The Estée Lauder Companies Inc.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 2025 Fourth Quarter and Full Year 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, references to net sales refer to organic net sales, which 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 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 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, Rainie, and hello to everyone. Before we discuss our results for fiscal 25 and 26 ambition, let me begin with a moment of remembrance of our beloved Chairman Emeritus, Leonard A. Lauder, who passed in June. On behalf of myself, Akil, the executive team, Board of Directors, and the Lauder family, we extend our heartfelt gratitude for the sympathy shared. We were profoundly moved by the outpouring of compassion from employees, consumers, peers, retailers, suppliers, media, analysts, and investors. Your condolences celebrated a life beautifully lived and a legacy deeply felt, recognizing how Lennard uniquely shaped and revolutionized not just our company, but also the beauty industry. Lennard was a mentor to me. and is as he was to so many others. He was a strong advocate for beauty reimagined when he entrusted us to lead. We are more committed than ever to regaining Prestige Beauty leadership in his honor and upholding the company's values it champions. Turning to our fiscal 25 full-year performance, Our results were in line with the revised outlook we provided in May and the expectation Akhil and I set in our first earning call in February. Nearly two-thirds of our 8% organic sales decline came from travel retail, as it decreased 28% driven by strategic decision and prolonged week conversion. Importantly, we ended fiscal 25 much better position than fiscal 24 with healthier trade inventory, especially in travel retail Asia for currently forecasted demand. Travel retail represented approximately 15% of reported sales, down 4 percentage points from fiscal 24, and 14% stage points below its fiscal 21 peak reached during the pandemic, making it more similar to the channel global prestige beauty share and reducing our exposure to its volatility. Gross margin expanded 230 basis points to 74%, driven by PLGP benefits, and better by 50 basis points than the outlook given in May, despite significant volume deleverage. Operating margin of 8% contracted 220 basis points, driven by sales declines and increased consumer-facing investments. Diluted EPS decreased 42%. Since I became CEO, we have acted with urgency to operationalize our strategic vision of Beauty Reimagined, making strong initial progress across all five action plan priorities from January through June. In the second half of fiscal 25, we gained prestige beauty share in China, Japan, and the U.S., demonstrated not only our ability to return quickly to share gain by building on our brand's high desirability, but also early wins from new consumer coverage and uptake of enticing innovation. Globally, Le Labo and La Mer gained prestige beauty share in the second half, confirming their strong desirability, and The Ordinary accelerated to high single-digit retail sales growth in the fourth quarter. La Mer, Tom Ford, and Estée Lauder fueled our second-half share gain in China, while Le Labo, Estée Lauder, and La Mer powered Japan. In the U.S., the Ordinary, Clinique, and Estée Lauder drove share gain, while Estée Lauder's new double were considered ranked number one product launch in prestige makeup by Sircana from January through June. In our first action plan priority, accelerate best-in-class consumer coverage, we achieved many accomplishments in the second half of fiscal 25, particularly for our online business. Following The Ordinary's launch in the U.S. Amazon Premium Beauty Store in the third quarter, Origin and Aveda launched in the fourth quarter, while Estée Lauder and Aveda opened in the Amazon Premium Beauty Store in Canada. We now have 11 brands storefront in the U.S. and three in Canada. And in Southeast Asia, we built scales on Shopee and TikTok shop across the third and fourth quarters. This action complemented second half growth from our existing presence in fast-growing online retailers like Timo and Dole. As a result, online organic sales growth accelerated from low single digit in the first half to mid single digit in the second half. Online reached 31% of reported sales for fiscal 25, up 3 percentage points from fiscal 24 to an all-time record. And we expect online mix to climb higher still. We continued our expansion in pharmacy in Europe and began entering the pharma channel in Latin America with Clinique, responding to rising demand for their brands. Moving to our second action priorities, create transformative innovation and innovate across prestige price tiers to reach a wider audience. Throughout the second half of Fiscal 25, we introduced a robust slate of breakthrough, all-trend, and commercial innovation aimed at new consumer acquisition, as you can see on the slide. We are realigning our innovation portfolio to deliver gross margin accretive product quicker and better capture faster growing industry trend in skincare with the night longevity and derms as well as across makeup and the still in demand luxury foreign segment as well as hair care. Let me share a few highlights from the fourth quarter beginning with skincare. La Mer built upon the iconic success of its treatment lotion with the Balancing Treatment Lotion, which along with the brand's third quarter launch of Night Recovery Concentrate, fueled La Mer's second consecutive quarter of double-digit organic sales growth in mainland China. Clinique and The Ordinary showcased their unique derm and scientific brand equities at entry-prestige pricing. For Clinique, the brand launched a supercharged SPF version of its renowned dermatologist-recommended DDML. For The Ordinary, its new UV filter SPF 45 serum offered consumer sun care protection in its signature serum format. In makeup, Clinique built upon its blockbuster Almost Lipstick franchise with a third shade, Nude Honey. Since 2021, Clinique has driven strong sales growth of Almost Lipstick, with volumes over 30 times greater than four years ago, demonstrating our ability to leverage social media virality to further fuel, demand, and attract younger consumers. MAC's bold, famous commercial innovation paired with the new lip gloss air contributed to strong share gain in the U.S. prestige makeup lip color and lip gloss subcategory in the second half. Aveda introduced Miraculous Oil, which is significantly outperforming initial sales expectations. For our third action plan priority, boost consumer-facing investment to accelerate new consumer acquisition. We increase consumer-facing investment at a greater rate of growth in the second half versus the first half to reignite retail growth. In mainland China, this contributed to high single-digit retail sales growth and share gain in each of the third and fourth quarters, solidifying share gains for the fiscal year with every category improving share. In the fourth quarter, 10 brands grew at retail to fuel share gains in every category and every channel. The incremental investment coupled with innovation drove outstanding performance for 618 for La Mer, Loder and Jo Malone London across online platform and powered the ordinary success launch in China with Sephora. And we invested in our freestanding store as we strategically drive a more productive fleet. For the full year, we opened nearly 40 doors for our offerings run to much success and closed unproductive doors, primarily for Mac, Aveda, and Origin, for over 10 net new stores globally. Le Labo continued its spectacular expansion with new stores, including the Beijing and Seoul Experience Center, while Jo Malone London had installed navigation and experience to meet evolving consumer needs. Next, let me share an update on our portfolio review. We recently engaged external advisors as we consider evolving the portfolio to best align with the strategic vision of Beauty Reimagined and focus on our highest return opportunities over the medium to long term. We will share updates in due course. Let me now turn to our fiscal 26 outlook. With three fiscal years of sales decline and operating margin erosion behind us, we enter fiscal 26 with signs of momentum and the start of our turnaround. A return to top-line growth in fiscal 26 and the pursuit of a solid double-digit operating margin in the years ahead. For fiscal 26, we expect to deliver low single-digit organic sales growth, maintain our now stronger gross margin despite the headwind of incremental tariffs, and expand our operating margin by 165 basis points at the midpoint. Akhil will describe the drivers in detail, but let me share a few overarching themes. For sales, we intend to significantly reduce discounts. We made good progress in this fund in fiscal 25 and believe there is much more that we can achieve. Our sales growth also unbends benefit from accelerating best-in-class consumer coverage, recognizing we still have a lot of work to do in markets with a high penetration of department stores. Finally, we are putting greater emphasis on accelerating in high-growth emerging markets, given our still untapped potential, as emerging markets only represent 10% of reported sales. For operating margin, the organization has embraced PLGP, and its momentum is very encouraging. We achieved much more from PLGP than we expected in fiscal 25, which gives us confidence that we can deliver meaningful cost savings in fiscal 26 and fund incremental consumer-facing investments. To fuel our 26th outlook, we are focused on executing with excellence beauty reimagine. Already in the first quarter, we are further accelerating best-in-class consumer coverage. The Ordinary launched on Tmall in China with a breakthrough service. The first AI power flagship stores co-developed with Tmall. And we are excited to be expanding on Amazon Premium Beauty Store's success beyond the US and Canada, starting with The Ordinary in Amazon UK, which launched in July, as well as Clinique in Amazon Mexico this month. In travel retail, we are greatly expanding our presence in the Americas through the all-new distribution with Duty Free Americas. This builds on progress in EMEA to expand the presence of our luxury France brands in airports. Moving to our second action plan priority, create transformative innovation. We have identified our external hire for the new leader of R&D and expect to make this announcement in the coming weeks. For fiscal 26, we are targeting innovation to be back representing over 25% of sales. With this pipeline, we are well on our way towards tripling the percentage of innovation launched in less than a year, from 10% to 30%. In fiscal 26, we are set to have 16% of our innovation that is launched within a year. Here are a few fiscal 26 innovations already in the hands of consumers. In skincare, reflecting our imperative to innovate from the entry prestige through luxury tiers, the Ordinary launched off for 10% powder to cream concentrate, a breakthrough formula. Further up the prestige tier, Estee Lauder Advanced Night Repair franchise introduced a new eye cream, while Renutriv launched a watery lotion powered by longevity science. In makeup, we are rebuilding on our gain in lip with MAC Lip Glazer Glossy Liner and Bobbi Brown's Cashmere Luxe Matte Lipstick. And following Tom Ford's recent success with Cushion Foundation, the brand launched Architecture Radiance Hydrating Foundation. In France, the category poised to lead prestige beauty industry globally in fiscal 26. Jo Malone London's Raspberry Ripple, this year's seasonal limited edition color, is outperforming last year's limited edition runaway success. Tom Ford expanded the hollow of its wood collection with Wood Voyager and expanded to its popular Black Orchid franchise with Black Orchid Reserved. We are also proud to mark the exciting relaunch of the RME's brand with Intuition, a new finance fronted by global ambassador, NBA Hall of Famer, Dwyane Wade. For our third action plan priority, boost consumer-facing investment, we are deploying a new media model that puts greater focus on demand generation through broader media tactics. We made significant shifts in the mix of media budget to enhance consumer acquisition and improve ROI accountability. Our investments in AI have begun to show meaningful impact, transforming how we engage with consumers and operate internally. From personalized marketing and media optimization to agile go-to-market execution, AI has driven a 31% increase in ROI from our North American media campaigns, enabling faster decision-making and stronger real-time market responsiveness. For our fourth action plan priority, fuel sustainable growth through bold efficiencies. Among our newer initiatives, when we expanded the PRGB in February 25, is outsourcing. Our analysis revealed a significant gap versus industry benchmark, and we are rapidly advancing these initiatives. For our final action plan priority, reimagine the way we work. As of July 1st, brands own global strategy, innovation, and long-range planning. while regions have full responsibility for the P&L, allowing for greater local agility and consumer focus. We introduced new ways of working playbook aligned to this structure to drive brand-region collaboration, and we are very encouraged by the elevated engagement so far. In closing, we are energized as we are transforming our company through beauty reimagined. To our employees, thank you for bringing Beauty Reimagined to life in six short months through your tremendous passion and commitment. Together with all of you, I am excited for what we will accomplish. I will now turn the call over to Akhil.