Good day, and welcome to The Estée Lauder Companies Second Quarter Fiscal 2025 Earnings Release and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Rainey Mancini. Please go ahead.

Hello. On today's webcast are Stéphane de La Faverie, President and Chief Executive Officer; and Akhil Shrivastava, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the noncomparable impacts of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales 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 webcast. And now I'll turn the webcast over to Stéphane. Stéphane de La Faverie: Thank you, Rainey, and hello to everyone. Akhil and I are pleased to be with you today for our first earnings call as CFO and CEO of The Estée Lauder Companies. We are incredibly honored to lead our iconic company, defined by our core values and portfolio of beloved brands. Having met with many employees, retailers, business partners, investors and other stakeholders since being named CEO three months…

Thank you, Stéphane, and hello, everyone. It's an honor to be with you today in my new role as CFO of The Estée Lauder Companies. I'm energized to partner with Stéphane as we boldly drive the execution of Beauty Reimagined, our transformative strategic vision. While we have made progress with initiatives under our PRGP, we recognize there's still much to accomplish. As we collaborate with our global teams to simplify processes and execute with speed and agility, we are confident we can achieve a leaner cost structure through significantly expanding our PRGP. We believe this evolution positions us to invest more in consumer-centric activities that drive recruitment and fuel sustainable, profitable growth and cash generation for the long term. I'll discuss this in more detail shortly. But first, let me recap our second quarter results, covering overall performance, organic net sales by region and product category, margin, cash flows, restructuring charges and other items. Organic net sales declined 6%, at the high end of the outlook range we gave in October. Adjusted EPS was $0.62 in the quarter, exceeding our outlook. This reflects better-than-expected gross margin expansion given a higher-than-expected category mix in Skin Care. It also reflects disciplined expense management while we continue to invest in consumer-facing activities to support growth in key areas of the business. Starting with our regions. In Asia Pacific, net sales decreased 11%, primarily driven by double-digit declines in Mainland China, Korea and Hong Kong SAR, mainly due to subdued consumer sentiment. The decline in Korea also reflects our November 2024 exit of Dr.Jart from the travel retail channel as well as the impacts of recent political and social unrest. These declines were partially offset by double-digit organic net sales growth in Japan where both domestic and traveling consumers continue to fuel growth across…

Thank you. [Operator Instructions] And the first question will come from Bryan Spillane with Bank of America. Please go ahead.

Thanks operator. Good morning, everyone. Thanks for all of the detail today, very, very helpful. And I know there's a lot that you've got going on. But Stéphane, maybe just to step back for a sec. I guess as we were - I was just reading through the press release this morning and listening to the prepared remarks, some of what I'm hearing or what it comes across, is there's some prioritization happening, meaning by changing the organization structure internationally, it's going to create, I think, more focus in some of those regions that maybe needed them. And in that light, can you talk a little bit about the portfolio? I know there's been some new stories about the potential, to maybe sell some brands. But absent that, just how are you looking at the portfolio, and prioritizing where the investments go, and maybe there are certain brands, or categories that you'll run more for cash? Just trying to get a better understanding, of maybe how you're looking at the portfolio itself and prioritizing? Stéphane de La Faverie: Thank you, Bryan, no, thank you, very good question. I'm happy to discuss. So first of all, your question is on the organization. Obviously, you saw as part of the press release, we put out this morning, obviously, the change and the evolution of our organization. First and foremost, this organization was thought through to be leaner and faster. Obviously, we are - if you look at the organization at three blocks. One about the one about the regions, one about the brand and one operation, we've really looked at every single of the element, to be able to just like act faster and to deploy and execute the Beauty Reimagined strategy in a much faster way. To your point, Bryan, the…

The next question will come from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning, everyone. I was curious, Stéphane, if you could talk a little bit about how you manage the pace of reinvestment. Because I noticed once or twice through the prepared remarks, you discussed one of the challenges in the past was investing ahead of the curve, investing for growth that didn't materialize. But at the same time, we need to keep reinvesting, right? So I mean to my ears, I feel like the difference between one in the other, is just a matter of success rate in ROI, right? If the sales had materialized, those investments would not have been deemed unsuccessful. So I just need a little help in understanding that change in approach, on spending ahead of sales growth versus spending to drive sales growth? Thanks. Stéphane de La Faverie: Thank you, Lauren, and great to hear from you. So on the - my prepared remarks, what I said what we did in the past is, obviously, we've invested ahead of growth in our capabilities. We did a lot of investment, as you may recall, in term of manufacturing network, in terms of system operating model, innovation centers around the world, for us to be able to just make sure we meet the consumer. And being able to just like deliver, with a more regional manufacturing network. What I'm referring to in terms of investment, is really much in line to the Beauty Reimagined vision, which is investing in consumer facing. So it's really much shifting our investment going forward to be where the consumers are, investing in the right media platform, being in the right the right distribution network with innovation. So in some way, is reducing our investment in SG&A, and accelerating all investments in consumer-facing like advertising, like promotions that we have…

I would add a few things, Lauren, that we are making a clear distinction here between consumer-facing and fixed costs. So as Stéphane said, on consumer facing, a lot more discretion, there's a lot more variability and a lot faster learning, to quickly pivot our plans. In the past, we made some investments, which are big bets in fixed costs and capabilities, then you are stuck with them. And that's the big distinction, we are making in pouring all our investments, to drive business and constantly pivot. And that's what we'll keep driving regularly month-by-month, quarter-by-quarter, and constantly pivot.

The next question will come from Dana Telsey with Telsey Group. Please go ahead.

Hi. Good morning, everyone.

Stéphane, as you think of the new initiatives. Stéphane de La Faverie: Good morning.

Hi. As you think of the new initiatives you're putting in place with the Beauty Reimagined, as we go through the next year or two years, what are the markers you're looking for to show the proof points that it's working? And how are you thinking about the travel retail channel, as we move through this? Thank you. Stéphane de La Faverie: Thank you, Dana. Look, there's five pillars to our Beauty Reimagined vision. And on terms of markers or KPI, we are tracking and we are creating - actually a very thorough way of like tracking and follow every single of our action, to just make sure that everything we do, is going to deliver on this promise that we are making today. The first one is the consumer coverage. What I mean about consumer coverage is our ability, to just capture the consumers where they are. We know we didn't make fast move in terms of new distribution when the consumer was moving. And that's what we've demonstrated, with the move that we made a few months ago, with Amazon and many others like TikTok Shop in Asia and even in the U.S. So we are going to really measure how quickly, we move in this channel and how much we can like capture lapsed consumer, but also new consumer. The second thing is our transformative innovation. I'm committed with the team, to really accelerate innovation in a dramatic way to meet the consumer. We have many great examples already like La Mer, Clinique, Estée Lauder in the U.S. and in China. But also throughout all our France brand. If you think about it, even like Le Labo going from strength-to-strength has been also about their ability, to deploy the right innovation in the right geography around the…

Thank you. Stéphane de La Faverie: You're welcome.

Your next question will come from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hi. Good morning. Stéphane de La Faverie: Good morning.

So we spent a lot of time on the execution plans with the reorganization, the detail is very helpful. I was just hoping also to get a bit more perspective from you on the softer cultural changes, among the workforce that are needed behind the organizational changes, the cultural points you're most focused on emphasizing over the next few years. And just also, how important is bringing in outsiders, whether it's the management, which appears limited so far, even use of consultants, external help as you look to sort of implement these detailed plans that you've outlined? Stéphane de La Faverie: Well, thank you. I love this question. Obviously, cultural change is going to be critical, because it has to be completely honest and transparent. This vision of Beauty Reimagined will be able to execute it as a team, we commit behind one basically the vision, which we are. And that's the reason why we deployed this new executive team, already announced like this morning, and I've spoken to every single leader, and all of them are committed behind it. It is about - we all love this company. We know that culture is like very important. Our values remain extremely strong. And we are actually also realizing, and recognizing where our strengths are. And this is the reason why I mentioned in my prepared remarks that, we are bringing some external partners, to help us in this transformation. There are a lot of like great partners that have done that multiple times. And we are recognizing like, today, we need somehow in this execution of the PRGP. And I'm really committed with the vision we have at the support of the Board, at the support of the executive team that, we are going to continue to build on our culture and our values, and make this company way more agile than it has ever been before. I mentioned it also we are going through the biggest operational transformation in our history. This is going to take a lot of hard work. This is going to take partners outside that are going to help us and guide us. But I know ultimately that every single person that I spoke into - two in this company today, within The Estée Lauder Company, is absolutely committed is absolutely committed to change, is absolutely committed to just bring speed and agility and everything that we are doing so we can rebuild this company, to the rightful place that it belongs, which is really at the top.

Dara, I would add one thing. I mean, of course, as Stéphane talked about, I mean, really what he's asking us all to do as leaders, to support in this is really build a culture of three things that I take away very importantly, from what he's telling us. One, each one of us are owners and leaders, and really empowered and accountable. Secondly, the consumer is at the heart of everything we do, whatever be your function. Whatever be your work, wherever you are in the company. And then thirdly, a clear focus on value creation. And long-term value creation while navigating some of the challenges, and these things are, as a leadership team, we all are owning it along with our employees around the world.

Great. Thanks.

Your next question will come from Oliver Chen with TD Cowen. Please go ahead.

Hi Stéphane and Akhil, as you think about prestige, what's your thoughts on the future of prestige in terms of hybridization, masstige, ingestibles in the broader sense of what the consumer thinks, or doesn't think about what prestige means. Also on your innovation pipeline, which looks quite exciting, what might be nearer term versus longer term? Because there's many great things that are underway, and as we think about the operating margin, just the recipe for expansion back to history, if there's a way to simplify that. I'm sure it's a combination of fixed cost leverage as well as innovation? Thank you. Stéphane de La Faverie: Thank you, Oliver. I'll start and Akhil, can add a little bit more flavor to the margin. So let me just start from the top of like your question about the outlook on the market. Frankly, the long-term fundamental of the beauty market are very, very strong and remains strong. Remember, we play in the areas where middle class is extremely important to future growth. And middle class is continue to rise in many markets around the world that is in the East that is in the West, in many markets around the world. We also, I believe, have a moment in time, we are living a great opportunity in terms of distribution expansion. The buyers have like been completely redefined when it took - it comes to like distribution, and how and where you can connect with the consumers. As we demonstrated, we go from our own freestanding stores with brands like Le Labo or Jo Malone, but at the same time, we are also like able to operate in channels like Amazon Premium Beauty prestige that allows us to connect with the consumer, and seek new consumer and continue with this principle…

Thank you, Stéphane. Hello, Oliver. So Stéphane touched upon our sales growth. I mean, of course, as we look, we are driving the three critical things for long-term value, sales growth, margin and cash flow. And from a margin perspective, you saw that our margins are in the single-digit right now. We have demonstrated a clear way to improve gross margin over the last few years. And there is still a lot more work to do here, and we are confident based on the work we have already done, and what we see ahead that with the whole zero-waste mindset and the supply chain efficiency, we can make significant progress here. So that would be a critical building block as we go towards solid double-digit margin in the next few years. Within OpEx, we are - you saw that we have increased. We have doubled the restructuring program. So that's a significant increase on the employee cost, opportunities that would be there. Secondly, as Stéphane called out, we are step-changing our work on procurement, which means every single line item of our expense, is an opportunity to improve. So that's the second big pillar. And the third big pillar is shared service, where we have done work in the past few years. But we have an opportunity to step-change, with some of the leading partners around the world. So with all of those building blocks, we remain confident that we can move towards a solid double-digit margin in the next few years. And of course, we will share with you more details on the upcoming forums.

Okay. Very helpful. Thank you. One quick follow-up. M&A, Stéphane and Akhil like. There are a lot of good founder-led brands and innovations happening everywhere. How are you going to think about M&A within your culture, or not in terms of as you look forward to new opportunities? Stéphane de La Faverie: I think, Oliver, on the M&A, as you know, part of our strategy, we are laser-focused with Beauty Reimagined, to really reignite growth and rebuild profitability. In that sense we are in, obviously, our portfolio is key. As I said, we have some strengths that we need to accelerate and we have areas, where we know we need to transform. And this is what we are going to tackle in the next few months. To really making sure that we are putting every single of our beautiful brand in the right position, to really accelerate and contribute to the overall growth of company. When it comes to M&A, we will come to you like in the future. But obviously, every time there's an opportunity, we have a team, a great team that is looking at what is available, but it has to be looked with the lens of. One, is it complementary to the portfolio? Is it going to add one thing? And at the same time, we need just also like manage, and balance our overall balance sheet, overall in the near-term.

Yes. The only thing I would add is - that we clear priorities to delever in the short-term, our balance sheet. And then, of course, we are brand builders and we are constantly looking at opportunities. But in the near-term, as Stéphane outlined, our priority would be to deleverage the balance sheet.

Our next question will come from Olivia Tong with Raymond James. Please go ahead.

Great. Thank you so much. You had mentioned a lot about increased complexity of the prestige beauty portfolio, clearly lots of changes both domestically and globally over the last several years. Presumably, you've gone to your key retailers in your early days as CEO. Can you elaborate on your discussions with them? And then also the game plan to capture more of the consumer in Asia, especially given their increased willingness to accept local brands in the premium segment despite obviously very significant investments that you've made. And then lastly, in Western markets, what you're doing to differentiate yourself versus your competition in all key categories? Thank you. Stéphane de La Faverie: So Olivia, like if I'm clear on the question you're asking is, obviously, like from what are we doing from a differentiation, obviously to win. And I think the second pillar of Beauty Reimagined, with the transformative innovation stimulus plan in a way that we are putting out there, is really for us to be able to connect with the consumer in a greater way and in a faster way. As committed, we are going to triple the number of launches that we are going to bring to market within less than a year. That allows us, when you think about this overall acceleration of innovation, to better tailor innovation by retailer to connect with the consumer at different places around the world. And there are clear retailers, frankly, from our own back to consumer to the partners that we are working. That are defined to be more about the trial and recruitment, when some others are much more about like retention and recruitment. So we are really tailoring not only an innovation plan to accelerate, but also an innovation plan that allows us to be able to react, to an increased fragmented distribution around the world that allows us to just capture all the consumers. So I would say, in this one, complexity can be managed as long as you have the right innovation that, goes to the right consumers in the right distribution. And our intent, as part of the first pillar of Beauty Reimagined, is to meet the consumer where they are with the right product, but also at the right price point. And I think this is one of the new elements that we are bringing to just make sure that, yes, La Mer can play in the price tier where they are. But you have multiple brands that have the right to play at different price points of prestige and luxury. And that's what we intend, and you are going to see a lot more innovation coming tailored by consumer by distribution, by price point across, frankly, all the four categories that we operate in, and the many subcategories that we see growing in the future. I hope it answers your question, Olivia.

This will conclude our question-and-answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.