Estee Lauder Executive Insights: ROI Timing, Advertising Spend

On Friday, Estee Lauder Cos Inc Class A (NYSE:EL) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

ROI Timing

Christopher Ferrara – Bank of America Merrill Lynch: I wanted to ask about I guess the timing of the returns on the investments you’re making, because obviously you guys are putting a lot of advertising bag behind the business which is great and the top line growth has been pretty robust. But if you look going forward, it looks like you’re throwing more advertising at the business but you’re getting to adjusting for SAP and other timing a little bit slower growth rate. Understanding all the macro factors can you at least parse out what your take is on that slight slowdown in top line relative to the advertising you’re throwing at it? Also, in relation to that what’s the timing of the return on that? Is this going to result in a lagging sales acceleration or sustaining of sales as you move out into the beginning of fiscal ’13?

Fabrizio Freda – President and CEO: Chris, first of all, I think we are getting very solid returns in the sense if you look at after adjustment, which are technical adjustments, our quarter this fiscal year will be all between 9% and 11%, even 14% first. This quarter 9% we’ve been growing and last quarter we will probably go between 10% and 11%. So, in the total year between will be a second year in a row at double-digits. Frankly, I believe this is the result of increased advertising. We are increasing advertising to levels that we need frankly in the long-term to sustain in order to deliver this kind of growth also in soft markets and in good markets because the second way I think you should judge the results is that we – thanks to this strategy we are growing in high growth market like China and we are growing also in such markets like Italy for example. So, also the third way to judge the results that we are growing market share consistently quarter-over-quarter globally and going in the right direction. The last way (indiscernible) the advertising investment that anyway we are increasing – this fiscal year is interesting. We are increasing advertising for a total of $275 million versus previous year, while at the same time growing margin of 120 basis points. So it’s not that we are investing without return in the short-term. I think we are even short-term returns in the way we are investing. So anyway, you should not assume that this increased advertising will continue forever. There is a moment where we’ll reach what we believe is sustainable level of advertising to grow the business.

A Closer Look: Estee Lauder Earnings Cheat Sheet>>

Christopher Ferrara – Bank of America Merrill Lynch: And I guess just a quick follow-up. Is it possible to benchmark your share of voice, your advertising relative to the peers and like never (as your) share of voice relative to your market share in the major regions?

Fabrizio Freda – President and CEO: Yeah, we do this. I’ll tell you we have a frankly the level of advertising that we do is very different by region and reflected the market dynamics. As you can imagine we have a higher share of voice in advertising in countries like U.S. where we have a very big market share, in countries like China where we have the biggest growth opportunity. While on the contrary, in more mature markets where the market is now growing very fast and we do not have very high market share. Obviously, our share of voice tends to be much smaller. So, it is a mixed picture but we have this (indiscernible) a bit complicated to share all of them, and I think some of them are pretty confidential. But the important concern here is that we are now investing more and more, but as a next step we’re also doing a lot of internal work to become more effective and efficient in the way we spend our advertising money. So, you should expect in the next couple of years us to also been able to improve while we get out of advertising, improving our targeting capabilities in the Company, improving our understanding or the new medias we are using, particularly digital TV and improving the quality of our advertising from a creative standpoint, which by the way I believe is one of the key strengths we are exploiting in this moment, and finally addressing and focusing our advertising on the areas of higher return, that clearly appear to be our outstanding innovation.

Advertising Spend

Neely Tamminga – Piper Jaffray: Fabrizio a related question here on advertising spend. Could you give us a little sense in terms of the complexion of that spend. Where you have been for a print, TV, social media perspective and kind of where you are headed. I guess, related to that, we are looking a little bit more for your strategy around the social media. Then just wondering how much of increasing advertising spending is related to just overall pricing going up in a one that is an election year versus actual dollars going towards impressions, et cetera that would be helpful.

Fabrizio Freda – President and CEO: First of all, we are investing in all three big media that you mentioned. We continue to invest obviously in print, magazine advertising around the world and this investment is gradually continuing to grow, but is not the area of maximum growth, the area of maximum growth is digital and television advertising in some selected markets. So in a nutshell, we are increasing advertising around the world, we are very strongly increasing digital and social media investment and we are selectively increasing TV advertising only on the brands and on the markets where TV advertising makes sense. So that’s basically our strategy. The pricing of media, frankly the pricing inflation on media is very different by markets. As you probably know, it’s pretty high in markets like China and pretty moderate in markets like Europe today are in a sluggish economic situation. But overall, the large, large majority of our increase on advertising is more advertising, more effective advertising and is not driven by pricing actually with our new media purchasing activity enabled by a global media agency by SMI we are getting better in purchasing media rather than worse.