Good day, everyone, and welcome to the Estée Lauder Companies Fiscal 2024 Third Quarter Conference Call. Today's call is being recorded and webcast. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call 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 results 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 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, reference 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 are pleased to be with you today to review our third quarter results and discuss our strategic initiatives. For the third quarter, we delivered organic sales growth of 6% at the high end of our outlook, exceeded expectations for profitability and continued to significantly improve working capital. We achieved stronger-than-anticipated performance beginning with gross margin. Results benefited from a greater than expected mix of skin care. Moreover, we made great strides in reducing the pressure on excess and obsolescence, driven by our now lower inventory levels and in realizing strategic pricing. Further contributing to the outperformance, we manage expenses with discipline across multiple areas of the business and have shifted certain advertising spending to the fourth quarter to support our rich innovation pipeline and expanded consumer reach. Encouragingly, with our third quarter results and fourth quarter outlook, we are confident that the second half of fiscal year 2024 will indeed prove to be an inflection point for the company, representing a renewed sales and profit growth trajectory. First, momentum in organic sales growth is primed to accelerate in the fourth quarter for a strong second half. Second, we continue to expect operating margin in the second half of fiscal year 2024 to be higher than the first half and to expand from the year ago period. Third, with a profit recovery plan designed to deliver $1.1 billion to $1.4 billion of incremental operating profit in fiscal year 2025 and 2026, we are well positioned to rebuild our profitability. And with the profit recovery plan also expected to generate savings to reinvest in our brands and consumer-facing initiatives. We are well-positioned to accelerate sustainable sales and profit growth as a faster and leaner organization with stronger leverage from our future growth. During the…

Thank you, Fabrizio and hello everyone. Our third quarter organic net sales increased 6% at the higher end of our expectations. As Fabrizio mentioned, we are pleased with the progress we've made thus far in Asia travel retail, with reducing retailer inventory and the corresponding return to net sales growth. These achievements in the quarter were a bit earlier than expected and led to a partial shift in the expected timing of the resumption of replenishment orders from the fourth quarter to the third. Partially offsetting this growth was lower-than-expected net sales in Mainland China, reflecting the impact of ongoing softness in overall prestige beauty, in part due to subdued consumer confidence and softness during holiday and key shopping moments. Our earnings per share of $0.97 exceeded our outlook for the quarter, due to the acceleration of skin care, the return to net sales growth in our Asia travel retail business, tighter expense management and a lower tax rate. The reduction in our tax rate was largely driven by the shift in our geographical mix of business. Regarding our regions, organic net sales in our Europe, the Middle East and Africa region increased 12%, driven largely by the growth in our Travel Retail business. Our Travel Retail net sales increased strong double digits, returning to growth after seven consecutive quarters of decline given the sequential acceleration of retail sales and shipments, as well as the anniversary of lower shipments last year, which were pressured by transitory headwinds in Hainan in Korea, as well as limited international flights, visas and group tours from China to other markets last year. Elsewhere in EMEA, organic net sales in our priority emerging markets increased strong double digits where we drove growth from most brands and in most channels of distribution given our strategic initiative…

The floor is now open for questions. [Operator Instructions] Our first question today comes from Bryan Spillane from Bank of America. Please go ahead with your question.

Thanks, operator. Good morning, everyone. So Tracey, I just wanted to ask I guess a question about the 4Q guide and what's implied. So I guess, the implied margin in 4Q steps down from 3Q, yet the revenue will be roughly the same. It just implies maybe there's not as much leverage. But so if you can just give us some perspective on the margin step down quarter-to-quarter. And then as we think about the run rate into 2025 is there anything that we should read into the fourth quarter guide that would sort of inform exit rate for 2024 into 2025 both in terms of organic sales and margins. Thank you.

Thanks, Bryan. When you think about the fourth quarter and what I said in my prepared remarks, I talked about some shifts that are occurring in the fourth quarter. So we did shift some advertising expense out of the third quarter and into the fourth quarter and that was to support some of the timing of the activity that we had in the fourth quarter both innovation as well as some of the holidays in the fourth quarter. I also talked about the fact that Travel Retail – Asia Travel Retail, we resumed shipments earlier than what we had expected in the third quarter. So there are – it's hard to look at Q3, Q4, you really need to look at the second half together because of some of those shifts. What's impacting our fourth quarter performance is – and the change in our guidance is softer growth of prestige beauty in Mainland China. The continued macro uncertainty that retailers are cautious in many markets have. We also have higher currency than what we had expected. So that is pressuring our EPS a bit as well. But when you look at the second half compared to prior guidance, what you will see is some of the expense savings that we realized and that I again talked about in my prepared remarks, we are actually flowing through. So we are offsetting some of the currency downside that we had and we're also offsetting some of the sales softness that is embedded in our updated guidance range.

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

Great. Thank you. You mentioned several times that you've seen improvement towards targeted retail inventory levels in travel retail but not quite there yet. So can you talk about exit rate on the quarter more recent performance in Asia Travel Retail, particularly in Hainan and Korea and then also China both on and offline. And just what consumption looks like more recently your views on the 618 festival upcoming. It sounds like you're going to spend a bit more money on that than you had previously anticipated and just your outlook there. Thank you.

So, global trade retail return to growth also driven by frankly growth and retail growth across all the regions. So, the first important point is retail sales growth. And this was very, very strong in EMEA Americas in many parts of APAC and was single-digit in the China TR part. But this is a very important progress versus the past. And this is for Estée companies brands is great news also for the future. The second thing that we are seeing is a very robust traffic recovery across the travel retail channel which is driving the sales to travelers there is work to be done still on conversion which is the areas of improvement that we are still working on, but we had a lot of work and progress in this by activations and retail division activating particularly in Hainan with a lot of activity and this activation are working. And so we see progress also in this area. And then as it was part of your question, because of all these elements strong improvement in the inventories in our retailers and so reaching the targets in several retailers and in several SKUs ahead of our original communicated target. So, at the end, this created a very good growth which is based on retail growth and sell into replenishment because of the decreased inventory levels versus the past. This combination is very solid. We expect this to continue and to progress in line with our goals.

Our next question comes from Lauren Lieberman from Barclays. Please go ahead with your question.

Great. Thanks. I just had a question about spending levels. It was great. Tracey thanks for being so specific on the advertising and the reinvestment this quarter and then shipped into 4Q. But if I remember in 3Q, there was also some timing shift on spend. So, I wanted to talk a little bit about maybe the decision tree of like when to put that spending in? Is it -- because if it's shifting is it about pace of getting innovation ready and launched? Is it about the consumer environment, maybe avoid putting money in play that would be like pushing on a string if the consumer isn't there. But it does feel like some of those spending plans are shifting gently quarter-to-quarter. And so I was curious if you could just comment on that. Thanks.

Yes, well, you outlined a few of the reasons that we would make a decision to shift some of the spending. So, one of the things that we saw early in the quarter towards the middle of the quarter is that some of the holidays particularly in China were not performing as we had anticipated. I think we mentioned in our prepared remarks holidays that are important for us Chinese New Year and Valentine's Day. We're closer this year, actually overlapped a bit than in prior years. Valentine's Day is actually a pretty strong gifting moment for us in China. Our team does a fantastic job of supporting Valentine's Day -- both Chinese New Year and Valentine's Day are less promotional holidays than some of the other holidays. But we didn't see the lift that we would normally see out of those holidays and trending into other holidays in the quarter we made the decision or the China team made the decision that it was best to shift some of that advertising to the fourth quarter and support some of the holidays that are upcoming in May and then obviously the big 618 holiday in June. So one of the things that we've talked about for a long time is the agility that we have created particularly in our advertising spend that allows us to take some of those decisions so that we can better match our advertising spend and when we think consumers will be reacting and responding whether it's to our gifting programs or our innovation programs. So that is what you saw in Lauren in the Q3 Q4 shift.

Our next question comes from Dara Mohsenian from Morgan Stanley. Please go ahead with your question.

Hi, Tracey, I wanted to stick with that question, but perhaps look out more longer-term. Obviously, you mentioned higher investment in fiscal Q4 and the shift from Q3 and also you had better-than-expected expense management in Q3. So can you just take a step back and discuss the pace of reinvestment you expect behind the business over the next few years? How much of that is captured in the difference between gross and net savings and the profit recovery program? And then how the pace of that reinvestment fits with the savings from the profit recovery program and how you think about the savings. So, really the cadence annually looking at reinvestment versus savings as you look out over the next few years. And how they interrelate with each other?

Great. No, thank you for the question. So, yes, let me take the opportunity to talk as you asked about the profit recovery plan. We're always focused on profitable growth, let me start there. The actions that we're taking both within the profit recovery plan as well as outside of the profit recovery plan are focused on profitable growth. The profit recovery plan is an accelerator of our growth and in particular an accelerator of our margins. And let me just try to simplify it a bit. I know we've said that we will share which we will more with you in August once our plans are complete and we provide guidance for the next year, but the profit recovery plan is first and foremost focused on restoration of our gross margin. Now we're mindful of shifts in category mix and channel mix relative to history. Obviously, we had growth in fragrance in our artisanal and luxury fragrance portfolio and that's very important. We're also focused on restoration of our makeup growth. But certainly as you saw in this past quarter, we are also experiencing the acceleration of our very important skin care category, and we expect that that will continue. The biggest drain on our margin has been our gross margin. And it's in the aftermath of the pandemic. It has been the biggest focus of our recovery, and we are focused on price realization. Part of that will be driven by the actions that we are taking in terms of inventory management to control discounts in excess and obsolescence. You saw a bit of the results of that in Q3. And you will see certainly more of that in fiscal 2025. So that is a very big focus of our profit recovery plan, the focus on restoration of…

Our next question comes from Filippo Falorni from Citi. Please go ahead with your question.

Hey good morning everyone. I had a question on the Mainland China business. You clearly mentioned strong start in January, but then a deceleration. You mentioned that the exit rate has been soft in the country. So maybe you can comment particularly like, what you've seen more recently from a category growth standpoint, promotional activity levels and maybe market share? And then maybe longer term, if you take a step back, based on your analysis on the market, what do you think has been the main driver of the weakness? Is it mainly macro related? Is it more trade down in the category? Or are competitors doing better? Any sense of what the drivers of this slowdown will be helpful. Thank you.

Yes, sure. On the -- in this moment, the slowdown, the softness is the overall prestige market. And that's what is softer than what we originally expected and that's what is stuck in Mainland China. What I want to clarify is that, we need to look at the -- we do look at the Chinese consumers in total and not only the segmentation the market does. So there is a Mainland China's consumers, there is Hong Kong SR. There is the TR China which includes Hainan for example in other parts and there are the international traveling people, which for tourism or business travel from China to Tokyo, Paris et cetera. So, we see actually progress in the total Chinese consumer consumption on our brands and they are very solid. And when you took Mainland plus the progress in Hong Kong SIL plus the TR China retail progress that I was speaking about in the previous question, plus the success we see of our brands internationally the Chinese travelers now are growing more for example in Japan, for example in Paris. And so when you put all these numbers and frankly, they are all solid numbers, except the international travelers in other cities, which is an estimate in our model, but we see clear progress and there is progress between quarter two and quarter three despite the softness in Mainland, and there is actually their turn positive, very interestingly positive in quarter four estimates for the future. So, the trends are also depend by channel. And the drivers, first of all, at different consumers, the consumers that travel both for vacation and internationally tend to have been the high end. In this moment, the softness is more in the middle in the consumer sentiment of the middle class. We tend…

Our next question comes from Steve Powers from Deutsche. Please go ahead with your question.

Yes, hey good morning, Fabrizio and Tracey. Thanks for the question. So I wanted to clarify, I think Olivia had asked about it, but on the trade inventory in China, it sounds like on certain SKUs, certain parts of the portfolio you're ahead of schedule and clearing that inventory backlog. But the total portfolio seems like it didn't quite hit that April 1st target you had. So is that the right read and just your confidence in being able to ship to consumption across the total portfolio in the fourth quarter? Is that intact? Or is that part of the lower organic outlook for the fourth quarter versus what was implied back in December. The second question that I really want to…

Yeah, no.

Sorry go ahead, Tracey. And I can follow-up if that's okay.

No, no, go ahead with your second question, Steve.

Well, that was a clarification. So I want to put Clinique on Amazon. Historically, you've cited for a long time hurdles launching on that platform that were at least to me a combination of questions around achievable unit economics on that platform, the brand experience for consumers and being able to curate that effectively. And then just your own visibility into the required consumer insights. So just to the extent that that's correct, how did you overcome those hurdles and get to a point where Clinique on Amazon in your mind is the right time for that? Thank you.

Okay, Steve. So I'll take the first part of that question on the inventory in Asia Travel Retail and Fabrizio will take the Amazon Clinique follow-up question. Regarding the inventory in trade in Asia Travel Retail, we did reach the objectives that we had in the third quarter actually before April. And so the reason that we ended up shifting a bit more from -- or doing a bit more from a replenishment standpoint in the third quarter is because we actually reached those levels a bit earlier than what we had anticipated. We anticipate reaching them by April, which is the beginning of the fourth quarter obviously, and we reached them within the third quarter. So that is the reason why some of the shipments were a bit higher in the third quarter and we will expect the retail sell-through in the fourth quarter. And so – and as Fabrizio mentioned, we are expecting as well an acceleration of retail in the fourth quarter. Just remember for the cadence of what we're anniversarying we actually had some disruption even in the fourth quarter as it related to Hainan last year. So we are going to see a bit of a disconnect between retail and net for a couple of quarters because of the significance of the interruptions that we had both at the beginning of the third quarter last year and the end of the fourth quarter last year, as well. And so we would expect that net will as we replenish relative to the comparison year-over-year to last year then that would be ahead of retail but we will be maintaining the inventory levels in the range that we and our retailers have agreed to.

Yes. And on Clinique-Amazon I want to say, one of the important progress we are making on Clinique is the initiative of building on Clinique heritage in active derma and relaunch the brands in North America and UK in this moment and globally soon on this overall platform. The Amazon introduction in the US is also right for Clinique in the context of this big launch because a lot of new consumers that are very high consumers of active derma are also in this chart. Amazon provides expanded consumer reach a lot of new consumers we expect to recruit, to engage and to educate new consumer by this new channel. Amazon in this moment is a fast-growing online platform in the US and the premium Beauty store has been clearly a contributor to the overall market growth and particularly has been an important brand discovery for some consumers and also consumers are new consumers to Clinique. And so the early results are very promising. And the first period has been extraordinarily positive frankly and we have expectation that this will continue and will accelerate over time. So part of your question why was the right moment now, I think because now the model of Amazon has evolved in a situation where there is a better fit between the Clinique brands and the Amazon model and the opportunity to communicate the heritage, the equity, the education and the various ideas behind the science of active derma of Clinique is now there. And so we believe the brand can express its fundamentals correctly on the platform and the work that the Clinique team has done in providing amazing asset quality of execution to achieve a very good quality expression of the brand on the platform also reassured us that is the right moment and is a very good fit. And as I said initial results are confirming that.

And our next question comes from Andrea Teixeira from JPMorgan. Please go ahead with your question.

Thank you. Good morning. I have a question for Fabrizio and then one clarification for Tracy. Fabrizio, I have a question on the US sales. If you're seeing any acceleration in shipments as you exit the quarter, it seems that the third quarter was still negative excluding the strength in Brazil and Mexico. So, I wonder if you can comment on how this innovation that you're putting and more money behind M·A·C and Clinique has been handing out as you exit the quarter? And also a clarification for Tracey. I appreciate all the details of the profit recovery into fiscal 2025. By my math roughly the $700 million operating profit benefit at the midpoint. Should we be thinking of this benefit being mostly spread with seasonality and excluding the shorter quarters or mostly back half weighted as you do this plan? Thank you.

So, I'll take your last part of the question first. We'll give more guidance on the calendarization of the profit recovery plan in August. We're still -- we're well into the finalization of some of those plans and making taking some decisions within the next couple of months. So, we'll be able to provide you with much better guidance on calendarization in the August time frame.

Yes. On the U.S. -- no, I think -- actually U.S. in quarter three has been growing low single -- sorry North America in quarter three is growing low single-digit. And if you exclude the M·A·C loyalty program actually it's getting closer to mid-single-digits. So, is -- there is growth in North America in quarter three. Said this, there is softness in consumer sentiment in this moment and the market growth is moderating in North America. So, obviously, there is pressure in -- particularly in certain channels. There is pressure but the quarter three was in the right direction and it was in line with our goals. And for us the positive is that we had for example a positive impact on Clinique on the part of March. And in this part of March, already we saw the impact of that -- positive impact of that. If we -- you can assume that we will have in the full quarter four, the impact of Clinique on Amazon, this for example, will be a positive element in the mix. We assure that.

And ladies and gentlemen, this will conclude today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1:00 P.M. Eastern Time today through May 15th. To hear a recording of the call please dial 877-344-7529 using passcode 5758677. 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. You may now disconnect your lines.