Good day, everyone, and welcome to The Estee Lauder Companies Fiscal 2024 Fourth Quarter and Full Year 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 report 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 on 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. 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 call. And now, I'll turn the call over to Fabrizio.

Thank you, Rain, and hello to everyone. Today, we will review our results for fiscal year 2024, which represented a difficult year for the company and discuss the implementation of our strategy reset to drive improving performance in fiscal year 2025 and beyond. After a challenging first half, we returned to top line growth in the second half of fiscal year 2024 with organic sales growth accelerating from 6% in the third quarter to 8% in the fourth quarter. And we delivered an adjusted operating margin of 11.6%. This level of profitability was higher than the first half and expanded from the second half of fiscal year 2023. All told, for fiscal year 2024, our organic sales declined 2%, we achieved modest gross margin expansion and adjusted operating margin contracted 120 basis points to 10.2%. These results were in line with the revised outlook we offered in May for sales and better than expected for operating profitability despite the further softening of the prestige beauty industry in China and Asia travel retail. That said, we remain unsatisfied with this performance. Looking ahead, our fiscal year 2025 outlook reflects continued declines in the prestige beauty industry in China and Asia travel retail. While the PRGP, which remains on track relatively to our previously stated goals, enable us to offset the pressure to profitability from declines in areas of our business that have high penetration of skin care, it yields a slower pace of operating margin expansions for fiscal year 2025 than we had previously expected when we expanded the PRGP in February. For fiscal year 2025, in the rest of our global business, we are planning to deliver improved performance across both developed and emerging markets. To fuel this, our strategic priorities are reigniting skin care, capitalizing on the multiple growth…

Thank you, Fabrizio, and hello, everyone. We navigated through another challenging year across several areas of our business and took specific actions to more sustainably improve our sales and profit results as it became apparent that the recovery that was anticipated to occur throughout the year in some of our markets was impacted by far more volatility. And while we returned to growth in the second half, primarily driven by resumed shipments in Asia travel retail, we are certainly not pleased with our overall full year results, and on top of global prestige volatility, the execution of our strategy has not met our expectations in some key areas of our business. During the year, we also largely completed the basic design and began the implementation of our multiyear PRGP to deliver stronger results against our expectation or a more gradual rebuilding of sales growth along with an acceleration in profitability. Before I discuss our fiscal 2025 outlook, let me first share with you the fiscal 2024 fourth quarter and full year results. Our fourth quarter organic net sales increased by 8% compared to last year, meeting our expectations, albeit with a different geographical mix than we anticipated, which reflected lower results in mainland China and North America due notably to further softening in overall prestige beauty in both of these markets. A combination of tentative consumer sentiment in China and consumer inflationary pressures in North America are believed to have contributed to the deceleration in both markets. Diluted EPS rose to $0.64 from $0.07 last year, exceeding our expectations, largely due to our operating performance and the reduction in our full year effective tax rate. From a geographic standpoint, organic net sales rose 32% in EMEA, primarily driven by the increase in our Asia travel retail business, given the favorable…

Thank you, Tracey. And I want to make a final comment before we turn to Q&A. Today, I announced my intention to retire from Estee Lauder companies. It has been a privilege, a great honor to lead the company for 16 years, I have been deeply enriched by exceptional colleagues around the world, and I take this decision to retire with gratitude for all we have accomplished. I have two primary objectives ahead of my retirement. First, I intend to execute with excellent strategy reset that the Tracey and I described today, inclusive of our profit recovery and growth plan. It is important to me that our next leader inherits a business with momentum. Second, I plan to work closely with our Board of Directors and my successor, once named, to ensure a smooth transition. My passion for our beautiful company is as strong as ever, and I'm confident in its bright future. Throughout the years, I've deeply enjoyed representing the company with analysts and investors. I look forward to our continued engagement until I retire. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

[Operator Instructions] Our first question today comes from Steve Powers from Deutsche Bank. Please go ahead with your question.

Great. Thank you so much. There's a lot to cover. But, Fabrizio, maybe we can pick up where you left off, as you -- both you and Tracey both outlined a very challenging and transformational time for the company. As you personally look ahead at the priorities facing Estee Lauder, how are you thinking about -- or how would you frame the most important attributes that you'd look for in your successor? And how closely will you be involved over the coming months and quarters finding that successor.

Sure. As I said in the prepared remarks, I will be very involved with the Board in working on the succession. And obviously, as you know, it's the Board responsibility to decide the successor, but we are working all together to get the best output out of the work done for some time. This is a long-term process. It's not something that we are just starting working now, obviously. And in terms of the characteristic of the successor, I think the successor has to be obviously a great leader and understand the key elements of our company. And one of the key elements is being brand builders and people that can develop growth. We are a growth company, and we are a global company. And so obviously, being able to drive growth globally and being able to continue reshaping the cost structure of the company in the proper way that will become even more leverageable with future growth, are going to be essential characteristics. But I would just want to reassure you that the options that the Board has developed, they all have these characteristics. So as I said, the Board is pretty well advanced in the work needed to determine the future.

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

Hi, thanks, operator. And good morning, everyone. So maybe just to kind of try to put this year, fiscal '25, into a little bit of a perspective, maybe Tracey, can you give us a sense of if China hadn't decelerated like it has since you last reported, what would earnings power have been this year? Or maybe to put it a different way, how much -- in terms of your forecast this year and the change in trend in China, like, how much do you think that actually affected earnings power in fiscal '25?

Yeah. No, thanks, Bryan, for the question. So clearly, China and travel retail are important growth drivers for the company, have been historically and they're also high-margin areas of the company as well. So, when we see pressure in those areas as we saw in fiscal 2024, you can see what the impact on the company is. So if, right now, in our guidance, Mainland China is expected to be anywhere between flat to down high single-digits and travel retail Asia is expected to be down double-digit, that puts quite a bit of pressure on our earnings results and our EPS. The fact that this year, with those two pressures, we actually will have EPS up is really because of the contribution of the profit and recovery growth plan, the PRGP, which we will refer to it from now on, as we said in the prepared remarks. So that is delivering -- if you think about delivering around 51% at the low end of the range given the fact that we're relatively flat if you take the midpoint of our range in terms of our growth this year what we're expecting. So that means other markets like the Americas, APAC outside of China and EMEA outside of travel retail are expected to grow. But if you take that contribution, it is being offset by some expense deleverage. It's also in looking at your models, you need to add back some of the interest expense from our debt that we took out for the acquisition of TOM FORD in DECIEM and bonus as well back at target levels. So those are some of the differences. And then obviously, you heard our estimates for currency, which will be slightly dilutive for the year. So all of that puts pressure on our overall EPS. But still on a year that is close to what it was last year from a sales performance perspective, we are demonstrating improved margins and improved EPS. And that is because of -- and with a negative mix impact related to travel retail in China and that is because of both the PRGP as well as other actions the company has taken to really halt a lot of activities that we would normally do in the course of the year. We are also, importantly, as I said in our prepared remarks, protecting some investment for the momentum that we spoke about in the prepared remarks, in categories like fragrance, the active derm category and where we're seeing momentum. That will be important for us when we think forward to fiscal '26 and beyond and have more market growth, hopefully, but also those brands continuing to become a greater proportion of the business.

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

Great, thanks. Good morning. I’m pausing, I had to frame my seven questions. So I wanted to just follow on, Tracey, maybe on the -- what you've just shared and the driver, the fact that there will be earnings growth even with sales flat to down. And you called out halting some activities, protecting some investment, noting all the expense deleverage that there will be, how should I -- why shouldn't I be concerned that there's going to be constraining investments this year because the market doesn't stand still, right? You mentioned North America more competitive. I'm going to guess other companies, whether they are global or local across China, are not going to be pulling back on investment. Everyone is going to want to be gaining share in a market that's down. So how do we know that there isn't too little investment being put back in '25 in the name of putting up some earnings growth? And then frankly, when we get to this time next year and there's new leadership in place or has been named and you have the strategic reset but there isn't another strategic reset. So I threw a lot in there, but those are the things that are in my mind that I'd love to hear both of you comment on. Thanks.

No. Of course, Lauren. So, if you think about when we first described the PRGP, we said we have gross savings, and we are investing some of those gross savings in order to fund the program as well as fuel some of -- create fuel for some of our consumer-facing investments. And so when you think about the cadence of results and savings that we expect from the program, obviously, first quarter, there is some benefit, but that will progressively improve through the course of the year as our actions materialize. So, we are funding some of the consumer-facing investments out of the gross investments in our -- out of our PRGP. I also mentioned that even in fiscal '24, where we had green shoots, you heard, I mean, many of those strategies were put in place before, obviously, some of the innovation that we came out with and some of the plans that we had to expand in faster-growing channels. So we have tried to, in a very difficult year, even in fiscal '24, protect some of the consumer-facing investments. And as we see growth happening in certain areas, we will certainly fund more of it in some of the savings generated throughout the course of this year in the PRGP.

And also, Lauren, I wanted to add a concept here, which is, my intention also announcing the retirement at the end of the fiscal year is also to work together with the Board, together with the team and when announced together with my successor on making sure that we put in 2025, the company in a condition to leverage growth momentum in general, in all the areas where the opportunity will be in the China market where today we see declines to continue to grow market share, and that's the focus. And in terms of the [PRT] (ph) to make sure that we have sufficient investments in all the key areas of the business where this momentum has to be preserved in the future. Those are internally key goals that we are going to pursue. And I hope that the strategic reset that I explained in my prepared remarks, somehow indicate also not only the numbers but the content on which we want to invest the numbers because it's clear that we have extraordinary strengths in our brands and brand equity and in our portfolio. It's clear that we continue to have great, high repeat rates because our products are outstanding [in light of] (ph) the consumer. I hope it's clear that our innovation is getting much stronger in many areas. And in clear that we have two big strategy reset areas. One is the lowering the exposure to declining market and declining channels and substitute this with high-growth market, high-growth channels, the best we can. And the second is actually improving the effectiveness of our marketing plan of our recruitment plans. And so we will get better support to our business, not only spending more money, but all what I said about precision marketing, is all about increasing the power of our recruitment. And finally, you heard me saying that our recruitment is being -- going to be focused more than ever on new consumers. And that, I believe, will make a big difference. And so all what I just said is really the purpose of the transition. And so the transition is going to be tailored to that.

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

Hi, good morning, everyone. I wanted to ask a few questions on the travel retail business, given we have a bit less visibility on the inventory levels. So can you -- it seems like the last two quarters, the industry decelerated in terms of sell-through, but you were up double-digit in terms of sell-in. Can you give us a sense of the inventory levels exiting the year? And Tracey, you mentioned you expect double-digit decline in fiscal '25. Can you give us any sense of the cadence of that decline? Is it more concentrated in the first half and then an improvement in the second half? Any color there would be helpful. Thank you.

Sure. So you're right. As we said, and certainly, as you mentioned, others have said also there was a decline in Asia’s travel retail, particularly in China travel retail in the last few months of our fiscal 2024, and that certainly did impact us. The reason we were up, we were anniversarying very low shipments from the prior year. And so we had in certain parts of China travel retail, specifically Hainan, very low shipments in our fourth quarter last year. And so even with decelerating sales, we were replenishing relative to what we had experienced in the prior year. But because of the acceleration from Q3 to Q4, the deceleration from Q3 to Q4, we did end with inventory levels higher than what we would have liked. And so part of what you see in our first quarter results is making sure that we keep inventory levels at the level that we and our customers want in that region even managing, obviously, the volatility from month-to-month that we and our retailers are experiencing.

Yeah. And I just want to add the perspective that this is actually a big priority for us, is really manage much better stock normalization in TR in the future. And so the -- what you said, which is obviously the retail in quarter four went down much more than expected. So by definition, created higher temporary stocks. We are already reacting in quarter one, readjusting it. That should be seen as a better activity and better management of this in the future. And as I said in previous calls, we are also preparing to build a distribution center in Hainan that will further shorten the time between orders in travel retail and delivery that will make this process better and better over time.

Our next question comes from Dana Telsey from Telsey Group. Please go ahead with your question.

Hi, good morning, everyone. As you think about the distribution channel shifts and the margin impacts, whether going on to Amazon specialty-multi, what does that mean for the business in terms of how you're seeing in North America, in particular, department stores and Amazon specialty-multi? And then with travel retail being 19% of sales, how do you see that in fiscal '25 and the progression as we move forward? Thank you.

So, I'll start with the second one, Dana. Travel retail will be lower than it was in fiscal '24 because we're expecting it to be negative all year. So it will be a lower percent of our mix. And as Fabrizio mentioned, part of what obviously is happening is we're seeing channel shifts. We're seeing some of the travel retail business go to other regions whether it's remaining within mainland China or traveling to back to international travel in certain parts of the world, including, obviously, markets in addition to within the travel retail channel. So we expect that it will continue to shrink as a percent of our mix, at least in fiscal 2025 and hopefully see some stabilization after that. In terms of the faster growth channels that we are pivoting to, I mean, obviously they represent growth. Different channels had different margins. As you know, we don't give specific channel margin information. But to the extent that those channels are allowing us to recruit new consumers, it is certainly margin accretive for the company overall when we see the kind of reversal that we saw even in the last few months, launching on Amazon with Clinique. And so I think that's something that we are focused on. Fabrizio spoke about other platforms, online being a big focus for us as well from a strategic standpoint, platforms in other parts of the world that also represent growth and the recruitment of new consumers. So that is a big area of strategic pivot for us that we expect will be margin accretive for the company overall.

And I’d just want to add that as you have heard from our example today, a lot of these channel rebalancing is also between online and brick-and-mortar. And the online is very efficient for many reasons. On top of that, we’ve used the last few years to develop online platforms that now we are in a condition to scale and to leverage in our activations of the various online channels. And finally, when you invest in a high-growth channel where the consumers are particularly active, particularly the young consumer, the return on the investment in advertising and the ability to recruit the right cost of recruitment actually increase while the cost of recruitment tends to be higher in declining channels. So the overall move for us will be actually positive in the long term. And we are managing this with the profitability mix in mind, one of the key things that we need to achieve.

Our next question comes from Peter Grom from UBS. Please go ahead with your question.

Thanks, operator, and good morning, everyone. Hope you are doing well. I was hoping to ask, maybe, a bigger picture question here, just given all the commentary in the release on the path forward and what has been slower progress in China and Asia travel retail. When you speak to category growth returning to mid-single-digits in fiscal '25, assuming China progressively recovered, what do you think is a realistic category growth expectation in China and maybe Asia travel retail as well as we look out longer term. Specifically, just trying to understand or be curious how you think about the ability to return to 6% to 8% organic sales growth if performance in these regions and channels doesn't necessarily return to growth rates we saw prior to the recent challenges? Thanks.

Yeah, I'll start and then Tracey will have to speak. I assume when you say category growth, you define the category as the prestige global market in total. That's what I understood for your question. And so the overall category growth of the luxury prestige part of the beauty business historically has been growing in the mid-single-digit range. And I think the factor today with China and travel retail Asia declining double digits in this moment in those markets, you see that we are forecasting 2%, 3%. And this forecasting 2%, 3% of the category growth is the reflection that we are not assuming in our guidance for fiscal year 2025, a stabilization of that. And basically, this is our attempt, try not to guess the future that is in this moment is very difficult to predict because of the volatility that Tracey spoke about. So with that context, you see immediately that the difference between stabilized Chinese consumers. So China stabilized and the market is [indiscernible] because the market with a stable growth in China was single digit -- sorry, was mid-single-digit. And so that's the difference between the 2% and the 5%. Now if in the future, we do expect the overall global category, as you define it, to benefit of the stabilization of the China TR consumption and market, and that will make the category stronger. So assuming the category will go back to a 5% global growth also because to be clear, except now the Chinese reset in this period, the demographic fundamentals, the reason of long-term development of this category are intact globally. In fact, you see still pretty strong development in Asia ex China, in Europe, in America, as we said before, despite a gradual reduction of the growth, the growth is still mid-single-digit and plus. So the market has strong fundamentals and the market will go back as it happened in the past. In the past, during, I don't know, the recession of 2008, 2009, the market went down in the 2% and then bounced back to the normal the year after. So we have seen this many other times in the history of the market. And we as a company believe that the strategy reset that we are discussing and the ability of our Profit Recovery and Growth Plan to put us back on track for leverage-ability will put all of us in a condition to grow at least 1 point ahead of the market in the long term and to reestablish our -- the way we think of long-term algorithm as growing ahead of the market.

And ladies and gentlemen, our final question today comes from Rupesh Parikh from Oppenheimer. Please go ahead with your question.

Good morning, and thanks for taking my question. So just going back to the commentary on North America market, you guys called out a strong competitive environment in the Americas. So just hoping to get more color on what you're seeing there? And as you look forward for your planning assumptions, are you expecting a further moderation in the US prestige market?

So in our guidance, we are reflecting the current moderation of the growth because again, in this guidance, we are not guessing the future. We are reflecting what we see currently. And this moderation of the growth, however, brings the market still in the mid-single-digit growth. So it's not -- it’s not a bad market. I mean, US has been weaker than that in the past. So it's still a relatively solid market growth that is happening today. And in this relatively solid market, we are working for dramatic improvements. I think it's important to understand that we have seen progress in quarter four. Because we grew retail even if the net was difficult, but we grew retail. And again, the net was reflecting also some issues happening in many of the retailers in our less fast-growing part of the business. But the retail was growing in July as we revealed the retail has further accelerated -- our retail has further accelerated. Some of our brands like Clinique is showing very exciting progress which is super encouraging. Actually, I would say that all the brands where we have started implementing a new strategy, we see that there is extraordinary interesting progress, which is validating that once we'll be able to implement across the portfolio, all the improvements that we are trying to do, we could achieve the stabilization, which is the first goal that we have in mind, the stabilization. So, stop the decline of market share, stabilize and align with the market growth in the US. So we are -- in summary, we are cautious of the overall market in the US in this moment, but we are positive on our progress in executing an improvement strategy in America.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 01:00 p.m. Eastern Time today through September 3. To hear a recording of the call, please dial (877) 344-7529 using passcode 3757854. That concludes today's Estee 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.