The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's fiscal 2024 fourth quarter and full year conference call. Today's call is being recorded and webcast. For opening remarks and introductions, I turn the floor over to Senior Vice President of Investor Relations, Ms. Rainey Mancini. Ma'am, you may begin. Thank you.

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 report 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 non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures on 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 site, and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP. 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. Today, we will review our results for fiscal year 2024, which represented a difficult year for the company, and discuss the implementation of our strategy reset to drive improving performance in fiscal year 2025 and beyond. After a challenging first half, We returned to top line growth in the second half of fiscal year 2024 with organic sales growth accelerating from 6% in the third quarter to 8% in the fourth quarter. And we delivered an adjusted operating margin of 11.6%. This level of profitability was higher than the first half and expanded from the second half of fiscal year 2023. All told, For fiscal year 2024, our organic sales declined 2%. We achieved modest gross margin expansion and adjusted operating margin contracted 120 basis points to 10.2%. These results were in line with the revised outlook we offered in May for sales and better than expected, for operating profitability, despite the further softening of the prestige beauty industry in China and Asia travel retail. That said, we remain unsatisfied with this performance. Looking ahead, our fiscal year 2025 outlook reflects continued declines in the prestige beauty industry in China and Asia travel retail. While the PRGP which remains on track relatively to our previously stated goals, enable us to offset the pressure to profitability from declines in areas of our business that have high penetration of skincare. It yields a lower pace of operating margin expansions for fiscal year 2025 than we had previously expected when we expanded the PRGP in February. For fiscal year 2025, in the rest of our global business, we are planning to deliver improved performance across both developed and emerging markets. To fuel this, our strategic priorities are reigniting skincare, capitalizing on the multiple growth drivers of high-end fragrance, moving faster in leveraging winning channels, launching a creative innovation inclusive of new big opportunities, and enhancing our precision marketing capabilities for increased effectiveness and efficiency of our consumer-facing investments. The PRGP enables and accelerates strategy priorities and is the foundation to restore sustainable long-term organic sales growth and to rebuild our operating profitability. We are also creating a faster and leaner organization that will more quickly adapt to market dynamics and be better able to leverage future growth. While our sales and profit outlook for fiscal year 2025 is disappointing, this year we will make important strides as we implement our strategy reset to continue rebalancing regional growth deliver improved annual profitability and strengthen go-to-market and innovation capabilities to elevate our execution in response to a more competitive market. These efforts will position us to both outperform the prestige beauty industry in fiscal year 2026 and accelerate profitability expansion. Let me now describe the drivers of our fiscal year 2025 outlook before discussing our strategic priorities in greater detail. The prestige beauty industry reported retail sales trends in mainland China further weakened sequentially in the fourth quarter, from a decline of mid-single digit in the third quarter to a decrease of low double digits. as the consumer confidence remains subdued. Importantly, we gained share in the prestige beauty industry in mainland China in the fourth quarter, driven by La Mer and Estée Lauder progress in the market's far largest category of skincare. Retail sales trend for the prestige beauty industry in Asia travel retail also did not improve during the fourth quarter. This was most notable in Hainan, where retail sales in the beauty market declined over 40%, despite a more favorable comparison to the previous period as the quarter unfolded. For Heinen and Asia Travel Retail overall, as traffic returns, conversion levels remain subdued and significantly lower than pre-pandemic levels owing to weak consumer sentiment reducing basket sizes and to an extent consumer diversity spending to experiences. The U.S. prestige beauty industry retail sales growth decelerated each month throughout the fourth quarter, albeit with growth at a still compelling pace of mid to high single digit. Encouragingly, Our company retail sales returned to growth. While we continue to see the Prestige Beauty share driven by the extent of our exposure to slower growth channels, our share loss was reduced in the fourth quarter. This reflects gains from gradually increasing our exposure to high growth channels like Amazon and specialty movies. And this trend was further reinforced in July, when our company retail sales growth accelerated to mid-single-digit, driven by double-digit growth in fragrance and hair care. Moreover, the company retail sales improved to mid-single-digit growth in skincare, and we gained share in the category in July. For fiscal year 2025, we forecast the global prestige beauty industry to grow 2% to 3%, reflecting ongoing strengths in many developed and emerging markets globally. The markets in the West, which collectively exited fiscal year 2024 relatively strongly, are primed to drive the industry performance. The markets in the East, in total, are expected to be tempered a strength in Japan and Southeast Asia, is offset by ongoing declines in mainland China and Asia . We expect the global prestige beauty industry to re-accelerate to historical mid-single-digit growth in fiscal year 2026, assuming China progressively stabilize and then return to growth. With this industry landscape, And given the size of our business in some areas most challenged, our fiscal year 2025 organic sales growth outlook range is in a decline of 1% to an increase of 2%. Our organic sales growth outlook reflects an acceleration in several areas of business, partially offset by declines in mainland China and Asia . For our first quarter, the pressure is more acute. such that our organic sales outlook calls for a decline, which Tracy will describe in further detail. For fiscal year 2025, we are refocusing consumer-facing investment on the biggest opportunity and streamlining our organization to be faster and more agile in order to fuel the organic sales growth momentum we have in many areas of our business across developed and emerging markets. We also intend to better leverage the strengths of our brands in North America, where we are leaders in prestige makeup, which is the region's biggest category, and where we hold the top two ranked brands, and in prestige skincare, adding four of the top five ranked brands. Moreover, in North America, we also intend to leverage the market strengths across generations, as we forecast a balanced contribution to industry growth by age. Looking at our strategy priorities for fiscal year 2025, let me begin with skincare, which represents over 50% of our sales and is our most profitable product category. Our initiative are designed to enable us to even better leverage our top-ranked global prestige skincare portfolio to welcome new consumers and further engage our loyal consumer through elevated precision marketing, a robust accretive innovation pipeline, and expanded reach in high growth channels. This starts with the ordinary, which entered fiscal year 2025 with momentum, having brought its organic sales by more than 20% in fiscal year 2024. The Ordinary is leading the way among our brands in capitalizing on white spaces opportunity in products, channels, and geographies. In the fourth quarter, The Ordinary launched its first product in lip care, executed a hugely successful TikTok Shop Super Brand Day campaign in the US, and established its footprint in Japan. For fiscal year 2025, the ordinary has already newly entered the body care subcategory and is preparing to expand into more emerging markets, given its proven successful launches in India, the Middle East, and South Africa over the last two years. Among the brands we are incubating, a star in fiscal year 2024 was NIOT in skincare. The brand has a promising future. Clinique is making great strides, executing a strategy to double down on its authentic dermatologist heritage. Clinique began this work in the U.S. and U.K. this past spring and has been expanding its global rollout. This includes its successful launch on the U.S. Amazon Premium Beauty Store in March. Impressively, Clinique has returned to share growth in the U.S. prestige skincare with three consecutive months of gains through July. Clinique performance in U.S. retail in July was particularly impressive, with the brand skincare brand and makeup outperforming across subcategories, and Clinique retaking the number one rank in overall prestige beauty. La Mer, along with Estée Lauder and Renutri franchise, fueled our luxury skincare strategy. With both brands poised to build on their success of fiscal year 2024, during which La Mer's exceptional growth made it our best performing brand. For Renutri, we plan to build upon its fiscal year 2024 launches of the new moisturizer and serum foundation this year, through an expanded product portfolio focused on the science of skin longevity, a visible age reversal. With The Ordinary, Clinique, Estée Lauder, and La Mer, we are bringing to market in Fiscal Year 2025 a rich innovation pipeline focused on the benefits of nighttime skincare ritual, which is an incremental usage location. Our brand portfolio strategically addresses various skin concerns and types with targeted ingredients and claims designed to appeal to a diverse range of consumer segments because of price and product position. Let me now turn to our next strategy priority. capitalizing on the multiple growth drivers of high-end fragrances, where our luxury and artisanal portfolio of Jo Malone London, Tom Ford, Le Labo, Kylian Paris, Frederic Malle, and Erin Beauty collectively rose mid-single digit organically in fiscal year 2024. The luxury tier of the fragrance category, where we are number one ranked, was the best performing tier in retail sales in fiscal year 2024, and we expect this to be the case again in fiscal year 2025. We are focused on further realizing the growth potential of high-end fragrances, given its broad-based strengths around the world, to drive greater scale for the company. From Le Labo of standing performance in fiscal year 2024, led by Asia Pacific, where its organic sales nearly doubled, to Jo Malone London's disruptive campaign with Tom Hardy to drive its men's business, and we are well positioned to build on our momentum. Our brands have distribution expansion and compelling newness slated, not only in descent, but also in the form and size. to trade consumer into the luxury tier. And we are thrilled to be expanding our luxury portfolio with the September launch of the Balmain Beauty brand, which chose the fragrance category to begin its journey. We are also focused on driving accelerated sales growth in the prestige tier of the fragrance category with our Estée Lauder & Clinique brands with broad reach go-to-market activation slated for this and upcoming quarters. Let me turn our strategic priority of winning in fast-growing channels globally. To do so, our mindset has shifted to more boldly merchandising our brands where consumers are increasingly discovering a shopping for beauty, while executing with excellence and staying true to our high-touch approach. While this encompasses both brick and mortar and online, today I will share with you examples from online. In the U.S., our launches of Clinique, Too Faced, and Bumble and Bumble on the Anzon Premium Beauty Store in the second house epitomized this philosophy. Clinique launched with a skin analysis tool in March and by June had expanded to offer live chart with the Clinique ambassador, while Bumble and Bumble launched with extensive hair education from the brand's expert stylists. All three brands are off to a very strong start on the US Amazon Premium Beauty Store. Clinique and Bumble and Bumble are seeing promising uptake also with male consumers. And for Clinique, where we now have a full quarter of performance, we are encouraged by the extent of consumer subscribing for future purchases as well as the strong level of repeat purchases in the quarter. So far, in fiscal year 2025, Dr. Jart, Smashbox, and LabSeries have already opened storefronts in the U.S., and we have more launches on the horizon. Around the world, We are building growth momentum with social commerce, driving new consumer acquisition by engaging consumers where they're spending their time, leveraging a content-focused approach with live streaming and short-form videos, and activating full-funnel integration of social media and commerce. In China, we have scaled and sustained strong growth on Douyin, with more brand launches later for fiscal year 2025. Looking at Japan and Korea, we are further unlocking platform opportunities for our brand with LINE and Rakuten and accelerating social commerce on Kakao with focus on gifting. Our final strategic initiative is enhancing our precision marketing capabilities, enabling us to be more focused on new consumer acquisition. From brand equity to product assortment, distribution and media, we are better able to target new consumers and also to accelerate the effectiveness of acquisition and efficiency spent. This capability has been designed to leverage data, including over 200 million consumer profiles we have built over the years, and exclusive partnerships with AI leaders. Precision marketing is also allowing us to be far more nimble with trend to action. During fiscal year 2024, we began pilot studying in market around the world to marry trends with our rich portfolio of existing products and innovation to activate against trends with speed. We realized promising results, including successes with the peach makeup and bronzing trends. We have now formalized this process and developed the Trend AI tool to enable our brand teams around the world to quickly drive trends to action. In closing, we have designed our strategy reset to position the company for a stronger future. We are wholly focused on executing with excellence across these strategy initiatives and our PRGP to again realize the proven performance of our company. To our employees, I extend my deep gratitude for your commitment amid a challenging time for our company. And now I will turn the call over to Tracy.