The Estée Lauder Companies Inc.

Good day and welcome to the Estee Lauder Company's second quarter fiscal 2025 earnings release and conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star T followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded I would now like to turn the conference over to Ms. Rainey Mancini. Please go ahead.

Hello. On today's webcast are Stephane de la Fabrie, President and Chief Executive Officer, and Akhil Srivastava, 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, 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 webcast. And now I'll turn the webcast over to Stephan.

Thank you, Rainy, and hello to everyone. Akhil and I are pleased to be with you today for our first earnings call as CFO and CEO of the Estée Lauder Companies. We are incredibly honored to lead our iconic company, defined by our core values and portfolio of beloved brands. Having met with many employees, retailers, business partners, investors, and other stakeholders since being named CEO three months ago, I am more convinced than ever that our fundamentals are strong. We have a strong foundation to leverage given our brand equities, high-quality products, and exceptional talent. Our focus is clear, restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years as we aim to become the best consumer-centric prestige beauty company. Let me begin by reflecting on the drivers of our challenge performance over the last few years, before turning to how we plan to realize our ambition for much improved results. Subdued consumer sentiment in China greatly pressured the prestige beauty industry and our business. Given our strategically strong share in prestige beauty with the Chinese consumer, we were disproportionately impacted. At the same time, the increasing complexity of our organization, coupled with a narrow focus on too few markets and channels to drive growth, prevented us from tapping into the prevailing strength of prestige beauty around the world. This was especially true in North America. Simply said, we lost our agility. We did not capitalize on the higher growth opportunities quickly enough in channels, markets, media, and prestige price tiers, nor fuel new consumer acquisition aggressively enough. We also did not deliver sufficient levels of on-trend innovation in our time to market, often put us behind trends. This happened as Prestige Beauty became nimbler, driven by both incumbents and new entrants, as we learned with our own indie brand, The Ordinary, along with faster-moving consumers magnifying our issues. Compounding matters, lower sales in higher margin areas of our business, coincided with our overall expense base becoming too large as we invested in capabilities ahead of growth that didn't materialize. Our bold new strategic vision of Beauty Reimagined is designed to address these factors to restore sustainable sales growth and deliver a solid double-digit adjusted operating margin over the next few years. We are reimagining our operating model to be leaner, faster, and more agile through the biggest transformation in our history to best serve consumers globally. Beauty Reimagined has five action plan priorities to achieve our mission. First, accelerate best-in-class consumer coverage. We are going to put the consumer at the heart of our business. To do so, we plan to rapidly expand our portfolio presence in consumer-preferred high-growth channels, markets, media, and price tiers to fully participate in the growth opportunities of Prestige Beauty. We have numerous areas in which to capitalize. Geographically, in the US, the UK, and emerging markets, and by channel from travel retail in Western markets to online platforms, specialty multiglobally, and pharmacies in Europe. By doing so, we expect to better diversify our growth drivers. Second, create transformative innovation. We aim to deliver fast-to-market, on-trend innovation with an eye towards in-demand subcategories, benefits, and occasions. For instance, there are several dynamic subcategories in skincare, like body, of makeup, like multi-benefit lip products, and of fragrance, like lifestyle for home, for our brands to either enter or expand. We will innovate across price tiers, from entry prestige to luxury, making sure to bring products to market at attractive price points for new consumer acquisition. As we look to step change our innovation, we are committed to tripling the percentage of our innovation that is launched in less than a year. Third, boost consumer-facing investments to accelerate new consumer acquisition. First and foremost, We plan to do this by increasing visible advertising spending, optimizing marketing programs, and eliminating current A&P spending that is unproductive. Moreover, this also includes greater investment in selling to support our freestanding store acceleration for our luxury and artisanal fragrance brands to drive growth. Fourth, fuel sustainable growth through bold efficiencies with today's announcement of our now expanded PRGP. We've made significant progress to date in the PRGP, having delivered over 60% of our fiscal 2025 objective in the first half of the fiscal year. This has primarily been driven by addressing elevated excess and obsolescence, realizing strategic pricing through fewer discounts, lowering professional service expenses, and restructuring our workforce. However, greater expense reduction is necessary. We have experienced further volume deleverage since the plan's inception, driven by moderated industry growth projection and geopolitical uncertainty, as well as the company-specific issues as described. We must redesign our expense structure for an evolving mix of business to better align with Prestige Beauty growth drivers and given the significant changes in the travel retail industry. We're embarking on our biggest operational transformation in our company's history, enabled by now an expanded PRGP. We are redesigning how much and where we spend, further rationalizing our non-consumer-facing investments, and significantly evolving our operating model to be more efficient. The new areas we have identified in adopting a more competitive approach to procurement, improving supply chain network efficiencies, and outsourcing of select services, the latter of which we plan to do with proven global partners, we are advancing well in the design of the outsourcing program with our potential partners. We are laser-focused on right-sizing expenses with the dual mandate to meaningfully reinvest in consumer-facing initiatives to drive top-line growth and achieve a solid double-digit adjusted operating margin over the next few years. And as we return to delivering sustainable sales growth, we will be positioned once again to realize operating leverage to further improve profitability. We plan to give more detail on our growth algorithm once we have more fully operationalized the action plan priorities of Beauty Reimagined. Fifth, reimagine the way we work. We are removing complexity and simplifying our organization. In doing so, we will provide for greater focus on execution excellence for the consumer. Moreover, we are unburdening our smaller brands so they can be more successful in a large organization while driving greater benefits of scale for our larger brands. As we make these changes, we will empower faster decision-making in part through a flatter and leaner organization. The foundation of our Beauty Reimagined strategic vision is a new framework where we are clear on our strengths so that we can more optimally allocate resources. Our strengths are where we will lead and excel. Brand desirability, consumer experience, innovation, quality, and end-to-end execution. In support of our strengths, And for certain other areas of our business, we are hardwiring AI through the organization. We are at an exciting moment in time for the company with AI, as we have been working with the best-in-class technology partners. Their resources, technology, and investments combined with our use cases and proprietary data are enabling us to deploy AI in a cost-effective manner to drive efficiencies with high quality and differentiated outputs. As one example, we are leveraging AI to forecast our demand and plan for our material and production needs. which has resulted in our weighted average forecast accuracy reaching new heights. This better synchronizes our demand and supply and delivers significant improvement in inventory. Added proof that the initiatives that we are deploying to restore stronger operating margins are sustainable. We are ready to dramatically scale the integration of AI into our workflows, from product development to marketing, supply chain, back office, and beyond, to accelerate processes and improve decision making. What's most exciting, we expect AI to free up resources to unleash even greater creativity by our brand teams for the consumer. As part of the expanded PLGP, we also plan to work with other external partners to outsource areas of our business that are not core to where we want to lead and excel. Since I became CEO, we've moved quickly to Jumpstart Beauty Reimagined in my first 30 days. First, We announced this morning we established a new consumer-centric executive team through a combination of elevated top talent internally and recruiting externally. The new flatter, leaner team structure and governance model are designed to significantly improve collaboration and speed of decision-making. with clearer accountability across brands, regions, and functions in support of our action plan priorities. Second, and as I said a few minutes ago, we strategically expanded PRGP, including its restructuring program, with the full support of our board of directors. This was a decision we did not take lightly, and it will result in the reduction of several thousand additional positions. Third, we dramatically simplify certain work streams across brands, regions, and functions to enable teams to focus more on external execution to drive sales growth. As we execute Beauty Reimagine, We are embracing a test and learn mentality. When we see an early win, we will endeavor to move with speed to scale it. Conversely, we will seek to move quickly to exit what's not working. we are putting a new organizational structure in place to empower colleagues to act as owners as we improve communication, accountability, and collaboration to be more decisive and faster to action. Encouragingly, as demonstrated in the second quarter, we have some momentum on which to build across the five action plan priorities of Beauty Reimagined. As we accelerate best-in-class consumer coverage, nine brands have now launched on the U.S. Amazon premium beauty stores, including the successful launch of The Ordinary in January. Last March, Clinique was our first brand to launch on Amazon Storefront, at which time it also doubled down on its authentic dermatologist heritage with strong commercial execution across all channels. Given Clinique's resounding success in the U.S., demonstrated by eight consecutive months of Prestige Beauty share gain through December, it launched in Canada Amazon Premium beauty stores during the second quarter. Across markets in Asia-Pacific, we continue to build our presence on TikTok Shop, Line, and Shopee, with more brands launching in some markets on these high-growth platforms. And we are thrilled that The Ordinary is debuting in mainland China this month with its proven disruptive launch strategy. We also realized excellent results as we extended the reach of our luxury and artisanal fragrance brand with their experiential in-store offerings, led by Le Labo and Édition de Parfum Frédéric Malle, as each delivered strong double-digit organic sales growth. As we deliver our plans to create transformative innovation, Clinique, Estée Lauder, and La Mer's strategic launches for the nighttime usage occasion demonstrate the gains we can deliver where we have the right to play and win. In mainland China, La Mer grew in retail in contrast to the industry's decline in prestige skincare, driven by its new rejuvenated night cream. Clinic CX, the brand's new advanced post-procedural treatment franchise for China, further epitomizes our aspirations. Clinic CX debuted in November at the Chinese Dermatologist Association with medical device 2 classification after less than 12 months development from concept to launch. We also announced the opening of a new biotech hub in Belgium in December and a collaboration with MIT in January to further accelerate the company's cutting-edge biotechnology innovations. Finally, we saw the fruits of our labor when we boosted consumer-facing investment to reach new audiences. as seen by Jo Malone London's significant growth with men in the second quarter. Before I close, I want to speak briefly about our third quarter outlook. While we are not satisfied with our third quarter outlook, it primarily reflects weak retail sales trend in our Asia travel retail business, which deteriorated in the second quarter driven by Korea. While our retail sales trends in Inan were still negative in the second quarter, they improved sequentially fueled by our retail activations. For the third quarter, we expect overall soft retail trends to persist in Asia travel retail, significantly pressuring our organic net sales despite the improvement we made with our in-trade inventory levels in the first half of fiscal 2025, which we intend to maintain across current levels. In order to reignite our retail sales growth, we are strategically increasing consumer-facing investments around the world in the third quarter. We expect the benefits of the PRGP to both fund these investments and modestly offset the meaningful operating deleverage from the sales decline. In closing, While we have much work to do, we are confident that Beauty Reimagined is the way to realize our ambitions to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years. To our employees, thank you for your passion and contribution at this pivotal moment in our company's history. I am grateful for all the ideas that you've shared with me over the past months, and I'm energized for what we can achieve together. This is our shared vision. I will now turn the call over to Akhil.