelerate. So yes, you should start to see an inventory build related to the shipments that we expect to see in Q4. In Korea, again, the pace is a little bit more uncertain given the transitory nature of what's going on right now. So we do anticipate, as I mentioned in the prepared remarks that we will start to see resumption of travel in Korea. And depending on the pace of that resumption that will depend on the amount of shipments that we have in the quarter. But we have taken obviously an assumption there. We are sitting on a decent amount of inventory even in our own warehouses to supply the sales that we expect to see in the fourth quarter.

The next question is from Dara Mohsenian of Morgan Stanley.

So just sort of extend that question a little bit, right? We have a lot of quarterly volatility in terms of Q3 versus Q4. Q2, there's a difference in shipments versus underlying retail sales. Obviously, COVID impacts in China. So it's hard to get a great underlying sense of retail sales here and how the business is doing. So a ratio, maybe you can just give us a little bit of an update on retail sales by region I'm particularly interested in category growth and any macro impacts in the U.S. and Europe? And then how you're thinking about Asia Pac and China versus the rest of the region. Let's so -- on near-term results here, but more how results came into the quarter versus what you originally expected and that might inform the revenue trajectory as you look out over the next couple of years and how you think about it? I think you touched on a lot of aspects of that, but it would be helpful to get a general overview.

Yes. No. Absolutely, with pleasure. Let me start with China, first of all. And so China, the results in the quarter where pretty good. We built significant market share. So the overall market in China was negative double digit. Our net sales were and our retail was negative single digits, and we built market share in every single category. So in most arises, we build market share in makeup in fragrance, in health care in every aspect. Now this, for us, is a very important sign that the -- our brands are really working the aspirational value of our brands remains very, very strong, which in the moment of reopening is a very strong position to be. So excellent performance relatively to market. Though some of our brands were shining, La Mer in skin care was the brand that was gaining the best market share on for beauty in makeup and Jo Malone London in fragrance was really leading the share gain. The other important reading of China is that during 11/11, our net sales were up 10.9%, and our retail sales were up 11.9% and holding the #1 ranking across various categories. and there was a lot of great success on the brand creative activity in live streaming on innovation. And so the way when the consumers are back in this very difficult volatile period like a situation like 11.11, where there is obviously high traffic our brands respond enormously. And obviously, when the consumers are not back or don't travel or our site is when, obviously, we have seen some issues. So in total, China is developing the way we planned. And from a market share standpoint, recovering also and is definitely going in the right direction. In terms of the future, the potential of China, we continue to see now the opening to create a gain traffic in Mainland, in brick-and-mortar, we see the continuation of the line success. And we see the -- obviously, the reopening of Hainan. And so the Chinese consumer on all fronts. Also, we see the fact that the Chinese consumer is starting to travel internationally. [indiscernible] and this will gradually increase as the governments will agree theses and models of growth. In this moment, there are parts of the world we already opened, others we will open soon Japan, we understand it's been an agreement, but it's not yet open, we'll be in soon. Korea is the 1 where the agreement is not yet finalized, but we are optimistic that in the future, this also would be resolved. So that's another very important trend. This will have a positive impact, obviously, in our retail channel, but also in the countries of destination, like it's always been historically happened. In terms of categories in China, obviously, the most important thing that will happen as the China accelerate on all fronts will be the skin care will accelerate for us. And so the acceleration of Travel Retail Asia, the Aleris China, the acceleration of international travel of Chinese, which we had in front of us in part in quarter 4, but in part in -- fiscal year 2024. This will will generate a substantial improvement of our skin care trends that, in turn, will have a positive impact on our margin mix. So that's obviously an important element of the program. Then other regions of the world. As I commented in my prepared remarks, has been very strong in Europe where we built market share. in most of the European markets. Very strong in the rest of Asia, particularly strong gains in Japan and Australia, as I commented already. And in Korea, excluding the travel retail impacts, that are particularly heavy on our Dejar brand, which has a big percentage in Travel Retail, excluding that also Korea started progressing very well. So good progress in all the other regions. Then North America. Now in North America, obviously, we also continue to lose share in the quarter. And overall, we would like to accelerate our plan of share recovery. But the good news is there's been very strong progress in quarter 2. Every single month, October, November and then December, there was progress in top line sales acceleration. First of all, in retail, the quarter in the U.S. ended plus 2%, so on the positive. But December was plus 6.5%, 7%. So in line with our goals of acceleration. So we see the U.S. progressing. Now the next 6 months, there is an even stronger plan. In the U.S., we have a strong acceleration of innovation. I mentioned already some in the in the prepared remarks like Estee Lauder Pachorolistic, Moreso Sudo Clinique, Hyperion Marc, soft cream on La Mer, cherry collection to Ford. So -- and then we have some important distribution improvement. We are deploying more distribution in department store of our high-end fragrances in Macy's in dealers the ordinary is entering some doors and strands. We are deploying in Ulta and in Sephora new, incremental [indiscernible] and incremental expansion of our key brands in these doors. And we are renovating 100 free stand store opening 8 new freshen stores and continue to improve our omnichannel capabilities on all fronts. So we see an acceleration of our progress also in the U.S. So in summary, when I should add what Tracey also underline that at the same time, we have improved our capability behind this program. Our digital marketing is strong. Our supply chain is shortened and faster. Obviously, we have done progress in our factory in Japan, our R&D has opened our R&D center in China that will increase the amount of local relevant innovations in Asia in an important way in the next fiscal year -- starting this fiscal year in a significant way. And we have opened a new distribution on the serves travel retail in Switzerland and on the service, obviously, China, within China, as we discussed also in the last call. So there are all these investments and progresses in capabilities that make us ready the reacceleration in the future. And so this fiscal year, in summary, has been a year where, really, we suffered about the COVID lockdowns, particularly in Asia. And then the high level of infections during the reopening and the impact of the strength of the U.S. dollar that was particularly big in our high profit, high important channels like travel retail, like China, travel retails because on core and China, the dollar was particularly impactful. So it was really a perfect storm kind of situation. But all the rest, apart from these 3 areas really progressed and in some cases, very successful in market share gaining. So that's my overview. I hope to answer your question that having an overview of the situation. but I would say is very, very encouraging for the recovery period.

The next question is from Peter Grom of UBS.

So Tracey, I wanted to ask about the implied outlook for organic revenue growth in the fourth quarter, which is quite strong and better than expected. And I know we're still a few months away from fiscal '24 here. But is the implied exit rate in the 4Q guidance a fair way to kind of think about the potential top line recovery looking out to next year? Or are there kind of the timing-related impact given what you're forecasting in 3Q that could be driving them a stronger growth So look, we are expecting a stronger fourth quarter than probably you anticipated and us as well, given a few months back. And part of that, as we said in our prepared remarks, is because of the shift of recovery expectation, certainly in terms of some of Travel Retail, I would just remind you that -- and I know you're well aware of this, we're also anniversarying last year's some pretty significant shutdowns. So this volatility that we're speaking about actually started at the end of our fiscal 2022 in the fourth quarter. And we're coming up on the anniversary of that. So the numbers look particularly large from a from a growth standpoint because we are anniversarying some lockdowns in China and in travel retail in Hainan in particular, which was the start of some of the problems that we have anticipated on this call today. I think we are anticipating for fiscal '24, we're not giving fiscal '24 guidance right now. But given that in the fourth quarter, all markets are anticipated to be open and remain open and traveling will gradually resume and again, uncertain about the pace of that resumption, but we've certainly seen encouraging signs in many of our markets. that fiscal '24 will be a strong year for us. So I wouldn't take the the Q4 implied growth and apply it to fiscal '24. Peter, if that's what you're getting at. But certainly, we expect that we -- many of -- there will still be volatility in fiscal '24, but the volatility related to the pandemic and some of the things that we've experienced this year should be much moderate than certainly what we've experienced this year. And if you have any predictions on currency, certainly do let me know.

The next question is from Michael Binetti of Credit Suisse.

Tracey, maybe I could just dovetail on that a little bit. you told us a few quarters back that 20% margin was a North Star. As you think out to next year and many of the moving parts of your business finally start to come back online? Is that -- is there any -- I don't know there may be some pull-forward revenue that leaks into the first half of the year. I don't know, obviously, you gave us the fourth quarter here. But as you look out to next year, is 20% in appropriate North Star for next year given the revenue drivers back online? And then I guess, Fabrizio, can you help us size the travel business a little better since it's such a big swing factor in the model here going forward. I think it was about 15% of sales pre-COVID, half of it China. You spoke a little bit about the shape of it at a conference in December that the pre-COVID that Chinese business -- the Chinese traveler was largely a Tier 1 international traveler. I think you said Hainan only has completely replaced that, but it's a different customer, maybe a lower-tier customer. just because this moves the model around so much, can you help us just think about how big that business is today in the non-China markets, Hainan -- non-Hainan China to help us think about the model.

So let me just -- and Fabrizio will pick up on your questions on Travel Retail. But Travel Retail actually was larger. You're remembering, Michael, our online business was pandemic. Travel Retail was more like 26% pre-pandemic. But in terms of the operating margin for fiscal '24, as you can imagine, with some of the more recent events, we are still going through what our expectations are for fiscal '24, and we'll certainly provide guidance as we normally do in the August time frame. I think 20% is a little ambitious right now for fiscal '24 based on what we're seeing. But some of that has to do with how currency moves, which was my previous comment in terms of if you have projections on currency, let me know. But certainly, in terms of the business fundamentals, the growth, we would expect obviously more margin expansion that is in our normal algorithm for fiscal '24 because of the recovery of volume. And obviously, when you're down in volume as we are this year, as much as we protect the strategic investments, but also make choiceful discretionary investments as well. Volume solves a lot of sins. And so we would expect more leverage on our expense base next year, certainly than we're able to get this year. practically because of the volume trends and as well as the shocks in terms of those hits have occurred and how fast we can react to them. So again, we are expecting a certainly progressive fiscal '24. And with all of the things that we spoke about in the prepared remarks as it relates to the investments that we made that will come online, we'll have a new factory operational in Asia that will make our time to market shorter, will have the new innovation center, which will start to contribute to the development of product for us in the future, et cetera. So all of those things that we said in the prepared marks should also support the acceleration of growth in fiscal '24. Now for your travel -- or more on your travel retail question, I'll turn it to Fabrizio.

Yes. Thank you, Tracey. Also, I want to add on the margin thing is the first step of normalization of our margin that Tracey is describing on top of volume is also -- will depend on which volume. Because, obviously, if you assume that the normalization of business would be in travel retail in China, then you are assuming that the normalization will be in skin care that tend to be higher margin. So there will be a moment of recovery and normalization. And then from there, we will restart our normal algorithm. And obviously, we will see how the normalization trends evolve and how long they will take. But that will be the way we will move back -- in terms of the travel retail question, stress clarified before and then even more during coded. But the -- you are asking about the -- what are the key dynamics in that retail. So the dynamics in fiber details will be, first of all, Hainan is now established. And yes, I said that when the international travel of the Chinese consumers will restart, Heinen will not be cannibalized in a big way is Hainan is now well-established vacation place for Chinese, for internal travel is, yes, there are different target groups. The high-end travel is obviously more affordable, easy does require visa doesn't require a passport, by the way. Keep in mind that at least before COVID, I do not have the last information now that everything is changing on the Visa model. But before Covis less than 20% of Chinese had a passport. And so there is anyway 80% of Chinese debt will go to Hainan and they will not travel internationally in this model. So Hainan will continue and will continue to develop. The addition will be the international charter, which is coming back. in an important way. And then obviously, the Korea and rest of Asia, so Korea has always been a very big business. But as you know, Hong Kong, Macau, Japan were all very important travel retail businesses that now will improve. And so there will be different levels of growth, obviously, in all of this. Now in term of categories, the -- because of the prevalence of Chinese consumer Asia travelers in general, as percentage of the total global travel retail, skin care is a very important category. So the travel retail acceleration in the future will carry, as I was saying before, skin care. And so this will be a double positive impact on marginality and profitability is that combination is powerful. And then by category, we see in Travel Retail a strong acceleration of the fragrance category, particularly the high-end fragrance category, which is, again, profitable and very interesting category for the consumers in this moment. We observed many travel retail partners around the world, making more space for the high-end fragrance development in the future of travel retail. So that's another important positive. And then the last point I want to make is keep in mind that the travel retail is driven by increased traffic and by increased conversion. The numbers that were available before covered in a normalized way in 2019 were depending which part of the world, the travelers to buy as conversion was between 10% and 15%. And -- we know also that when there is retail like in China and Korea, so where people can buy online before they go to the airport, this conversion number increased substantially -- and there is a lot of retail business that has developed very well in Asia, particularly linked to Hainan. And so the amount of conversion of these travelers is increasing -- and last thing I want to say is that the comeback of Chinese consumers in international travel is very good news because the Chinese consumer, when they travel used to have much more purchase per person than the average travelers from different regions. So the increase in mix of Chinese travelers is very good news for global travel retail as well. So in the post corded world, when will be really postal I think we are going to see some years of exciting opportunity globally in the travel retail development.

We have time for one more question. It is from Mark Astrachan of Stifel.

Yes, I wanted to ask about the sustainability of growth in some of these categories, which benefited from reopening like fragrances makeup and expectations for skin care improvement, it sounds like you’re obviously talking to improving skin care trends globally, obviously, China as well. And then I wanted to ask the same question around China. So should we expect a similar reopening trajectory? Or are you expecting a similar reopening trajectory in China that we’ve seen around the rest of the world in terms of growth and in terms of the categories which benefit.