The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2024 First Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I'd like to turn the floor over to Senior Vice President of Investor Relations, Ms. Rainey Mancini. Ma'am, you may begin.

Hello. On today's call are Fabrizio Freyda, President and Chief Executive Officer, and Tracy Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations, is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the 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 investor section of our website. As a reminder, references to online sales include sales that 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. During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for this call. And now I'll turn the call over to Fabrizio.

Thank you, Reni, and hello to everyone. We appreciate you joining us to discuss our first quarter results revised outlook for fiscal year 2024, and accelerated profit recovery plan to benefit fiscal years 2025 and 2026. Before we begin, I want to start by expressing the tremendous grief and sadness we have for the victims and their families of the horrific terrorist attacks against Israel, the tragic loss of Palestinian lives, and the growing humanitarian crisis in Gaza. Our hearts break for the profound suffering across the Middle East during this terrible time. We are committed to continuing to support the safety and well-being of all our employees in the affected areas and around the world. Let me now turn to our first quarter results. We delivered our outlook for organic sales and exceeded expectations for adjusted diluted EPS. Organic sales decreased 11%. Our global travel retail business drove the decline, as expected, with organic sales lowered by 51%, given the combination of trade inventory reduction and a structured market containment. The entire rest of our global business rose 4% organically, led by mid-to-high single-digit growth in the Americas and the markets of EMEA and double-digit growth in Asia-Pacific, excluding mainland China. The excellent performance in these regions enabled us to deliver our sales outlook despite a slower-than-expected recovery of overall prestige beauty in mainland China. Adjusted diluted EPS of 11 cents was ahead of the outlook, as we achieved a better-than-expected adjusted operating margin. There were several drivers for this more favorable profitability, led by a greater contribution to sales from skincare than forecasted, as well as disciplined expense management. Notably, we continue brand-building investments in the areas with the greatest growth opportunities, with AP spending rising as a percentage of sales. While we had a better than expected start of the fiscal year, we are lowering our fiscal year 2024 outlook given the further incremental external headwinds in two specific areas of our business. First, the expected growth rate of overall prestige beauty has lowered in Asia travel retail and mainland China, which is currently also evidenced in the pre-sale phase of the 1111 Shopping Festival. To reflect this input, as well as the ongoing policies and efforts to contain a structured market activity, we are moderating our expectation for fiscal year 2024 retail sales for Asia Travel Retail and Mainland China. As part of this, we continue to expect to reset retail inventory in Asia Travel Retail by the end of the third quarter. Second, we are reflecting the risks of business disruption in Israel and other parts of the Middle East. For fiscal year 2024, our revised outlook continues to expect sequentially improving sales trend each quarter, with double-digit organic sales growth in the second half. We also still expect sequentially stronger adjusted operating margin each quarter, we continued consumer-facing investment in our growth engines. Moreover, we are accelerating and expanding our profit recovery plan, which is designed to benefit fiscal years 2025 and 2026 for us to realize our ambitions to rebuild profitability despite the external high winds increased pressure on the business in fiscal year 2024. On our earning call in August, I described our four strategic imperatives for fiscal year 2024, which are drive momentum where our business is thriving, return to growth in the U.S., capture demand from the returning individual travelers in Asia travel retail, and begin to rebuild our profitability. Let me share with you our progress across these pillars, as well as the framework of our accelerated and expanded property recovery plan. First, we have focused on extending the gains we achieved in fiscal year 2023 in the numerous developed and emerging markets around the world where we prospered. In the first quarter, we did just that. In the markets of EMEA, we achieved impressive results once more, driven by the UK and Germany. Organic sales growth was balanced across brick and mortar and online. as engaging activation in store and on social media resonated strongly with consumers across our brand portfolio. We extended our Prestige Beauty share gains in Western Europe, driven by our high-quality hero products and innovation. In India's emerging market, India was a standout, driven by stellar gains by The Ordinary and double-digit growth by MAC. In Latin America, Prestige Beauty remains vibrant, and we again achieved strong results. Mexico and Brazil excelled, each up double digits organically. Our localized go-to-market initiatives in these two dynamic emerging markets are succeeding in attracting new consumers. We continued our winning ways in many markets across Asia-Pacific. The evolution of Hong Kong's SIR is especially compelling, and we realized very strong prestige beauty share gains. with our brand's strong desirability, high-touch services, and innovation engaging consumers as retail traffic increasingly returns. Our performance in Japan and Australia, once again, robust, driven by our diversified brand portfolio catering to local desires. Around the world, our direct-to-consumer business performed especially well. every region contributed, led by double-digit organic sales growth in freestanding stores in Asia Pacific. On a global basis, we are thrilled that the make-up renaissance is in full swing, and we have been ready to meet consumers as they again embrace their enthusiasm for the category. Make-up thrived in the quarter as the America's The markets in EMEA and Asia Pacific each contributed high single-digit organic sales growth to offset the pressure in the category from global travel retail. We are successfully tapping into and creating trends with on-point innovation like MAC Studio Radiance Foundation and Estée Lauder Futurist Skin Tint Serum Foundation. During this exciting era for the category, Our brands are leveraging their expert artists and social media know-how to engage with consumers and generate strong and expanding levels of earned media value. Fragrance, a game prospered. We deliver our 11th consecutive quarter of organic sales growth, led by outstanding performance in the Americas and Asia Pacific, a strong share gains in prestige fragrance in Western Europe. We continue to believe that we are still in the beginning of a promising long-term phase of growth for fragrance in Asia-Pacific as consumers increasingly embrace the category and penetration levels are low relatively to the West. Indeed, in Asia-Pacific, fragrance represents 8% of the prestige beauty industry, whereas in Western Europe, it is 40% of the industry. We are well positioned for this growth opportunity with our luxury and artisanal brands' alignment with the trends in the region as consumers gravitate to fragrance collections in addition to single-use trends for multiple distinct scents of the highest quality. Moving to our second pillar. We have focused on returning to growth in the U.S. for the full year and made strides in the first quarter when, encouragingly, our organic sales growth improved strongly on a sequential basis and moved from a modest decline last quarter to mid-single-digit growth this quarter. Our multifaceted strategic plan included launching a robust innovation pipeline with increased focus on breakthrough ideas and leading trends, increasing engagement by brands on social media to realize greater earned media value, accentuating our strengths in luxury and artisanal fragrance, and in high-performance ingredient-led and derma skincare, and expanding brand reach in specialty multi to attract new consumers. During the first quarter, innovation proved to be a powerful catalyst for growth in the U.S. across every category. The contributions are many, from Clinique High Impact, Hi-Fi Full Volume Mascara, and MAC Studio Radiant Serum Powered Foundation in Makeup, to Estée Lauder Advanced Night Repair Rescue Solution in Skincare, and more. Through these high-profile launches with sophisticated media strategies, our brands elevated their engagement on TikTok, Instagram, and other platforms. Impressively, MAC's earned media value in the U.S. beauty improved several ranks. to number two in the month of September, further solidifying its number one rank globally. We also achieved strong progress in fragrance in the U.S., driven by our luxury and artisanal brands. Le Labo, Tom Ford, and Jo Malone London each rose double-digit, driven by multiple growth engines, from innovation to online brick-and-mortar and expanded consumer reach. Encouragingly, we returned to growth in skin care in the U.S., The ordinary was a standout. Consumers continued to gravitate to the brand for its scientific ingredient-led skin care, driving strong prestige beauty share gains. The brand launch of soothing and barrier support serum drove exceptional new consumers' acquisition trends on brand.com and strategically expanded the ordinary portfolio to include more multi-active products. Moreover, Estelode and La Mer further bolstered our improving performance in the category. Let me now discuss the third pillar, to capture demand from the returning individual travel in Asia travel retail. For the first quarter, retail sales in global travel retail were substantially ahead of our organic sales decline, which reflects the execution of our priority to reduce trade inventory in alignment with retailers. Indeed, we are making solid progress through exciting activation of our heroes, capitalizing on innovation, and investing in beauty advisors. Across these three pillars, one of our greatest strengths to leverage is our diverse brand portfolio, which was a fundamental driver of our progress during the first quarter. MAC's excellent performance showcased the strengths of our portfolio among large brands, while The Ordinary drove double-digit organic sales growth among our scaling brands, and Le Labo excelled, rising over 40% among the developing brands. Let me now turn to our fourth pillar, rebuilding our profitability. We are accelerating and expanding upon our profit recovery plan. We expect to realize $800 million to $1 billion of incremental operating profit across fiscal years 2025 and 2026. The plan consists of four building blocks to improve each of gross margin and operating margin. First, we are focused on optimizing mix by elevating luxury across brands, most especially in skincare and fragrance, driven by consumer preferences by expanding our direct-to-consumer ecosystem across brick and mortar and the line. Second, we have identified many opportunities to maximize value through better price realization and accretive innovation. Third, we intend to increasingly leverage the strategic investment we have made over the last few years, most notably our new manufacturing facility in Japan, our new China innovation labs in Shanghai, and expanded online capabilities. Lastly, we believe we can unlock meaningful cost efficiency from a combination of shorter supply chains regionalization of our value chain and improved forecasting accuracy enabled by our new integrated business planning process across the global operation supported by advanced AI capabilities. Before I close, I'm pleased to share that today we will release our fiscal year 2023 social impact and sustainability report. The feature advancement made possible by the extraordinary efforts of our employees around the world across our ESG areas of focus and previously stated goals. Importantly, we again achieved Scope 1 and Scope 2 carbon neutrality and maintained our status of 100% renewable electricity globally for our direct operations. The report also details that we attained our global gender pay equity target for selected employees' populations and achieved our spending targets with women and black-owned suppliers. and made strong progress toward our water withdrawal reduction and packaging targets. Today, we will also publish our second climate transition plan, which describes the effort in our ongoing climate transition journey. In closing, in fiscal year 2024, we will remain focused on driving momentum in our markets of strength, returning to growth in the U.S., normalizing our Asia travel retail trade inventory and expanding Prestige Beauty's share further in mainland China from our calendar two-year date gains, while accelerating our profit recovery plan for a robust acceleration of profitability in fiscal years 2025 and 2026. To our employees, these are difficult times for the world and all of us. I'm grateful for what you do each and every day in caring for each other and for our beautiful company. Thank you, and I will now turn the call over to Tracy.