The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2025 Third Quarter Conference Call. Today's webcast is being recorded. 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 webcast are Stéphane Delafabrie, 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, all organic net sales growth also excludes 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 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 Stéphane.

Thank you, Renée, and hello to everyone. It is great to be with you today to review our third quarter results, share the progress that we are making on our Beauty Reimagined strategic vision, and discuss our fiscal 2025 outlook. Amid elevated macroeconomic challenges, our commitment to transforming our operating model to be leaner, faster, and more agile as the most consumer-centric prestige beauty company globally through Beauty Reimagined has only deepened. The executive team, our board of directors, and the organization remain committed in restoring sustainable sales growth and achieving a solid double-digit adjusted operating margin over the next few years. First, let me briefly review our fiscal third quarter performance. Organic sales declined 9% as expected. Our business excluded travel retail decreased 3% organically, a sequential improvement from the 4% decline in the second quarter. Travel retail declined 28% organically, and it continues to shrink as a percentage of our business towards the low teens. Diluted earnings per share decreased 33%, far better than we anticipated in our outlook, showing disciplined expense management. Gross margin was a bright spot, expanding over 300 basis points to the fourth consecutive quarter as the PRGP continued to deliver meaningful benefits. Operating margin of 11.4% contracted 270 basis points, driven by increased consumer-facing spending as volume deleverage from the decline in travel retail was offset by PRGP benefits. We struck a good balance between reducing certain SG&A expenses and increasing consumer-facing investments. We pivoted quickly as volatility increased, choosing to spend less than what we expected towards incremental consumer-facing dollars, showing new discipline in how we are operating our business as we focus on higher ROI opportunities. We've been laser-focused on improving our retail sales trends and delivering a sequential acceleration in global retail sales growth, excluding travel retail. We outperform in the U.S., China and Japan and a couple of emerging markets in Southeast Asia to gain share. This marks the first share gains in the U.S. in many, many years. For China, we have now gained share in three of the last four quarters. And for Japan, it is our fourth consecutive quarter of share gains, showing the tremendous strength of our brands in these key markets. Clinique, The Ordinary, and Bumble and Bumble drove gains for the U.S. Clinique now has gained share in 11 consecutive months through March. La Mer, Estée Lauder, and Tom Ford fueled China, while Le Labo, La Mer, and Estée Lauder gained share in Japan. Through the Beauty Reimagine framework, we are focused on expanding gains in these key markets while also reigniting share gains in many more markets, including the UK, Korea, and Mexico, where we have a lot more work to do. Next, let me turn to Beauty Reimagine and discuss our progress across the five action plan priorities, beginning with the first. accelerate best-in-class consumer coverage. If the consumer has endorsed a retailer and provided it is brand building, we are moving there without debate. We will not let evolving channel preference be a disruptor to us like it has been in the past. During the third quarter and through April, we moved quickly across brands and platforms. Let me give you a few examples. The Ordinary launched in the U.S. Amazon premium beauty store and the U.K. TikTok shop. The Ordinary also expanded in Thailand, China, and Turkey. In Southeast Asia, more brands launched on Shopee and TikTok shop across various markets. As a result, in the fourth quarter, online organic sales grew mid-single digit, driven by pure play and third-party platforms. Across pure players, our new brand storefront on the US Amazon Premium Beauty Store propelled growth along with Jelly, Notino, and Zalando. For third-party platforms, strong performance on Douyin and Tmall in China was further amplified by TikTok Shop and Shopee's strength globally. We are incredibly pleased by the results we are delivering across Amazon premium beauty stores in the US and Canada, as well as TikTok shops in the US, UK, and Southeast Asia. We are exploring expansion with these and other retailers, so more to come with this action plan priority. Moving to our second action plan priority, create transformative innovation and innovate across prestige price tiers to reach a wider audience. In the third quarter, we introduced innovations aimed to new consumer acquisition at both the lower and higher end of our brand portfolio. Among the innovations, clinic new moisture surge active glow serum, strategically priced to recruit at the time when consumers are more price sensitive. Demand of the new serum contributed to Clinique's significant share gain in the U.S. prestige serum subcategories. Estée Lauder new double wear concealer realized strong uptake, benefiting from and further amplifying the popularity of its namesake foundation, such that the franchise delivers share gains across the facial subcategory of U.S. prestige makeup. MAC had a blockbuster commercial innovation with the Nudes collection, bringing back fan-favorite shades in lip along with creating new ones and drove significant gains in US prestige makeup lip subcategories. For our luxury brands, La Mer successfully expanded its nighttime portfolio with the new Night Recovery Concentrate to capitalize on its highly sought-after rejuvenating night cream. Tom Ford's new Slim Lip Color Shine Lipstick at entry luxury pricing proved highly compelling to drive new consumer acquisition. This innovation by La Mer and Tom Ford fuels double-digit organic sales growth in China for each brand. In the fourth quarter, we are working hard to keep the momentum going. Already out in China is newness from La Mer and Tom Ford. Building on the iconic success of La Mer's treatment lotion, the brand is launching the Balancing Treatment Lotion, designed for oily skin, capturing the multi-generational consumer. Tom Ford Architecture Soft Matte Blurring Cushion Foundation achieved the top rank for new product launches in cushion foundation on Tmall in April. This month, Jo Malone London is introducing a body spray for cypress and grapevine to build upon the strong global momentum of its scents with men through new formats. MAC repositioned Studio Fix Powder Plus Foundation. We strategically lowered its suggested retail price in the U.S. and U.K. to get the hero product in more consumers' hands at a more competitive pricing with the indie brands. to face new ribbon wrap of growth in the third quarter versus the second quarter. We concentrated our incremental investment primarily in China and the U.S. In China, this contributed to return to growth organically and at retail, while in the U.S., we deployed multiple strategies, of which some worked better than others. We are taking our learnings and holding our strategies in the fourth quarter. And we continue to invest in our freestanding stores, which drive brand equity and act as valuable media channels. We opened nearly 10 net new stores globally, led by Le Labo in the US and China. Le Labo leveraged this investment especially well, with strong double-digit organic sales growth, owing to both like-door growth and expansion. Our fourth action plan priority, fuel sustainable growth through bold efficiencies. In the third quarter, we made significant progress in the PRGP, which Akhil will describe. As of late April, as part of the PRGP's restructuring plan, we have approved initiatives to reduce over 2,600 net positions. With these actions, along with natural attrition, we are streamlining our middle management position by 20% versus February 2024. Likewise, through our new Flutter and more streamlined executive team, we drove a 30% reduction in expense while also enhancing it with new capabilities needed for the future. For procurement and outsourcing, which were two new PRGP initiatives announced in February 2025, we are moving swiftly to transform our sourcing models to drive efficiencies of scale with top suppliers and to leverage external partners for select back office functions. Our final action plan priority, reimagine the way we work. Our new executive team, with reduced layers, has been in place since April 1st. Brand now owns global strategy and innovation, while regions drive planning, scaling, and go-to-market execution. And functions enable both. Beginning of fiscal 2026, the P&L will be owned by the regions, creating a greater degree of accountability and simplification. Since February, we cascaded our Beauty Reimagined vision, strategized, and aligned on the worker's head through global and regional town halls, in-person leadership team meetings, and market visits in the U.S., Western Europe, and Asia Pacific. Before I close, I want to speak briefly about our fiscal 2025 outlook. We expect the headwind we face in our travel retail business in the third quarter to be even greater in the fourth quarter. Outside of travel retail, we expect organic sales decline to moderate further and retail sales growth to continue. One of the primary drivers of the gap between organic and retail is weakened consumer sentiment in the U.S. and areas of Europe and prolonged weak consumer sentiment in China and Korea. This is resulting in tighter inventory management as retailers manage their working capital. With the strategic reset of our travel retail business well underway to better reflect recent industry trends and market conditions, and provided there is a meaningful resolution of the recently enacted tariff to mitigate potential related negative impact, we are confident in our ability to return to sales growth in fiscal 2026. Regarding the new tariffs, Our sourcing and manufacturing are strategically regionalized around the world. Supply chain agility has always been and will remain a priority. This is a valuable asset, although there will still be pressures. Our supply chain footprint afford us decision-making flexibility And we've been working since last November on how to best leverage our existing regional capabilities under multiple scenarios to partially cushion the direct impact of tariffs on profitability. We already increased North America production of U.S. demand from its already high level. And we also accelerated plans to increase volumes levels at our relatively new manufacturing facility in Japan to service our business in Asia Pacific. Our plan in Japan is our ninth manufacturing campus globally, as we have five in North America and three in Europe. In closing, We are moving decisively and building momentum as we bring our Beauty Reimagined strategic vision to life across its five key priorities. To our employees around the world, thank you for making Beauty Reimagined a reality through your significant contribution. I will now turn the call over to Akhil.