Good morning and welcome to The Estee Lauder Companies Q1 Fiscal 2025 Earnings Release and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Rainey Mancini, Senior Vice President of Investor Relations. Ma'am, please go ahead.

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 non-comparable impact of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the investor section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our Brand.com sites and through third-party platforms. It also includes estimated sales of our products through 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, Rainey, and hello to everyone. For the first quarter, we anticipated a challenging start to fiscal year 2025. Our results today are largely consistent with the outlook for the quarter we offered in August. Organic sales decreased 5% at the low end of the expected range, driven by double-digit declines in mainland China, global travel retail primarily owning to Asia, and Hong Kong SAR. Excluding these three areas, sales in the rest of our global business rose 1% both on a reported and organic basis, while retail sales growth accelerated sequentially from 2% to 3%. A number of markets continue to deliver organic sales growth in our first quarter, led by Japan, where we gained prestige beauty share. The developed markets in EMEA and our emerging markets also grew organically, while North America declined modestly as it compared to a big innovation launch calendar in the previous year. While we are not satisfied with our organic sales performance, we are encouraged by initial results from several pillars of our strategy reset that we announced in August, which I'll elaborate on in a few minutes. Despite a lower level of totally company-reported sales, adjusted gross margin expanded by over 300 basis points. Initiatives of the PRGP drove improvements, as Tracey Travis will describe. We strategically increased AAP spending as a percentage of sales in support of our robust innovation pipeline to realize over 100 basis points of adjusted operating margin expansion, despite significant operating leverage. We delivered adjusted EPS of $0.14, better than $0.11 in the year-ago period, and $0.04 above the high end of our outlook range. Looking ahead, as the quarter evolved and through October, it became increasingly apparent that we are facing greater macro headwinds for fiscal year 2025 than we expected in August. First, the…

Thank you, Fabrizio, and hello, everyone. I'll begin by reviewing our financial results for the first quarter, followed by the outlook that we are prepared to share today. As Fabrizio mentioned, our first quarter organic net sales declined 5% at the lower end of our expectations. Our adjusted earnings per share was $0.14, which exceeded our initial outlook for the quarter, primarily due to the timing of certain expenses. Starting with our regions. Organic net sales in our Asia Pacific region decreased 11% mainly driven by further softening in overall prestige beauty due in large part to our consumer sentiment in Mainland China. In addition, we experienced a net sales decline in Hong Kong SAR, where sales were pressured by lower spending from traveling consumers as well as reduced foot traffic at retail. These lines were partially offset by continued strength in Japan, where domestic and traveling consumers drove double-digit growth in both brick-and-mortar and online channels. Organic net sales in our Europe, the Middle East and Africa region decreased 4%, driven largely by the ongoing challenges in our Asia travel retail business. Our global travel retail net sales decreased double digits due to lower replenishment orders in Asia travel retail. This reflected the further retail market deceleration and worsened consumer sentiment in China, resulting in lower conversion rates. Consequently, while we managed to reduce our overall initial -- overall inventory levels in the trade, it was a slower pace than we initially expected. Elsewhere in EMEA, net sales grew low single digits, benefiting from commercial activations like Estee Lauder's #NightDoneRight campaign as well as both existing products and new product launches, including the Clinique caplet franchise. Luxury fragrances was also strong, led by Le Labo. Retailer and pure-play sites drove overall double-digit growth from online channels. Organic net sales…

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Dara Mohsenian from Morgan Stanley. Please go ahead with your question.

Hey, good morning. So clearly, the external circumstances have worsened in the beauty category, particularly in China and Asia Travel Retail, as you mentioned. Just wanted to get your perspective on the internal reaction to that. A, just from a productivity standpoint, is there more you can do beyond the PRPG program. Tracey, you alluded to that in your prepared remarks, but just the significant pressure on the business and the dividend cut today, can you give us a bit more detail on how much more aggressive you can get on cost structure, the potential areas you're looking at? And then, b, just the other side of that, is how much reinvestment might be needed going forward to drive a top line recovery. So any thoughts there in light of the industry conditions at this point would be helpful. Thanks.

Sure, Dara. So obviously, given the situation, and I discussed this a little bit in the prepared remarks, we are evaluating additional actions related to the PRGP and beyond, given the continued pressure on the business. So we have identified some additional cost savings to offset some of the volume pressure that we saw in the first quarter. There are more plans under discussion as it relates to the PRGP. As it relates to investment, we did protect some investment in the first quarter. We actually did experience a bit of deleverage in more of our consumer-facing areas like marketing, advertising and promotion as well as selling. We will do that again in the second quarter. So that is some of what is embedded in the guidance. And obviously, Stephane and Akhil will be communicating going forward what the plans are that are in process right now being worked on in terms of the new actions that might be incorporated under the PRGP as well as other growth areas as well. But we are very much focused as we have communicated previously. Under the PRGP to free up costs, obviously not only to improve our margin, but importantly, to fuel additional growth for our brands and more to come on that.

And I want just to add that on the reinvestment on top of the amount of funds that we need to reinvest is the improvement of the quality of this investment and on the return on these investments where we are doing as part of the PRGP a lot of work. And this means, for example, what we call the strategy of increasing our precision marketing and our consumer-focused marketing, which is basically the recognition of the improvements we need to do in the digital social media part, in the way we go to market in every market of the world in this area. And there are some exciting progress happening as demonstrated by some results in the market share that some new innovation created while using this precision marketing techniques. And then is the -- also the winning -- the acceleration of winning fast in growing channels is obviously a big part of that. Because when you are present in the growing winning channels with our brands faster and with more services and clarity, like we are doing, as I explained in my prepared remarks in many markets. This makes the return on the investment that we are doing better and more productive. So it's a combination of investing more as Tracey explained and making every dollar count more.

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

Thank you very much. And good morning. I was hoping we could step back a little bit, just amidst all this volatility, you get some perspective on how you see your market share standing across key markets, your expectations for how those market shares should trend into 2Q and over the balance of the fiscal year? And to the extent possible, how you see different regions contributing to the negative 6% to negative 8% organic growth call for second quarter? That would be helpful. Thank you very much.

Yeah. So in terms of the regions, and Steve, you know we normally don't give regional guidance, just our overall guidance. But obviously, with down 6% to down 8%, we would expect as we said, continued pressure from China and travel retail. We've also seen, and I think Fabrizio will touch on this point on the market share. We have seen slowing in other markets as well. So when you think about last year first quarter, we had double digit growth in several markets in North America and APAC. And we've seen that progressively decelerate, still positive. And I'm talking market now, but progressively decelerate throughout the four quarters. So part of the uncertainty is whether or not those markets will decelerate again in the second quarter. But we are expecting that China and Travel Retail will be down meaningfully in the second quarter as they were in the first quarter. And the rest of the business, which Fabrizio talked about what the results were in the first quarter being a bit of a pickup in the second quarter, but resulting obviously in the Q2 guidance that we gave.

Yeah. And in market share, I mean, maybe I should -- we can speak about the market share plans in every single region of the world. But let me focus on what will make a big difference with China, U.S., Japan, so the big markets. And so in China, I think this quarter, in a declining market, we had proved that when we focus on the strategy that we just discussed, meaning focusing on skin care in the case of China, the night skin care, focusing on winning in the growing channels, focusing on improving our precision marketing and focusing on leveraging very strong innovation. We can get market share growth in a very difficult market situation. In China, the growth we got in skin care, which is more than one full point of market share growth in skin care is very, very strong. And this is driven by this innovation, for example, the La Mer brand and their own innovation. We grew also market share in makeup, where the activity, for example, was less than in skin care, our activity was less than in skin care. We still grew market share. This shows at least the clear strengths of our brand equities that when activated correctly via market share growth. So in China, we are optimistic on the opportunity in the future. Japan was another great example where we focused particularly in the case of Japan on our fragrance portfolio in the new Le Labo store and with the new Jo Malone stores in Tokyo that are flagship stores and the result has been an extraordinary, frankly, 200 points of market share gain in fragrance, becoming the number one fragrance company in Japan in only one quarter. Again, shows that the focus, when we put the focus on the…

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

Great. Thanks, good morning, everyone. I wanted to talk a bit about the dividend cut, both in terms of timing and kind of the message. So first, just in terms of timing, why not clean this up back in office? I know that China worsened during the quarter. But I would argue it's not to the degree that dividend should have come into question. And then the second thing is just on the message. Should we be thinking here about it because of time line and magnitude of earnings recovery when we think out over the next several years, should we be thinking about cash and reinvestment needs because there's hardly a leverage problem, there's not a balance sheet problem, but this is a pretty big change. So timing and sort of the message and how we should be thinking through this beyond there just being room for new leadership? Thank you.

Yeah. Thanks, Lauren, for the question. Look, reducing our dividend is not an indication at all of what we think about our long-term growth opportunities. Given the pressures, not only in the first quarter, which, to your point, we expected, but in the second quarter, which is a difference, obviously, than where we were in August. As we looked at recognizing the level of uncertainty that we are experiencing for the balance of the year, which caused us to pull our guidance. We thought it appropriate at this time as well to look at the dividend. When you think about paying $0.66 dividend with the earnings, the $0.14 that we had in the quarter. And obviously, what we guided for the second quarter, it was appropriate for us to rightsize the dividend at this time to make sure. Obviously, we don't have a liquidity problem to your point, but recognizing the prolonged situation in terms of pressure in our markets, rightsizing the dividend still a very good dividend yield for investors. But rightsizing it was the appropriate thing to do to protect the cash that will be needed, obviously, for additional actions that we may take under the PRGP as well as additional investments we may make to support growth. So really looking at it into totality in terms of total shareholder return and figuring out what's the best way for us to invest back in the business as well as obviously continue to return a nice yield in terms of dividend to our shareholders.

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

Thanks operator. Good morning, Tracey. Good morning, Fabrizio. I guess, my question is more related to the management change and the qualities and skill sets that both you and Tracey were looking for in terms of replacements. And I asked that in the context of you both have been around this company as it was effectively turned around and brought it to a very amazing peak. And the landscape's changed a little bit for sure. Maybe that understates it. And so just I think people are trying to understand what comes next and not asking about the people specifically, but just the qualities, the skill sets you were looking for? And I guess how it informs like what you think needs to be different, right, as the company kind of charter through these next few years relative to maybe what you all brought to the party over the last 10-plus years.

Yeah, first of all, the -- let me say, first of all, what has to be different in the business. As you know, we have announced what we believe is the strategy reset. And we are working hard to rebalance the growth model of the company and avoiding in the future overexposures to areas of the global world that becoming too volatile and more uncertain. And so the rebalancing for the certainty of growth. Just to make an example of this because these actually in many areas. This concept of balance growth better exposing to the company, to the growth trends of the world is referred to countries, but it's also referred to channels, referred to consumer segments in a very broad way. And obviously, in this moment is referred to the overall Asia Travel Retail and overall China market volatility, where we have rebalanced 10 points in only two years already. And this year, more rebalance will happen. And then this refer to channels where the proportion, for example, of global department stores versus the other channels, which in this moment are growing faster, is changing in favor of the winning channels and et cetera. So all this work, by the way, on consumer is, obviously, the penetration of young consumers to mention one. So all these important strategic rebalancing elements is something that we believe we need to continue to do. And we need leadership that has the characteristic that can really look at the business in this way. And so a big understanding of the global market dynamics and understanding on the global consumers and continuing the work that we have started of focusing the company on the consumers and on the big consumer changes that are happening around the world leadership that will focus on with…

Our next question comes from Rupesh Parikh from Oppenheimer. Please go ahead with your question.

Good morning. And thanks for taking my questions. I just wanted to go to the cash flow statement. So I just want to get a sense of if there's opportunities to further reduce CapEx to better align with the weaker earnings part of the business currently? And then I just wanted to also get your thoughts on the health of inventory as you see it to that?

Yeah. So -- and I'll start with CapEx. We have already reduced CapEx from what we had initially expected to invest this year. And that is certainly one of the areas that we're looking on as it relates to cash, along with obviously, improvements in working capital. We made some big improvements last year as it relates to inventory. So our inventories are in pretty good shape. But obviously, given the further sales declines, that is something that we are very much focused on in terms of making sure we are faster to react and respond to sales declines in our markets. And keeping the obsolescence in discounting under tighter control. So we've gotten much more agility in our planning processes and the connection with certainly our supply chain to make sure that we're making the right -- taking the right decisions as it relates to production as well as the overall management of the network.

Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question.

Hi, thank you. Good morning, everyone. I actually wanted to circle back to Asia Travel Retail with a question. You mentioned the lower replenishment orders. So could you give us a sense of maybe where retail inventory levels are currently maybe versus a year ago? And how much further destocking you expect, I guess, ultimately, how do you sell-in, sellout trends to evolve throughout the balance of the year? Thank you.

Yeah. So we definitely have lower levels of inventory in the trade relative to last year and even last quarter. So we have made progress. As I said in the prepared remarks, as it relates to bringing down the inventory and trade in Asia Travel Retail. Because of deceleration of the market, we didn't make as much progress as we had expected. So it is taking a little bit longer. But again, we're not giving guidance for the second half of the year, but we do expect even in Q2 to be able to make -- assuming no more significant change than what we've reflected in our Q2 guidance. Some more progress in terms of inventory in the trade. Right now, it's really a function of the market volatility. Some of the trade that had built up or the inventory that had built up during the pandemic years, we have managed that down. And now it's a matter of the current market fluctuations that's impacting the levels of inventory that we have in the trade, but we're in a much healthier place than we were certainly a year ago, given the significant actions that we took, particularly in the first half of the year to bring our inventory levels down.

And to give a dimensionalization just to add what Tracey saying, is we actually have the level in the last several years, but the market is lower than it was in the previous year. So that we should need to continue doing some work. But definitely, there's been extraordinary progress, and I would like everyone to know that the team is very focused in this progress and also our vision of quarter to reflect the need to continue this never let pass more than a few months when we decided to reflect the market trend also in the level of inventories.

Okay, thank you.

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

Great. Thank you. I wanted to ask more about the Q2 outlook, more so for profit than sales and whether you could talk about what's embedded from a deleveraging aspect versus maintaining investment versus perhaps more difficulty in achieving savings as part of the PRGP. Effectively, just helping us bridge from sales to EPS, is it like a much bigger sequential dollar increase than in the years past and up pretty considerably on a year-over-year basis as well. So essentially, what's driving costs up so much in Q2 to help us assess what that pressure looks like in the second half of the year when you're not giving us additional color? Thank you.

Okay. So I'll give it a shot, Olivia. So I would start with gross margin. We expect that gross margin will continue to improve in the second quarter. As I said in the prepared remarks, not as much year-over-year as in the first quarter. But from first quarter to second quarter, we will expect -- we do expect even on declined sales, a further improvement in gross margin. On a 6% to 8% decline in sales and that being in China and Travel Retail and Travel Retail, in particular, that does put pressure on our expense base. We have talked in the past about both China and Travel Retail being quite profitable areas for us given the productivity per door in that region. And so that is putting some additional pressure on our expense base, but we also are protecting some investments very selectively in areas of the business that are working. And so it's a big quarter for us, obviously, with holiday. We do have some new innovative advertising that we are doing behind some of our faster growth areas in order to make sure that we do set up the business to have the best holiday possible in light of the declining sales and 11/11 as well as, obviously, going forward into the second half of the year. So advertising is one area that is continuing to deleverage, selling as well, making sure that we have the right staff in our channels of brick-and-mortar distribution in order to execute the sales. And then the other area that we've protected strategically this year and continue to do so, obviously, rationalizing that as we see performance come through is store investments. And so we have brands like Le Labo and Jo Malone, who are freestanding store brands in addition to other channels of distribution. But doing quite well and growing, and we are investing in their store base as well. And so those are the areas predominantly that we are protecting from an investment standpoint. And it relates to the PRGP, what we had had previously, and again, I'll reiterate it, is we expected the first half of this year and really much of this year to see PRGP benefits in our gross margin, which we're obviously seeing and more benefits starting in the second half of the year as it relates to some of the restructuring activities that we are taking under the program. And so the cadence of when to actually see some of those expenses reflected, obviously, being offset with some of the sales declines in the first half of the year would be in the second half of the year. But again, be mindful that the -- when you have mid-single-digit declines in your business, it does create deleverage on the rest of the business that is -- the PRGP is helping, but it's still deleveraging.

And the only thing I want to add, again for perspective to what Tracey explained, is the fact that there is a mix factor because where the markets decline. The majority of the change we are proposing is as we explained China market and Travel Retail Asia market. These are two markets where we have big market shares and with big market share can scale and we scale and profitability. So those are important profitable markets with us where the decline is happening. And this important decline of markets where we have scale, market share and profitability, obviously, it's more painful in terms of mix impact on a single quarter by quarter two that if the decline was more average around the world, which is not, in this case, is very focused on those two issues.

And ladies and gentlemen, with that, we've reached the end of the allotted time for today's question-and-answer session and today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.