The Estée Lauder Companies Inc.

Good morning and welcome to the Estee Lauder Company's Q1 fiscal 2025 earnings release and conference call. All participants will be in a listen-only mode. Should you need assistance, you may say no to a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touchstone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Rainy Mancini, Senior Vice President of Investor Relations. Ma'am, please go ahead.

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 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 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. 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, Reni, and hello to everyone. For the first quarter, we anticipated a challenging start to fiscal year 2025. Our results today are largely consistent with the outlook for the quarter we offered in August. Organic sales decreased 5% at the low end of the expected range, Driven by double-digit declines in mainland China, global travel retail primarily owned into Asia and Hong Kong SIR. Excluding these three areas, sales in the rest of our global business rose 1%, both on a reported and organic basis, while retail sales growth accelerated sequentially from 2% to 3%. A number of markets continue to deliver organic sales growth in our first quarter, led by Japan, where we gained prestige beauty share. The developed markets in EMEA and our emerging markets also grew organically, while North America declined modestly as it compared to a big innovation launch calendar in the previous year. While we are not satisfied with our organic sales performance, We are encouraged by initial results from several pillars of our strategy reset that we announced in August, which I'll elaborate on in a few minutes. Despite the lower level of totally company reported sales, adjusted gross margin expanded by over 300 basis points. Initiatives of the PRGP drove improvements, as Tracy will describe. We strategically increased AAP spending as a percentage of sales in support of our robust innovation pipeline to realize over 100 basis points of adjusted operating margin expansion, despite significant operating leverage. We deliver adjusted EPS of 14 cents, better than 11 cents in the year-ago period, and 4 cents above the high end of our outlook range. Looking ahead, As the quarter evolved and through October, it became increasingly apparent that we are facing greater macro headwinds for fiscal year 2025 than we expected in August. First, the prestige beauty industry reported retail sales in mainland China further weakened sequentially from a 10% decline in our fourth quarter to a mid-teens percentage decrease. Importantly, we gained shares in Prestige Beauty in mainland China for the second consecutive quarter, driven by industry-leading share gains in skincare and a return to share gains in makeup. Consumer sentiment in mainland China weakened further in our first quarter. While we believe the new economic stimulus measures present medium- to long-term potential for stabilization and then ultimately growth in prestige beauty, we anticipate still strong declines near-term for the industry. Second, the prestige beauty industry in Asia-Tribal Resale continues to be significantly pressured as conversion levels are still far lower than pre-pandemic. Third, the U.S. prestige beauty industry retail sales slowed sequentially, from high single-digit growth in our forecourt to mid-single-digit growth, as elevated levels of inflation-driven pricing fades. While this is still good growth, the months of August and September posted lower growth than July. Encouragingly, Although the U.S. prestige beauty industry's retail sales growth decelerated sequentially, our company retail sales growth accelerated, and we further reduced our prestige beauty share loss. We believe we are well on our way to stabilize the shares in the U.S. as we increase our exposure to high growth channels, and we have our sights set on a return to prestige beauty share growth. With this complex industry landscape, including the particularly difficulty in forecasting the timing of market stabilization and recovery in China and Asia travel retail, and in the context of the retirements of Tracy and myself, we are solely issuing an outlook for the second quarter and withdrawing our fiscal year 2025 outlook. Additionally, we are reducing our dividends to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team to re-accelerate our profitable growth trajectory. Our second quarter outlook reflects the extensive headswinds at retail in China and Asia travel retail, as we do not accept to see benefit from the stimulus in the near term. We intend to continue investing behind our strategy reset, especially in support of our rich innovation pipeline and expanded consumer reach. Our strategy reset at this point in time is focused on continuing to rebalance our regional growth, evolving our exposure to China market volatility, which has already come down by nearly 10 percentage points since fiscal year 2022. At the strategy reset, core is the PRGP, aimed at restoring sustainable long-term organic sales growth, in part through generating reinvestment opportunities, as well as rebuilding profitability and increasing agility. For fiscal year 2025, we have focused on executing the PRGP with excellence. During the first quarter, the focus and dedication of our teams around the world enabled us to establish a strong foundation on delivery for the plan. We have made good progress in operationalizing the PRGP, evident in our gross margin expansion despite the pressure to mix from skincare decline, as well as beginning to right-size areas of our organization and address overhead expenses to reflect the lower-than-expected sales growth in the last two fiscal years. As you know, our strategy reset for fiscal year 2025 also has the following five priorities. Greenlight skincare, capitalize on the multiple growth drivers of high-end fragrance, move faster in leveraging winning channels, launched a creative innovation inclusive of new big opportunities and modernized precision marketing by leveraging data and AI, the latter of which we call our consumer-centric growth model. Today, let me share our progress across skincare and fragrance, as well as leveraging winning channels. For skincare, we began to realize our ambitions to drive consumer demand in the ritual of nighttime skincare, as we brought exciting innovation to market, appealing to a diverse range of consumer segments. Our Estée Lauder brand has long been a leader in the science of skin recovery during sleep with its Advanced Night Repair Serum. Its new Advanced Night Repair overnight treatment drove expanding regimens by both loyalists and new consumers. This launch, coupled with a brand-new moisturizer in the Supreme franchise, focused on improving signs of collagen loss with overnight visible line reductions, led to high single-digit organic sales growth in skincare in the markets of IMEA. La Mer further contributed to our momentum in nighttime skincare. Its new rejuvenating night cream exceeded our expectation in Asia-Pacific, driven by the product resounding appeal in China, where we saw excellent new consumer acquisition trend, and La Mer realized strong share gains in prestige skincare. For Clinique, among its nighttime innovation is the smart clinical repair AM-PM retinoid-bound stick. It has been very well received in its initial markets, demonstrating an ability with nighttime skincare to take consumer up and into the brand with an approachable price point and unique form. Both this balm and the franchise new overnight recovery cream plus mask have compelling ingredient stories and strong clinical results, which Clinique scientists recently featured at the prestigious dermatology conference in Amsterdam. Indeed, Clinique's focus on nighttime skincare builds upon the strategy it began deploying earlier this calendar year to double down on its authentic dermatologist brand heritage. This strategy has been highly successful. evidenced by the clinic's fifth consecutive month of prestige beauty share gains in the U.S. through September. Turning to fragrance, our confidence in the category's promising growth opportunity remains strong. For the first quarter of our fiscal year 2025, excluding global travel retail, our luxury and artisanal brands deliver mid-single-digit organic sales growth, fueled by gains in every region. Le Labo, Jo Malone London, and Killian Paris were standouts. From Le Labo's significant double-digit growth in China to Jo Malone London's impressive results expanding with the male consumer to Killian Paris' highly sought innovation. And we are thrilled to have launched Balmain Beauty during the first quarter, beginning with a sophisticated collection of eight fragrances, four of which are Balmain's legacy scents reinvented for the modern era as we enter fragrance highly important holiday gifting season we are complementing the strengths of our luxury and artisanal portfolio with activations and innovations from estelode and clinic to re-accelerate their growth as we aim to better capitalize on opportunities in the prestige tier of fragrance let me now move to to our pillar of leveraging winning channels. From the Amazon Premium Beauty Store in the US, to TikTok Shop, to ShopKey in Southeast Asia, many of our brands expanded their reach to attract new consumers. Alongside these launches, we also strategically expanded the freestanding store footprint of our luxury and artisanal fragrance portfolio, offering elevated experiential shopping. This exciting work continues into the second quarter, when last week our flagship Estée Lauder brand launched in the US Amazon Premium Beauty Store. Before I close, I want to highlight that we recently published our Fiscal Year 2024 Social Impact and Sustainability Report, As detailed in the report, we achieved several sustainability goals, some ahead of schedule, including surpassing our water withdrawal targets, publishing our first corporate ingredient glossary, and reaching our palm oil objectives before our 2025 deadline. For the fifth year in a row, we achieved carbon neutrality across our Scope 1 and Scope 2 greenhouse gas emissions, and sourced 100% renewable electricity globally for our direct operations. Along with the report, we also published an update to our climate transition plan, which describes our recent progresses and evolution towards our 2030 science-based targets across our climate actions work streams. Let me now close by recognizing the evolution of the company leadership. following the retirement announcement of Tracy and myself. As you know, tomorrow, Akil Srivastava becomes the company CFO. Akil has been a proven leader at the company for nearly a decade, with demonstrated financial acumen, and we look forward to all he will accomplish. On behalf of the company, I extend our deepest gratitude to Tracy for her significant contributions. Tracy embodies the very best qualities of a leader, and we are a far stronger organization today, given her dedication to all of us. We wish her every joy in her well-earned retirement. Yesterday marked an exciting milestone in our company over 75 years of history, as we announced the promotion of Stéphane Delapherie to be our next president and CEO. I'm thrilled to welcome him into this role as of January 1st and look forward to supporting a seamless transition for the next several months. Stefan's deep knowledge of our company and the industry, exceptional strengths as a leader, and unique ability to combine inspiration, authenticity, and strategic insights to drive profitable growth will enable him to move us forward with speed and agility. To our employees, thank you for your passion for our company and its incredible brands. I'm confident that you and this company that I love will be in great hands. I will now turn the call over to Tracy.