Good day, everyone, and welcome to The Estée Lauder Company's Fiscal 2024 First Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I'd like to turn the floor over to Senior Vice President of Investor Relations, Ms. Rainey Mancini. Ma'am, you may begin.

Hello. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey 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 Investors section of our website. As a reminder, references to online sales include sales that 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. [Operator Instructions]. And now I'll turn the call over to Fabrizio.

Thank you, Rainey, and hello to everyone. We appreciate you joining us to discuss our first quarter results, revised outlook for fiscal year 2024 and accelerated profit recovery plan to benefit fiscal year 2025 and 2026. Before we begin, I want to start by expressing the tremendous grief and sadness we have for the victims and their families of the horrific terrorist attacks against Israel, the tragic loss of Palestinian lives and the growing humanitarian crisis in Gaza. Our hearts break for the profound suffering across the Middle East during this terrible time. We are committed to continuing to support the safety and well-being of all our employees in the affected areas and around the world. Let me now turn to our first quarter results. We delivered our outlook for organic sales and exceeded the expectation for adjusted diluted EPS. Organic sales decreased 11%. Our global travel retail business drove the decline, as expected, with organic sales lower by 51% given the combination of trade inventory reduction and a structured market containment. The entire rest of our global business rose 4% organically, led by mid- to high single-digit growth in the Americas and the markets of EMEA and double-digit growth in Asia Pacific, excluding Mainland China. The excellent performance in these regions enabled us to deliver our sales outlook despite a slower-than-expected recovery of overall prestige beauty in Mainland China. Adjusted diluted EPS of $0.11 was ahead of the outlook as we achieved a better-than-expected adjusted operating margin. There were several drivers for this more favorable profitability, led by a greater contribution to sales from skin care than forecasted as well as disciplined expense management. Notably, we continued brand-building investments in the areas with the greatest growth opportunities with AP spending rising as a percentage of sales. While we had…

Thank you, Fabrizio, and hello, everyone. Let me begin with a brief review of our first quarter results in order to devote the majority of my discussion to our revised fiscal 2024 outlook and our profit recovery plan. Our first quarter organic net sales declined 11%, and earnings per share was $0.11. From a geographic standpoint, organic net sales in the Americas increased 6%, led by mid-single-digit growth in North America and continued strength in specialty multi. In Latin America, net sales rose high single digits and was driven by continued strength in makeup as well as strong growth in both brick-and-mortar and online channels. Organic net sales in our Asia Pacific region fell 3%, primarily due to incremental headwinds from the slower-than-expected recovery of overall prestige beauty in Mainland China. There were several bright spots in the rest of the region, led by triple-digit growth in Hong Kong SAR as well as double-digit growth in Japan and Australia. Our strategic investments in brand activation and new product innovation continue to resonate well with consumers in these markets. Hong Kong SAR also benefited from increased traffic in brick-and-mortar due to fewer COVID-related restrictions compared to last year and the resumption of tourism. Organic net sales fell 27% in Europe, the Middle East and Africa due to the ongoing headwinds in our Asia travel retail business. The overall challenges in our travel retail business more than offset the performance in the rest of the region, where we saw strong growth in skin care and makeup as well as growth in most Western and emerging markets. Organic net sales growth was driven by our developed markets, led by the U.K., Germany and France. From a category perspective, fragrance continued to lead growth with organic net sales rising 5%. Strength from hero products…

[Operator Instructions]. Our first question today comes from Dara Mohsenian from Morgan Stanley.

So apologies for a multipart question, but just had a few things on the profit recovery program. Conceptually, it sounds like it's more of a recovery from a depressed fiscal '24 base pushing even harder on some of the building blocks you outlined previously. Is that the case? Or are there more significant organizational changes that are now new in this plan to generate incremental savings? And also that $800 million to $1 billion profit recovery, should we think of that as just savings and recovery from a depressed base, and then base business top line growth on top of that could lead to greater recovery? How do we think about that? And then just, b, taking a step back, why not get even more aggressive here in terms of posture with a larger restructuring? Obviously, the external environment has changed. There's been some internal issues with supply chain and forecasting. So just thoughts on taking a more aggressive tack with the broader restructuring at some point?

And ladies and gentlemen, at this point, we may be having some technical difficulties with the speaker line. So one moment while we attempt to reconnect the speaker line. [Technical Difficulty]. And ladies and gentlemen, we do have the speaker line reconnected to the conference. I'd like to turn the floor back over to Rainey for a quick statement.

Thank you, everyone, for your patience. We apologize for the difficulty. Fabrizio and Tracey are ready for our Q&A session now. So Jamie, if you can take us to our first question, please?

And our first question, once again, is Dara.

So just wanted to start with a clarity question on the profit recovery program. It sounds like it's stemming more from a recovery versus a depressed fiscal '24 base and pushing even harder on some of the building blocks you had previously outlined. Is that the case? Or is it more of the larger organizational changes here that are new in this plan versus 3 months ago? And also, is that $800 million to $1 billion profit recovery, is that just the savings and recovery from a depressed base? Or -- and should we expect base business growth on top of that in terms of a top line rebound and the flow-through to profit? And then b, and apologize for the multipart but I want to get clarity there, just taking a step back, why not get more aggressive here with the larger restructuring? Obviously, the external environment has changed. There's been internal issues the last few quarters with supply chain and forecasting. In theory, SG&A levels have looked high ex marketing relative to peers. So just any thoughts on taking a more aggressive tack with a broader restructuring and how you guys think about that?

Thanks, Dara, for the question. And again, we do apologize for the technical difficulties. As it relates to the profit recovery plan, it is incremental to the growth that we expect from the base depressed level this year, as you indicate, Dara. So -- and we are looking at everything. Obviously, the first thing we're looking at is, as we mentioned in our prepared remarks, recovering our gross profit margin. And to your point, we've had issues with high levels of inventory. We've talked for years about and you all know that we typically, because of our lead times and our historic footprint carry high levels of inventory, which does affect our agility to be able to manage when shocks happen to the system, which is what's happened over the last couple of years. So certainly regionalizing our supply chain and completing the manufacturing facility we have in Japan will help us over the next few years in terms of being able to take more inventory out of transit and being able to produce a bit closer to demand. We also have implemented and Fabrizio talked about our integrated business planning process, which is leveraging some of the tools that we've invested in over the last few years to really improve the accuracy of our forecast, to include a bit more of the commercial drivers that drive our business in our forecast, again, to improve the accuracy and have less excess inventory. And then the actions that we're already taking this year to help improve our gross margins for next year is a significant pull-down in our production volume. So our production units this year are down about 25% from what they were last year. So even though we are anticipating now more modest growth given the update to our forecast, we are drawing down on the inventory that we have on hand as well as, obviously, some of the actions we're taking from a shipment standpoint to draw down the inventory that we have in trade in Asia travel retail. So there are a number of actions that we're taking that will help gross margin. We are going through a SKU rationalization program in addition to cutting some of our smaller diluted innovation programs that were planned over the next year or 2. So there are lots of actions we're taking. All of those actions are not finalized yet, but many of them are in flight. They just won't impact as much this year as they will in future years. And then, yes, we are looking at our expense base and how we operate going forward, especially given our current level of sales and the lower base that we will be growing off of.

Our next question comes from Stephen Powers from Deutsche Bank.

I guess probably, Tracey, for you as well. Just maybe you could help provide a little bit more help bridging to the implied second half revenue and profitability outlook as implied in your guidance. It's a pretty significant step up from where you will be as of the end of December based on the 2Q guide. And that's despite battling what sounds like it will be headwinds in Asia travel retail inventory that will extend into at least the third quarter. So again, maybe you can -- just the building blocks there, your level of confidence and visibility. And alongside that, it might help just if you have a view on what consumption is for your brands through this first quarter, maybe through the first half versus what you're actually shipping. Because I think a big a big part of that bridge is that you start to ship more to consumption as you get out from underneath the inventory headwinds. But again, it's a very big step up. So just some clarity and some more detail there would be great.

Yes. So no, you're exactly right. The assumption is that we ship more towards -- we're able to ship more towards the retail trends. I mean, as we said in the prepared remarks, our retail trends are ahead of our net trends in Asia travel retail, both still down because we are destocking the trade. And so the expectation is that, that will be completed by the end of the third quarter, so in the second half of the year. So part of this -- a large part of the step-up that you see in the second half of the year is our shipping more towards the retail trends that we are expecting in the second half of the year. That's a big part of it. And when you think about what happened to us and what we're anniversarying from the second half of last year, where we had the policy changes first in Korea that impacted our third and fourth quarter and then the policy change -- or policy reinforcement in Hainan, which impacted our fourth quarter. We had, in some parts of our Travel Retail business, very low shipments given those policy changes. And so we are anniversarying as well some of the initial shocks of that. Lastly, I would say that we are seeing travel come back slowly, so again, more slowly than what we anticipated. We are seeing lighter levels of conversion relative to what we saw certainly prepandemic or even pre- the significant changes in policy across the Asia region. And -- but we are seeing traffic pick up, and we are certainly expecting that, that conversion will gradually pick up as well in the second half. So those are some of the things that are underlying our second half expectations and the reason you see that big step-up in terms of volume. It's a combination of multiple factors, mostly in our Asia travel retail. A bit of it is a pickup as well in China also. Fabrizio, I don't know if there's anything you want to add.

No. I just want to add that the -- our retail -- underlying retail calendar year-to-date is the mid-high single digits already globally. And our estimate of retail continue to be actually improving on this point. So the retail base, which is driven by the consumption of consumers, by the innovation, by the strength of the brand, by the demand from the consumer standpoint is very solid.

For calendar year.

For calendar year-to-date. And as Tracey has said, the readjustment of inventories is the big things that we are dealing with. And the evolutions of the policies that have created these readjustments is what has been difficult to predict and anticipate, and it's been pretty volatile. And so that's the adjustment. But the underlying fundamentals are already strong. It's not that we need to develop them in order to deliver the retail in the future. We just to continue evolving on these fundamentals.

Our next question comes from Jason English from Goldman Sachs.

Thanks for sharing that encouraging data point on retail sales. Tracey, you're talking about how shipments weighed down last year and it's kind of following the story for last year. We've been thinking, once you get leverage back in, and once you're able to turn back on the sales, catch up of retail sales is going to give you a lot of operational leverage to aid the gross margin recovery, and that's really a sales problem. But if I objectively stop back -- step back and look at the composition of the P&L, it does tell a slightly different story. I mean it doesn't look like a revenue problem. Revenue is actually just a round trip to where you were in the first quarter of '19. It looks like it's really a cost problem. Despite revenue being back where it was in first quarter '19, COGS up $250 million, SG&A up $320 million, and this is despite cost-cut program that you announced in late 2020, which so far doesn't appear to have yielded any savings. So can you help us understand what's caused the cost to run up so much over the last couple of years? Where have the efficiency savings gone so far? And I guess you are announcing the new actions to kind of go after it. Is that enough to kind of take that back out with the initiatives you have in place?

Yes. No, great question, Jason. So if you look back to the composition of the P&L in fiscal '19, you'll see that our gross margins were higher. And certainly, our cost as a percent of sales was a bit lower. And obviously, given the pull-down that we've had in this latest guidance review, our cost as a percent of sales are higher as well. But we did have -- we've had 2 cost-saving programs. We had the Leading Beauty Forward program, and then we had the post-COVID Business Acceleration program. In both of those instances, certainly Leading Beauty Forward gave us runway. We were actually expanding operating margins by over 100 basis points a year, anywhere between 60, 80 to 100 basis points a year through that program. And that program allowed us to reinvest in capabilities that we needed, in particular to accelerate some of our digital marketing activities, to create some shared service structures in some of our functional areas and to be able to leverage cost better in those areas. So those programs -- that program was successful in both delivering margin expansion and expense leverage at the time. Advanced allowed us to close some of our underproductive brick-and-mortar doors and take a little bit of or adjustments as well. But we have, over the last few years, invested in a number of capabilities that have been needed in terms of in our regulatory area. That includes cyber, but also in the regulatory area given the increasing regulations in all of the countries that we do business with and the claims and -- that we need to support our brand marketing initiatives going forward. We've made investments in areas like our sustainability program. So we have made a number of investments that, other than the shocks that we've had over the last couple of years, have been investments that were needed in the company. Certainly, as we look forward, we are looking at, as I said before, the profit recovery program is both focused on gross margin because we're not back at the gross margin levels that we were at in fiscal '19 or even before. And we also are looking at expense areas, everything from our procurement program where we expect that we can get some savings there, to other org efficiencies. So more to come in January, February, actually when we give you our second quarter results on what the final plan will look like. But it's -- believe me, we are as focused on the P&L structure recovery as you are, Jason.

Yes, just I would like -- Jason, just I would like to add the point on the fact that in really the profit recovery plan needs to rebuild gross margin. And as you said, also our new capability that we invested in that Tracey mentioned also in IT in many other areas needs to align to our current sales levels. And that's the work we are going to do as well. So those are the 2 big areas of focus. And in February, we will give much more specifics and details how will affect -- will impact 2025 in the majority in 2026. And so it's a pretty clear plan. I just want to say the entire organization is aligned on this plan. We have teams already working on this. We are completely committed to deliver that. And I just want to make a clarification on the programs that we announced in 2020 because you said it didn't deliver saving. It did deliver saving in the area of selling. That was the focus. Remember, this program was tailored a lot to the fact that the COVID had disrupted the go-to-market part of the business and then increased our sales online versus the sales in brick-and-mortar. So we need to reallocate resources more to online and less to brick-and-mortar and to create the right future in -- the future balance of cost between the 2 areas, that's what we did. In fact, we invested in the online progress. Today, we are still leveraging the benefits. And we did reduce our cost in the brick-and-mortar selling areas accordingly to the trends that COVID had created. So when we did in the past these kind of programs, we have been pretty successful in delivering what we wanted.

Our next question comes from Olivia Tong from Raymond James.

A bit of a multipart question and follow-up to a few. But first, just a point of clarification on the global retail number that you gave of up mid- to high single digits. What's that for you or for the category? And then on travel retail, can you give us a sense on your visibility into how much inventory is still sitting with the groups or individuals versus in a brick-and-mortar duty-free channel, which we have a little bit better clarity in?

Yes. Yes, it was -- it's our retail sales I was referring to. So calendar year-to-date in 2023, our trend of retail is mid-high single digit up to date. And our estimate for the future is to continue improving that trend. So my point is that retail is solid. And the negative net sales that we see in this first 6 months, for sure, our -- first, this month of the fiscal year are related to the readjustment of inventories that Tracey was mentioned. Second, on the visibility on these inventories in travel retail and -- by the way, when we say this retail, we say ex the travel retail numbers, just one clarification. So it's once the travel retail number. The point we are trying to make is that when the travel retail number, the retail and the net will be aligned, and we said they will be aligned as of the end of the third quarter. As of this moment, the retail -- the solidity of the retail progress is already in the making. That's the point we are trying to make. Anyway, on travel retail, we had a significant stock reduction in this first quarter. And we aim to be in line with the inventory expectation of retailers by the end of March. And we have visibility into these numbers. We have visibility. We have exactly the understanding for -- with each one of our retailers on where we are today, what are the programs that we are doing in order to accelerate sales retail of the existing stocks and what are the programs to obviously replenish and sell in innovation and all what we need to do in these areas. And finally, how by end March, we aim to have the retail and the net aligned. That's the program.

Our next question comes from Filippo Falorni from Citi.

So I wanted to ask a question on Mainland China. It's the first quarter where you guys talked about a bit of a slowdown relative to prior quarters. So maybe, Fabrizio, can you give some context on the level of slowdown that you're seeing in the category? And then from a competitive standpoint, we've seen some local brands doing a little bit better, more on the mass side. But have you seen any trade-down within the category, both on skin care and cosmetics?

Yes. No. First of all, the market was growing 2% in the first quarter in China. Our retail during this quarter was flat, but our retail in China calendar year-to-date is growing, and we are building market share. But in that specific quarter, the market growth went down to 2%. Now our estimate of the recovery of the beauty market in prestige was higher than that, and that is the -- one of the key readjustments we are making in the -- in projecting the year. That's the point. And so this 2% is the current trend level. Also, as I said in my prepared remarks, the presale period of Tmall and particularly on -- in general, the Singles Day, confirms a softer trend versus a year ago, and that's why we are reflecting this confirmation. Now we are more optimistic about the next part of the Singles Day events in November, but is -- the presale was confirming a softer market. In term of your second part of the question, is the -- there are local brands in mass and in masstige, which are doing well, we start doing well in China for sure. In prestige, the impact of that is for the moment limited. And so we see prestige being solid in comparison to mass in general. And we don't see a big movement from prestige to mass at this point in time.

Our next question comes from Bryan Spillane from Bank of America.

I wanted to go back to Jason English's question regarding margins. And I guess, as we kind of look forward and try to think about the rebuild to the previous margin aspirations, how much of it will -- do you expect to come from the expanded cost savings? And how much is just resetting the business mix? Because travel retail is so profitable. And so do we need travel retail to get back to kind of a similar percentage of sales as where it was 3 years ago? Or would you be able to get there if travel retail ended up being smaller for reasons given how cyclical it is?

Yes. No, it's a great question. Given where travel retail is right now, and certainly, we, I'm sure many others are thinking about the future of travel retail, which we are very encouraged by in terms of a return to growth but a return to the prior levels? Don't know. You have much now of the volume that has shifted to the local market. And I would expect to continue to see growth in the local market as well. So there may be a rebalance as it relates to the consumption for the Chinese consumer in particular as well as perhaps other consumer groups. So we're not counting on travel retail to get back to prior levels. If it does, that's great. But our profit recovery program, combined with some of the growth plans that we have for our markets and brands going forward, are not relying on that to return to profit margin -- the profit margins that we had previously.

And I would like to offer a bit of historical perspective on what happened during this COVID period and the volatility that this brought. I mean when you -- because you were comparing in your question versus before COVID versus the 3 years ago previous -- so take 2019. Our business in Mainland China versus 2019 is more than doubled. Our TR business today globally versus 2019 is by now, with this estimate that we are giving to you now, is actually well below. So -- but it's true that during this COVID period, the TR business, also driven by the unstructured phenomenon that we have discussed previously was actually up. But then by now, this has been reabsorbed. So the profile of the business in -- with Chinese consumers in 2019 was that there was a base sales in Mainland China. There was a lot of the sales to Chinese consumer that were happening around the world in their travel. This was estimated to be up to 40% of what was the total consumption at that time before COVID. And this -- a lot of this was in travel retail and also was in the cities that were visited like, I don't know, London, Paris, New York, Hong Kong, Tokyo, et cetera. So now during COVID, obviously, the frontier were all closed. So this consumption came back into Mainland China. In fact, our business in Mainland China today, as I said, has doubled the world was. And some of it went into travel retail, like Hainan development and all the other things that happened, which are very good for the long term. And some of it went into the unstructured business, which is actually going down now and is part of the readjustment. And these are positive things for…

Okay. So to be clear, we can get back to kind of the previous profit algorithm even if travel retail and basically Hainan is not as big as it was previously?

Yes, we believe so.

And ladies and gentlemen, with that, we've reached the end of today's question-and-answer session. I'd like to turn the floor back over to Fabrizio for any closing remarks.

Thank you. And I just wanted to try to summarize this enormous moving part and make sure that we give you the clarity of what we are focused on at this point in this moment. So we expect calendar year 2023 to be the final, and frankly painful, post-COVID reset period for the company. We move forward with confidence as our fundamentals are strong in this attractive prestige beauty industry. Our calendar year-to-date retail sales performance remain very solid in all recovery markets and in general, both developed and emerging in the mid-single high digit that I quoted before. Our brand portfolio is better than ever with the recent acquisition of Tom Ford, solidifying our luxury strategy and The Ordinary, which we didn't talk a lot in this call but is becoming a powerhouse brand at the entry of growing active derma segment and is definitely our fastest-growing brand in our portfolio. Our innovation pipeline is robust for fiscal year 2024, but it gets even better and bigger and stronger in fiscal year 2025 with the expansion into the white space opportunity that we have identified. We are on track to align retail and net sales via inventory reduction with our retailers in China private retail, as discussed during the call. We are focused on accelerating a more balanced growth in the future by market, by channel. And importantly, via the profit recovery plan, we are preparing to rebuild gross margin, leverage our new capabilities to align our expenses to our current sales level and further strengthen our consumer-facing activities. And we have the strategic focus and the talent to do this work, and together, intend to return to our historical cadence of delivering sustainable sales and profit growth. And thank you for your time and for your attention today.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.