Good day everyone and welcome to the Estée Lauder Company’s fiscal 2024 second quarter conference call. Today’s call is being recorded and webcast. 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 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 those 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 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 Investors 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. 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. Now I’ll turn the call over to Fabrizio.

Thank you Rainey and hello to everyone. We appreciate you joining us today. For the second quarter, we delivered our outlook for organic sales decline of 8% and exceeded expectations for adjusted diluted EPS. Organic sales in our global travel retail business decreased 28% with retail sales trends better than organic performance, reflecting both the execution of our priority to reduce trade inventory in alignment with retailers and efforts by various local authorities to contain structured market activity. We made meaningful progress with trade inventory levels in Asia travel retail and continue to expect to be a normalized trade inventory levels by the end of the third quarter of this fiscal year. The entire rest of our global business decreased 3% organically. This decline was primarily driven by the slow-down of overall prestige beauty in mainland China, although our retail sales trends were much better than our organic performance. Our global retail sales growth excluding travel retail in mainland China rose mid-single digits. The markets of EMEA delivered mid-single digit retail sales growth, and Asia-Pacific excluding mainland China rose double digits, as did Latin America, showcasing strong fundamentals for brand desirability and the success of our consumer engagement initiatives. Encouragingly, we made progress across several strategic priorities in the first half. Beyond reducing inventories of Asia travel retail, we improved working capital, realized higher levels of strategic pricing, and managed expenses with discipline. For the full year, we are revising our outlook as we have tightened the growth range for organic sales primarily to account for risk of macroeconomic volatility in some areas around the world and updated adjusted diluted EPS for an anticipated higher tax rate. In this revised outlook, we have maintained our prior outlook for full year operating profitability. Looking ahead, we are at an inflection point.…

Thank you Fabrizio, and hello everyone. I’ll start by reviewing our second quarter financial results, followed by a third quarter and full year outlook. I’ll also provide details on our expanded profit recovery plan. As Fabrizio mentioned, our second quarter organic net sales decline of 8% met our expectations. Additionally, through tighter expense management and despite experiencing a higher tax rate due to the shift in our geographical mix of business, our earnings per share of $0.88 exceeded our initial outlook for the quarter. From a geographic standpoint, organic net sales in our Europe, Middle East and Africa region declined 14%, mainly attributable to the persistent challenges in our Asia travel retail business. The impact from business disruptions in Israel and other parts of the Middle East accounted for a 2% reduction in the region’s overall net sales growth. The markets in the region had mixed results, leading to overall flat growth across all markets. Organic net sales in our Asia-Pacific region fell 7%, reflecting continued challenges in mainland China. While our results on Douyin nearly doubled, our total online sales declined due to softer than expected performance on TMall during the 11.11 event. The overall online performance more than offset the increase in brick and mortar sales, which was led by double-digit growth in our freestanding stores. In the rest of the region, we saw strong organic net sales growth led by double-digit growth in Hong Kong SAR and Korea, as well as high single-digit growth in Japan. Our luxury fragrance brands Le Labo, Jo Malone London, and Tom Ford drove double-digit fragrance growth in the region, which was fueled by both effective commercial activations as well as compelling holiday product offerings. Organic net sales in the Americas declined 1%, driven by a prior year benefit from changes made…

The floor is now open for questions. [Operator instructions] Our first question today comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey, good morning guys. First, just a couple clarification questions under the restructuring and profit recovery program. Could you just give a little more detail on the structural changes in the program beyond the job cuts, and in the past, you’ve done a pretty good job of delivering upside to savings goals, so how do you think about other savings areas that could potentially emerge over time and are you pushing beyond what’s potentially announced? Then if you’ll be generous enough to entertain a question on China, I think clearly there are some structural changes that have emerged in China beauty - the consumer perception of the category itself, willingness to be ostentatious, etc., changes in daigou selling, promotional impacts, mass brand performance. There have been impacts to Estée brand share, so maybe Fabrizio, just take a step back and broad thoughts on the opportunity in China from here, but also specifically how do you adjust to these changes, what are your focus points from here in this new China reality? That’d be helpful, thanks.

Dara, I’ll start with your question on the profit recovery plan. What we shared in November was our primary focus of the plan is to rebuild our gross margin, which is where we’ve lost, as you all know, quite a bit of margin. Some of the strategies that we spoke about at that time that we were putting in place is really to focus on more profitable channel mix, to get our inventories under control, which should improve our obsolescence as well as some of the discounting that has gone on over the last few years. We are being more granular in terms of some of the strategic pricing initiatives that we have, and we also talked at that time about from an expense standpoint, implementing an incremental indirect procurement program to reduce some of our expense areas, so those were some of the initiatives that we spoke about that made up the $800 million to a billion in terms of the profit recovery plan at that time, and then obviously we’ve announced an additional element to the program with the restructuring. On China?

Yes, so on the China question, first of all, we had some soft consumer sentiment in the recent period that drove this lower prestige sales growth. However, first of all, we remain very optimistic about the long term opportunity in China and continue to invest for growth. The second point is you asked about the brand health and what’s changing. Our brands are really, really strong. The retail sales growth has been much better than the net growth, and have been extraordinary, double-digit growth on many of our brands, particularly in luxury, like La Mer, Tom Ford, Jo Malone, Bobbi Brown, Kilian, Frederic Malle and Aveda, also Le Labo continues to track. In terms of market share, importantly we gained market share over the fiscal year in quarter two, despite there was a small reduction from market share in quarter two, but we gained market share in skin care category 80 points, we gained in fragrances, we gained in healthcare, and there are several important of our--many of our brands, we had really top ranks in 11.11. Another element to support the strength of our equity is the freestanding store double-digit growth both in total and in live doors in mainland China, and I should also mention the strength in Hong Kong, where we grew substantial market share, in part reflecting success with the Chinese consumers. Where we go from here? As I said, we are going to continue to invest in China and we believe we have a great team there and determination to continue building market share, winning in the long term. The first step is building our distribution in winning online channels, that this will continue, particularly accelerating the win in the short term, and continue to build market share in new cities in brick and mortar,…

The next question comes from Bryan Spillane with Bank of America. Please go ahead.

Thank you Operator. Good morning Fabrizio and Tracey. My question is just related to maybe how you’re going to measure yourself as an organization over the next two years, so the ’25 to ’26 time frame, and I guess I ask that in the context of stock clearly today reflecting an inflection, right - a positive inflection, but at the same time, there’s a lot of mix things, right? China, slower than it was, but again optimistic for the long term. You’ve got a lot of work to do underneath the hood, right, to execute on the restructuring program and improve margins. I guess I’m just curious how you’re thinking about how linear this improvement would be, and again, are you going to change the way you’re going to maybe measure yourself in the near term, just given how much work you’ve got to do and maybe how different it was versus business as normal over the last couple of years. Thanks.

Yes, absolutely. Your question gives me the opportunity to give an overview of what we are trying to do. I hope you realize that the work we have done in the last several months culminates today in what we define as an inflection point. It’s first of all acknowledging the need of some important changes to align to the future opportunity to address our key pressure points developed in this post-COVID environment, so I’d like to summarize first of all what we are doing, and then I will measure ourselves. The way we look at it is that, first of all, we are addressing the need to change and we are addressing the key pressure points. The first is the meaningful progress we have done on retail stocks in Asia, that as we said as of April, they should be aligned, and this will determine the ability to align in the future retail and net in this very important channel for us and for the industry in general. That’s a big pressure point that we are addressing. The second, the part that was driving margin was obviously the need of gross margin, addressing our gross margin, addressing our cost structure, and right-size our organization, and so the profit recovery plan enlarged and the execution of it, which is strongly advanced, and the additional restructuring are addressing decisively our ability to recover profitability at an accelerated pace. At the same time, this profit recovery plan is designed to resource our future growth plans more aggressively and to develop the right agility and speed to market in the organization, and we are going to measure this and to measures ourselves on that. For agility, I mean agility to allocate resources in this more volatile world more promptly and faster, as the one,…

The next question comes from Olivia Tong with Raymond James. Please go ahead.

Great, thanks. I wanted to talk a little about, just first, a follow-up on your U.S. distribution comments in terms of stabilizing U.S. share. With Clinique and The Ordinary sort of towards the entry level price point in prestige, how do you think about further diversification in U.S. distribution, especially as department store exposure continues to come down? Thanks.

As you know, we are working on this for some time, and the way we address it is that we are going to continue to increase the focus on high growth channels. We have done some extraordinary improvement in the specialty channel in the last year, and that will continue to be our focus. We are also obviously focusing our support to our department store partners where we have high market share, and we are managing this business carefully, and we are continuing to accelerate online with various opportunities that we have in this world, and the consumer is shopping more and more omnichannel, and so we are going to continue to put focus on the opportunity of omnichannel growth that we have in the United States. That’s what we are doing, and you will see this strategy to be implemented step by step in the next 12 months, accordingly, to these opportunities.

The next question comes from Oliver Chen with TD Cowen. Please go ahead.

Hi Fabrizio and Tracey. You mentioned agility many times. What are your thoughts on the priorities in terms of what you’ll do there, as well as direct-to-consumer and digital? Community engagement, as you know, is very important in terms of user-generated content and making sure to embrace a lot of new formats. A follow-up - as we model inventory in the back half, your inventories are in much better shape, but what gives you the conviction that the inventory levels related to Asia travel retail will be healthy in terms of the back half? Just some key aspects and being more confident there. Thanks a lot.

Thanks Oliver. I’ll start with the inventory levels. You know, we’ve made significant progress, as we said in our prepared remarks, on inventory and bringing down the levels of inventory in the trade that were high in pockets of Asia travel retail. We are pretty comfortable that we will be able to bring those down to levels that are healthier, that are expected to drive regular replenishment levels and therefore be the net sales accelerator that we have embedded in our guidance for the second half of the year. In addition, what we spoke about is we’ve also, at the same time of bringing down inventory levels in the trade, brought inventory levels down in-house, and that is part of the benefit that we saw in terms of the cash improvement in the quarter, and we expect with the tools that we’ve invested in and having healthier levels of inventory overall, largely driven by the pull down in production that we did in the first quarter that we spoke about, that we are going to be in much better shape as we support some of the upcoming innovation that we have, as well as in the future in terms of bringing inventory levels into better control. Obviously the investment that we’ve done, as Fabrizio mentioned, in our Asia supply chain allows us to have shorter lead times in the region and be able to better manage any volatility that may occur in the future, now that we have a plant and an R&D center in the region, so all of those things help us in terms of creating better inventory agility, being able to produce faster to market demand than we have been in the past.

Then your question in agility, there are two measures of agility that we look at as very important. One is agility in responding to volatility faster in reallocating resources, so the action in this area has been the shortening of our supply chain in Asia, for example, and the various aspects--even the way we are repositioned. We are leveraging the historical heritage position of Clinique and doubling down on it in active derma, the way we are leveraging The Ordinary strength in active derma, so in other words how we are responding to the consumer trend of active derma now very decisively, so those are elements of agility. We want to improve our ability to do these things faster and more promptly in the future. The other aspect of the agility is the way we go to market, so reaction to, for example, the new platforms. We are learning how to operate with Tiktok globally; much more, we are focusing on earned media value much more our organization, including resource allocation but also the training and the development and the understanding of the various models. We are doing this is all markets for the world at the same time. We are modernizing our promotional models and making them more relevant to the current consumer trends, and importantly as an umbrella concept, we are becoming more and more able to react to trends. There are two kinds of trends we are working our organizational development on. The first is the long term trends, the fundamental changes in consumer preferences, where frankly we have been always pretty strong, and we are further refining these abilities. Then there are the short term trends, the trends that can change in a week, in a month of what’s going to be popular online in a certain country, in a certain moment, where we have developed better and better models to react to short term trends with our brands, with our execution, with our resource allocation. And by the way, the work on organization of the profit recovery plan is also pillared to improve our ability in both these areas, meaning the agility in resource allocation and the agility in reacting to trends and to the new models of marketing around the world.

The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi, good morning Fabrizio and Tracey. As you think about pricing and the new launches that you have coming, how do you think about pricing both for existing hero and new products and how it’s changing? Then as you continue to enhance the specialty multi distribution, how do you see engaging with the department stores and what that relevance--how that relevance changes? Thank you.

We have a pretty sophisticated, Dana, pricing model for new product launches, and I think we had spoken about it even under the profit recovery plan, making sure that our new product launches actually are accretive to our overall margin, so we have actually cut some of our new product launches that were planned for fiscal ’25 in order to do that, and re-looked at our innovation pipeline to make sure that what we are launching is in fact accretive. But the sophistication that goes into our new product pricing model in terms of looking at what the competitive benchmarks are relative to that particular launch, also from a market standpoint, making sure again that the new product is positioned appropriately, we look at if it’s replacing an existing franchise, measure the product and pricing differentials related to added content, added benefits, added packaging, etc., so there are a number of things that factor into it. I think that as we mentioned, we’ve got some very exciting new product launches in the second half of this year. MAC is re-launching two of their largest franchises, Studio FX and the MAC lipstick. We’ve got Estée Lauder Re-Nutriv with SIRTIVITY that is quite exciting, really playing on the longevity focus that is accelerating in the market. Fabrizio just talked about trends - we’ve got quite a bit of trend-based but highly efficacious from a quality standpoint, products launching in the second half of the year, all of which have been priced appropriately for the benefits that they are contributing.

Yes, and on the different retailers, the retail channels, we obviously support every one of the retail channels, so specialty multi, department store. Every retail channel is going to be supported more and more in a tailored way, meaning tailoring to their model, to their strategy, to their specific consumer profiles, and this will be very different country by country. There are countries where certain channels grow faster than others and maybe the opposite happens in other countries, so it’s not about their preferences are changing, the strategy is about tailoring the strategy to each channel, supporting every one of our customers. At the end, the result of this is that the mix of our business in every country of the world will be focused on growth. It will be focused and leveraging the channels that the consumer is in that specific moment we choose, or the different target of consumer we choose in every channel, so it’s about tailoring to all the opportunities wherever they are.

The next question comes from Steve Powers with Deutsche Bank. Please go ahead.

Hey, thank you and good morning. Back to the profit recovery plan, I think your outlook today at the midpoint implies roughly $1.5 billion or so of operating profit in fiscal ’23, and you frame the recovery program as incremental profit from here, which assuming the benefits are all off a fiscal ’24 base, that implies $2.5 billion to $3 billion or so of operating profit in fiscal ’26, and I think that’s before considering presumed underlying growth in the business over those next couple of years.

That’s correct.

Okay, great. I guess the question is how do you protect--against that objective you’re saying today, how do you protect against those incremental profits being essentially countered by incremental investments that emerge over that time, because you’re seeing the expectation for investors today that the profit comes, it’s a pretty firm objective, but how do you guard against other costs creeping into the model over the next couple of years?

It’s a great question, Steve. Look - we are certainly realistic that with regulatory changes, with what happens with inflation, there are a lot of things that we, in the base business before the profit recovery plan, need to be able to manage, and one of the things that we are working through with our organization is how do you make those choices in terms of what to invest and dis-invest in, in terms of the base business, so those are areas that we are keenly focused on as we look at just what the base progression, which you’re very familiar with what our normal progression is, outside of obviously this unusual period of post-pandemic disruption that we’ve experienced, so. We certainly have in the past been able to do that and believe that we can do it in the future as well. We’ve also stood up a very disciplined and strong project management office in order to be able to track all of the savings that we are committing to, and also obviously with the base business, making sure that we’re meeting our normal base expectations as it relates to regular growth and margin expansion.

I’d just like to add one point, is that as you said, the $1.1 billion to $1.4 billion being defined as extra profitability, which means that the reinvestment part in building our brands and accelerating growth comes from more savings than what we define as extra profit, so to be fair, there will be more savings. Some of them will be reinvested in consumer-facing growth acceleration, and the $1.1 billion to $1.4 billion is our target for extra profitability, and that’s why we have been very clear on that. The investment in growth that will be done, or the extra investment in growth for the future that we want to develop capabilities for, are for consumer-facing. We are not planning to invest in many new capabilities; rather, we want to leverage the capabilities we have built in the last period in a very efficient way, so that’s the way to think, I believe, about the profit recovery plan.

Our last question today comes from Lauren Lieberman with Barclays. Please go ahead.

Great, thanks. Good morning. Two things I wanted to touch on. The first was just, I think during the prepared remarks, you commented that retail sales ex-China and travel retail are up mid-singles, but organic also excluding those things was down 3, so. I know you’ve spoken very explicitly about the inventory dynamics in Asia travel retail, but I was just curious about inventory dynamics outside of those markets and why that disconnect was that large. That was question one. Then question two is just on the go-forward plan around unstructured markets across Asia. Of course we all know there’s been regulatory change in China and Hainan, but you’ve spoken many times in the past, Fabrizio, about how that market tends to shift and move with the travelers and currency and all sorts of things that can impact where it’s taking place, so was curious on your thoughts about that unstructured market going forward, what you are or aren’t going to do in terms of regulating the degree of participation, because I think it has a lot to do with how we should be thinking about and modeling the absolute size of the travel retail business in dollar terms as we look out over the next several years. Thanks.

Thanks Lauren, I’ll start with the retail and organic. You know, when we have--especially in the second quarter, obviously when we have big events like 11.11, and you have holiday and in the case--you know, for us, when those events don’t go as well as expected, obviously retailers pull back on and we pull back on some of the shipments that we have to those retailers, in order to bring things back in line, so you will see from a quarter to quarter standpoint, there may be some disconnects related to that, but it averages out over the course of a year, so we don’t have any issues in any other markets like what we have been experiencing in Asia travel retail for you all to be concerned about.

On the unstructured market, our focus is on travelers and travelers converting, and that is getting better and better around the world, just to be clear, apart from the China situation that we have discussed many times. In the rest of the world, there is extraordinary progress in this area, double digits, in some cases triple digits in every market of the world, so this will happen more and more, also in China, also in Korea, and also in the part which has been the slowest to recover in that direction. So first part of the answer is the focus to continue growing in travelers and continuously improving the travelers’ conversion. As we are seeing from the data of the market, the travelers has been improving very, very nicely, but the conversion of the travelers for the moment is below expectations. The unstructured market as such is reducing, and I want to say it’s reducing also for regulations for the intentions of the government, so the retailers, so there is a trend to reduce the amount, and obviously this is also what we are doing, and so the way you should expect is that the unstructured market will be reduced, in my opinion will reduce also as a market, but will be reducing for us. It will be reducing in a gradual way as the travelers improve and increase over time.

That concludes today’s question and answer session. If you were unable to join the entire call, a playback will be available at 1:00 pm Eastern time today through February 12. To hear a recording of the call, please dial 877-344-7529, pass code 1939290. That concludes today’s Estée Lauder conference call. I would like to thank you all for your participation and wish you all a good day.