The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the S.A. Lauder Company's Fiscal 2024 Third Quarter Conference Call. Today's call is being recorded and webcast. If you require operator assistance, please press star and zero. For opening remarks and introductions, I'd like to turn the call over to Senior Vice President of Investor Relations, Ms. Rainey Mancini. Ma'am, you may begin.

Hello. On today's call are Fabricio Freda, President and Chief Executive Officer, and Tracy Travis, Executive Vice President and Chief Financial Officer. Since many of our results today contain forward-looking statements, let me refer you to our press release and our reports files 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, reference 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 for 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, Raina, and hello to everyone. We are pleased to be with you today to review our third quarter results and discuss our strategic initiatives. For the third quarter, we delivered organic sales growth of 6% at the high end of our outlook, exceeded expectations for profitability, and continued to significantly improve working capital. We achieved stronger than anticipated performance beginning with gross margin. Results benefited from a greater than expected mix of skincare. Moreover, we made great strides in reducing the pressure on excess and obsolescence driven by our now lower inventory levels and in realizing strategic pricing. Further contributing to the outperformance We manage expenses with discipline across multiple areas of the business and have shifted certain advertising spending to the fourth quarter to support our rich innovation pipeline and expanded consumer reach. Encouragingly, with our third quarter results and fourth quarter outlook, We are confident that the second half of fiscal year 2024 will indeed prove to be an inflection point for the company, representing a renewed sales and profit growth trajectory. First, momentum in organic sales growth is primed to accelerate in the fourth quarter for a strong second half. Second, We continue to expect operating margin in the second half of fiscal year 2024 to be higher than the first half and to expand from the year-ago period. Third, with the profit recovery plan designed to deliver $1.1 to $1.4 billion of incremental operating profit in fiscal year 2025 and 2026, we are well positioned to rebuild our profitability. and with the profit recovery plan also expected to generate savings to reinvest in our brands and consumer-facing initiatives, we are well positioned to accelerate sustainable sales and profit growth as a faster and leaner organization with stronger leverage from our future growth. During the third quarter, we accomplished much to solidify the inflection point of the second half. Indeed, we made progress in achieving targeted trade inventory levels in Asia travel retail. We are encouraged by the evolution of our Asia travel retail business this fiscal year as we execute our priority to reduce trade inventory in alignment with retailers and effort by various local authorities to contain a structured market activity. And retail sales growth in Asia travel retail significantly improved sequentially, returning to growth in the third quarter. This improving retail sales trend in Asia travel retail complemented double-digit retail sales growth we continue to see in EMEA and the Americas travel retail. So far this fiscal year, we also invested in the long-term growth opportunities of traveling consumers, evidenced by our brands, having moved within Hainan Sanya International Beauty Tree Shopping Complex to the Galleria's new Global Beauty Plaza. The larger, elegant new stores expands upon the high-touch services and experiences that we offered at the previous locations in the complex, from Estée Lauder Renutri's New Skin Longevity Institute to La Mer Cabine offering bespoke spa services and Killian's Paris juice and cocktail bar featuring fragrance-inspired cocktails. We also made great progress in advancing strategic initiatives and launching exciting innovation to fuel North America, reaccelerate growth in mainland China, and drive momentum in markets that are strong across developed and emerging markets in Asia Pacific, EMEA, and Latin America. Let me begin with Clinique, where we had a robust course of progress as the brand doubled down on its authentic dermatologist brand heritage. Clinique deepened its relationship with the medical community, returning to the American Academy of Dermatology annual meeting with high-impact engagements. The brand also established the Clinique Dermatologist Creator Council, a collection of doctors who are amplifying the sharing of science and dermatological insights on their own social channels, as well as informing Clinique narrative on its social platforms. Impressively, Clinique influencer earned media value for skincare in the U.S. soared 80% during the quarter, leaping 33 spots in rank. We believe this is just the beginning of the success Clinique will realize by communicating its dermatological education and clinically proven solution for skincare to makeup. Moreover, having started with Clinique in March, we are thrilled to be strategically expanding our consumer reach in the U.S. as a select few brands will open dedicated storefronts in Amazon's fast-growing premium beauty store over the coming months. Clinique's launch capitalized on its renewed dermatologist-guided branding with striking creative assets and elevated storytelling. Impressively, Clinique's store has exceeded our retail sales expectations so far and already contributed in March to the brand's share gains in U.S. prestige skincare biggest subcategory of moisturizer, among others, as well as in U.S. prestige makeup. We also successfully accelerated our innovation in the quarter. For the Estée Lauder brand, we brought to market breakthrough innovation across franchises. For its luxury Renuti franchise, the brand was inspired by its over 15 years of skin longevity research with its new ultimate diamond transformative brilliance of cream and serum cream foundation. The impact of these launches is powerful. Beyond contributing to the brand growth, they firmly established Renutri as a leader in the science of skin longevity, a visible age reversal. For Estée Lauder's Supreme franchise, the brand leveraged its decades of night repair expertise and collagen research with the new revitalizing Supreme Night Bounce Cream, first launched to rave reviews in Asia Pacific and expanding globally in the coming months. We believe this launch holds great promise, serving to strengthen the brand leadership in nighttime science and skincare across subcategories. La Mer extended its winning streak of innovation with a moisturizing fresh cream, which, along with its icon hero products, drove the brand to be the strongest contribution to the company growth for the quarter. Beyond these strategic innovations and go-to-market activations across active derma, longevity, night skincare, MAC introduced newness in makeup to jumpstart our rich innovation pipeline in the category for the second half. MAC launched Maximal Silky Matte Lipstick to great acclaim, successfully modernizing its icon matte lipstick with nourishing ingredients and bolder packaging. From Seoul to Berlin to New York City, maximal pop-ups events drove strong engagement and earned media value. MAC Remastered Studio Fix Fluid Foundation came to market in April, delivering a new soft matte finish enhanced with new skincare ingredients and even more shades. This high-salt innovation and its icon prove the enduring love of MAC with consumers and makeup artists alike, as the brand celebrates its 40 years in 2024. Looking at fragrances, over the last couple of months, we have expanded our consumer reach in the high-potential Asia Pacific region, opening spectacular flagship stores for Jo Malone London and Le Labo, each unique with locally relevant features. And we are incredibly excited for the evolution in luxury and artisanal fragrances as, together with Balmain, we introduce Balmain Beauty this September. Across our brands and around the world, we are focused on leveraging technology, including AI, in support of our enduring strengths and high-touch experiences and high-quality products. We continue to partner with leading technology companies from Microsoft, with whom we are collaborating to embed AI to drive faster speed to market and local relevance to Google Cloud as we strive to enhance customized targeting for media at scale. Turning to the regions, we have spoken about our focus on driving the momentum in markets which are strong. To that end, we have delivered terrific results across many markets, reflecting the desirability of our brands, the compelling innovation which I described, and strong go-to-market execution. We see this across our developed and emerging markets around the world. Beginning in Asia-Pacific, Hong Kong, SIR, Japan have prospered, have doubled DG organically in the quarter and year-to-date. and we are excited about what's to come, including the launch of The Ordinary in Japan during the fourth quarter. Moving to EMEA, Germany and Italy have consistently contributed to growth in the markets of the region each quarter. Mexico, Brazil, and India's strong double-digit growth in the third quarter has fueled excellent performance in our emerging market year-to-date. For North America, We delivered sequentially improved organic sales trends in the third quarter driven by the multifaceted strategic plan we first discussed with you in August. We are pleased with the results we are seeing in our areas of strategic focus. Skincare grew organically in North America for the third consecutive quarter. Driven by Estée Lauder and The Ordinary as hero products, innovation and go-to-market activation excelled. Our luxury and article of fragrances rose double digits organically one more, fueled by Jo Malone London, Kylian Paris, and Tom Ford. Across our brand portfolio in North America, we are realizing success as we focus on deepening consumer engagement on social platforms, where so much discovery in beauty takes place. The ordinary has long been a pioneer with an outstanding social engine and more of our brands have enhanced their engagement with consumers this year. We are also successfully expanding our consumer reach to better serve new consumers from Clinique's new storefront in the U.S. Amazon Premium Beauty Store to expansions early this fiscal year as the Estée Lauder brand entered into more Ulta beauty stores and Killian Paris entered into additional Sephora stores. Proclinique is the number one dermatologist beauty brand in the U.S. prestige. We are optimistic for the positive impact its launch on the U.S. Amazon Primo beauty store will have for the fourth quarter if the initial performance in March. For mainland China, we returned to organic sales growth, albeit at a slower pace than expected amid an overall soft prestige beauty industry. Retail sales for prestige beauty were strong in January, but moderated in February and March, due in part to the Chinese New Year coinciding with Valentine's Day this year, which limited gifting. This certainly impacted the industry, but also many of our brands, which have a strong presence in gifting. Our focus remains bringing irresistible newness to consumers to best create growth opportunities. Here, our innovation in Estelode Renutri and Supreme franchise, as well as La Mer and Mac, we have well received across the third quarter, and we have more compelling launches in the fourth quarter. One in particular, from Estée Lauder Perfectionist Pro franchise is especially exciting, as it is among the first product created in our China innovation labs and addresses local demand for SPF 50 plus UV protection that is suitable for sensitive and post-derm procedures skin. With the four-quarter innovation pipeline expanding Upon the innovation launch throughout the third quarter and the key shopping moments of 6-18 upcoming, we are increasing our investment in advertising and go-to-market activation to sustain retail. Since we spoke with you in February, we also made important progress in all work streams across the pillar of the profit recovery plan, of which I'm pleased to share a few examples with you today. For one, our integrated business planning process, which has now rolled out globally, is contributing to operational inventory improvements. Our enterprise-wide integrated business planning will serve as the foundation to drive better demand planning and reduce excess and global obsolescence. It is complemented by advanced planning technologies, including AI, to statistically elevate forecast accuracy and dynamically position and deploy inventories. We have refined and optimized our innovation pipeline for fiscal years 2025 and 26 to best focus on accretive innovation. bringing to market products that both create and drive trends locally and globally across categories. Innovation in fiscal year 2025 is still expected to be even bigger and stronger than in fiscal year 2024, with more breakthrough innovation and expansion into wide space opportunities. We also announced plans to streamline manufacturing and distribution on a campus, through realigning shift schedules, consolidating operations into fewer buildings, and shifting powder manufacturing to a trusted third-party partner. This strategic initiative accomplished multiple objectives, as in addition to consolidating capacity and optimizing costs, we also expect greater speed to market by leveraging more external innovation with a global leader in powders. Before I close, I want to speak to the exciting milestones in our brand portfolio during the fourth quarter. First, a few days ago marked the one-year anniversary of our Tom Ford acquisition. This transformational deal where we evolved from licenses of Tom Ford Beauty to the owner and licensor of Tom Ford, solidified and coveted brand in the company luxury portfolio for the long term and created a new royalty revenue stream. Moreover, it afforded us strategic synergies, which we are now unlocking, demonstrated by the recent launch of brand.com in the U.S. and U.K. as just one example. And with the Hermenegildo Zegna Group and Marcolin, we are capitalizing on the power of the brand modern luxury glamour across fashion, eyewear, and beauty, connecting these three verticals in compelling new ways to drive growth. Indeed, in February, for fashion weeks from Milan to London, Paris, and New York, we orchestrated the first ever 360-degree cross-category campaign and featured a blockbuster fragrance launch. Later this month, we are thrilled to be further solidifying our brand portfolio in yet another way, as we acquire the remaining interest in Dacian, completing the deal we made three years ago when we became majority owner. During these three years, Dacium and its beloved brand, The Ordinary, have soared to new heights, ranking top five in prestige skincare in many markets, including top two in its home markets of Canada and the U.S. Together, we have successfully invested to scale innovation for The Ordinary and had increased the ordinary innovation as a percentage of sales from 5% to over 25% expected this fiscal year. Expanded the brand globally from India to the Middle East to South Africa and improved its profitability by driving operational efficiencies in the supply chain. With that said, we believe the ordinary and the ASEAN still have bigger opportunities in front of them, and we are excited for what the future holds. Finally, we are pleased to see our initiatives' progress in sustainability recognized. And since we spoke with you in February, we were included in the CDP's Climate A-list for 2023. Overall, we received our best-ever collective scores in 2023 from CDP, as along with these excellent climate results, we scored A- in each of the water security, forest timbers, and forest palm oil. In closing, we are at an inflection point in our company performance, primed for a strong second half of organic sales growth and improved profitability. And with our profit recovery plan, we are well positioned to meaningful rebuild our profitability in fiscal years 2025 and 26, by also generating savings to reinvest in our brands and consumer-facing initiatives. We are confident in our strategy to realize the promising growth opportunities of global prestige beauty, leveraging the strengths of our diversified brand portfolio, rich innovation pipeline, and the superior quality of our products. I extend my gratitude to our employees for the significant contribution you have made in bringing us to this inflection point of a renewed sales and profit growth trajectory. I will now turn the call over to Tracy.