The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2024 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 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 those 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 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 today. For the second quarter, we delivered our outlook for organic sales decline of 8% and exceeded expectations for adjusted diluted EPS. Organic sales in our global travel retail business decreased 28%. We retail sales trends better than organic performance, reflecting both the execution of our priority to the reduced trade inventory in alignment with the retailers and efforts by various local authorities to contain a structured market activity. We made meaningful progress. with trade inventory levels in Asia travel retail, and continue to expect to be at normalized trade inventory levels by the end of the third quarter of this fiscal year. The entire rest of our global business decreased 3% organically. This decline was primarily driven by the slowdown of overall prestige beauty in mainland China, although our retail sales trends were much better than our organic performance. Our global retail sales growth, excluding travel retail and mainland China, rose mid-single digits. The markets of EMEA delivered mid-single-digit retail sales growth, and Asia Pacific, excluding mainland China, rose double-digit, as did Latin America, showcasing strong fundamentals for brand desirability and the success of our consumer engagement initiatives. Encouragingly, we made progress across several strategic priorities in the first half. And beyond reducing inventories in the trade of Asia travel retail, we improved working capital, realized higher levels of strategic pricing, and managed expenses with discipline. For the full year, we are revising our outlook as we have tightened the growth range for organic sales primarily to account for risks of microeconomic and volatility in some areas around the world, and updated adjusted diluted EPS for an anticipated higher tax rate. In this revised outlook, we have maintained our prior outlook for full-year operating profitability. Looking ahead, we are at an inflection point. We are positioned to return organic sales growth for the total company in the third quarter and we expect organic sales growth to sequentially accelerate in the fourth quarter. Second, we are positioned for stronger profitability in the second half of this fiscal year compared to the first half. we are preparing to significantly accelerate the rebuild of our profitability in fiscal years 2025 and 2026. Indeed, since we spoke with you in early November, our teams have been actively engaged to operationalize the profit recovery plan. In doing so, we have identified further opportunities to enhance profitability while also generating more resources to be invested in consumer-focused areas to drive long-term growth. As a result, we are expanding the profit recovery plan to include a restructuring program. While this is a difficult decision, we believe this now larger plan will better position the company to restore stronger and more sustainable profitability while also supporting sales growth acceleration and increasing agility and speed to market. For the consumer, we anticipate faster product and commercial innovation supported by strategic brand building distribution and go-to-market advancement, where digital leadership is at the core. Moreover, we intend to increase our speed and agility as an organization, enabling quicker and more localized decisions making to better create and respond to consumer trends. The profit recovery plan is now expected to deliver incremental operating profit of $1.1 to $1.4 billion, up from $800 million to $1 billion previously. In terms of timing, this incremental profit is anticipated to be realized in fiscal year 2025 and 26, with more than half in fiscal year 2025. We are confident that our multiple lenses of growth strategy will be enhanced by the profit recovery plan. enabling our company to more fully capture promising long-term growth opportunities and remain a leader in global prestige building. And to reinforce our commitment to execute this larger plan with excellence, we have engaged global consulting firm Alvarez and Marsal. They will provide strategic advisory services partnering with us on our restructuring program as part of the profit recovery plan to drive the realization of a sustainable rebuild of profitability. For the second half of the fiscal year, we have strategic initiatives and exciting innovation to drive North America, reaccelerate growth in mainland China, and drive momentum in markets that are thriving across developed and emerging markets in EMEA, Latin America, and Asia Pacific. Let me begin with Clinique brand. The brand will be doubling down on its authentic dermatologist brand heritage of over 55 years, deepening its relationship with the scientific community, strengthening its derma messaging, and engaging new consumers. First, Clinique will be dialing up its derma education in consumer communications, including on social media, brand.com, and in-store, with new dermatologist partnerships and ingredient communication. Clinique has also announced the establishment of the new Mount Sinai Clinique Healthy Skin Dermatology Center. The center's research is expected to produce breakthrough advancement in the study of allergic skin and premature aging. Next month, Clinique will return to the America Academy of Dermatology annual meeting to showcase its derm-level science and formulations, as well as its unique eye safety promise. All of this is coupled with Clinique's continued innovation of allergy-tested and 100% fragrance-free products, evidenced by Clinique's new post-procedure relevant claim on powerful products, including Smart Clinical Repair Lifting Face and Neck Cream. Turning to the Estelode brand. For over 15 years, it has been a pioneer in longevity, age, reversal research, a frontier of skin biology for its Renotrip luxury franchise. Last August, I spoke with you about how Renotrip should be standing upon its successful ultimate diamond transformative brilliant serum with compelling innovations. The franchise breakthrough soft cream with cutting-edge patented CertiVity LP technology for visible age reversal is now launching globally. And in makeup, there is a companion serum cream foundation amplifying the franchise skin longevity science across categories. We are encouraged by the global appeal of this innovation from China to Japan to the US. Why early? The franchise is welcoming new consumers at compelling rates and we look forward to all that is to come for Renutriv as launch events continue around the world. Moreover, the brand is collaborating with the Stanford Center of Longevity as the inaugural sponsor of the new program of Aesthetic and Culture. Beyond Renault's striking innovation, we have more standout launches across brands in the third quarter, led by MAC and Tom Ford. The new Maximal Silky Matte Lipstick modernizes MAC icon with a new silky matte finish, lip conditioning benefits, and elevated packaging. For Tom Ford, Eau de Mineral is primed to carry forward the brand's winning streak of innovation from Cafe Rose in the first half. In the second half, we expect this initiative and new product launches to build upon the strong momentum of several brands. Indeed, The Ordinary, La Mer, and Le Labo, among others, achieved terrific performance in the second quarter. The Ordinary delivered an excellent first half as the brand again realized double-digit organic sales growth in the quarter. Its new suiting and barrier support serum, which launched during the first quarter, is the brand's most successful launch ever and is already among the top 10 ranked products in the U.S. prestige serum category. The Ordinary continues to excel in specialty multi-globally and is also realizing very promising uptake on the new TikTok shop in the United States through engaging live streaming and creator content. La Mer further contributed to our strong underlining fundamentals in skincare. The brand's luxurious, high-quality product, from the iconic cream de la Mer to the new lifting serum, along with its exceptional services, proved high sought after by discerning consumers around the world. In mainland China, La Mer grew double digits every day to realize strong share gains in prestige skincare. Our luxury and artisanal fragrances also performed quite well. Le Labo led the broad-brained strengths, as Jo Malone London, Tom Ford, Kylian Paris, and Elision de Parfum Frederic Malle each rose organically, fueling double-digit organic sales growth in Asia Pacific and gains in the Americas. For the second half, we expect to return to organic sales growth in mainland China, driven by a rich innovation pipeline for a greater contribution to sales from new products in the second half than the first half. And we are investing in exciting go-to-market initiatives across brick and mortar and online. Impressively, we entered the third quarter in mainland China with momentum in brick and mortar. having expanded our Prestige Beauty share offline in the second quarter, driven by strong double-digit retail sales growth in each of department stores, specialty, multi, and freestanding stores. For online, while the channel was especially pressured by softness in overall Prestige Beauty and the 1111 Global Shopping Festival, our brands performed strongly on the win rising triple digit organically to partially offset lower sales for the event. The Estelode brand ranked number one in prestige beauty on the wind, adding also ranked number one for store live streaming. For the fiscal year, we remain focused on North America returning to organic sales growth and are encouraged by the low single digit growth delivered in the first half. While makeup was pressured in the second quarter by the cadence of major new product launches, we are very excited by the innovation coming to market across the second half, beginning with Max Maximal silky matte lipstick we launched last week. Moreover, skincare grew for the second consecutive quarter in North America, driven by the ordinary and the still order. Our luxury and artisanal fragrances rose double digits in the quarter, as our strategic initiative from Expand the Consumer Reach with Kilian Paris to strong engagement on TikTok by Jo Malone London are proving successful. In closing, we are at an inflection point, poised to return to organic sales growth in the second half and deliver sequentially stronger profitability than the first half, as well as expansion from a year ago. We are well positioned to deliver stronger profitability in fiscal year 2025-26, given the initial progress we have made for our profit recovery plan, as well as its new restructuring program. And we are well positioned to invest in consumer-facing areas to capture exciting growth opportunities in global prestige beauty. I wish to extend my gratitude to our leaders and their amazing teams for the hard work and dedication which has taken us to this inflection point of a renewed sales and profit growth trajectory. I will now turn the call over to Tracy.