Estee Lauder Cos. Inc (EL) — Q2 2024 Earnings Call Transcript

Hello. On today’s call are Fabrizio Freda, President and Chief Executive Officer, and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you’ll find factors that could cause actual results to differ materially from those forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third party platforms. It also includes estimated sales of our products through our retailers’ websites. During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for this call. Now I’ll turn the call over to Fabrizio.

Thank you, Rainey, and hello to everyone. We appreciate you joining us today. For the second quarter, we delivered our outlook for organic sales decline of 8% and exceeded expectations for adjusted diluted EPS. Organic sales in our global travel retail business decreased 28%, with retail sales trends better than organic performance, reflecting both the execution of our priority to reduce trade inventory in alignment with retailers and efforts by various local authorities to contain structured market activity. We made meaningful progress with trade inventory levels in Asia travel retail and continue to expect to normalize trade inventory levels by the end of the third quarter of this fiscal year. The rest of our global business decreased 3% organically. This decline was primarily driven by the slow-down of overall prestige beauty in mainland China, although our retail sales trends were better than our organic performance. Our global retail sales growth excluding travel retail in mainland China rose mid-single digits. The markets of EMEA delivered mid-single digit retail sales growth, and Asia-Pacific excluding mainland China rose double digits, as did Latin America, showcasing strong fundamentals for brand desirability and the success of our consumer engagement initiatives. Encouragingly, we made progress across several strategic priorities in the first half. Beyond reducing inventories of Asia travel retail, we improved working capital, realized higher levels of strategic pricing, and managed expenses with discipline. For the full year, we are revising our outlook as we have tightened the growth range for organic sales primarily to account for the risk of macroeconomic volatility in some areas around the world and updated adjusted diluted EPS for an anticipated higher tax rate. In this revised outlook, we have maintained our prior outlook for full year operating profitability. Looking ahead, we are at an inflection point. First, we are positioned to return organic sales growth for the total company in the third quarter, and we expect organic sales growth to sequentially accelerate in the fourth quarter. Second, we are positioned for stronger profitability in the second half of this fiscal year compared to the first half. Third, we are preparing to meaningfully accelerate the rebuild of our profitability in fiscal years 2025 and 2026. Indeed, since we spoke with you in late November, our teams have been actively engaged to operationalize the profit recovery plan. In doing so, we have identified further opportunities to enhance profitability while also generating more resources to be invested in consumer-focused areas to drive long-term growth. As a result, we are expanding the profit recovery plan to include a restructuring program. While this is a difficult decision, we believe this now larger plan will better position the company to restore stronger and more sustainable profitability while also supporting sales growth acceleration and increasing agility and speed to market. For the consumer, we anticipate faster product and commercial innovation supported by strategic brand-building distribution and go-to-market advancement, where digital leadership is at the core. Moreover, we intend to increase our speed and agility as an organization, enabling quicker and more localized decision making to better create and respond to consumer trends. The profit recovery plan is now expected to deliver incremental operating profit of $1.1 billion to $1.4 billion, up from $800 million to $1 billion previously. In terms of timing, this incremental profit is anticipated to be realized in fiscal year 2025 and ’26, with more than half in fiscal year 2025. We are confident that our multiple engines of growth strategy will be enhanced by the profit recovery plan, enabling our company to more fully capture promising long-term growth opportunities and remain a leader in global prestige beauty. To reinforce our commitment to execute this larger plan with excellence, we have engaged the global consulting firm Alvarez & Marsal. They will provide strategic advisory services, partnering with us on our restructuring program as part of the profit recovery plan to drive the realization of a sustainable rebuild of profitability. For the second half of the fiscal year, we have strategic initiatives and exciting innovation to drive in North America, re-accelerate growth in mainland China, and drive momentum in markets that are thriving across developed and emerging markets in EMEA, Latin America, and Asia-Pacific. Let me begin with the Clinique brand. The brand will double down on its authentic dermatologist brand heritage of over 55 years, deepening its relationship with the scientific community, strengthening its derma messaging, and engaging new consumers. First, Clinique will increase its derma education and consumer communications, including on social media, brand.com, and in-store with new dermatologist partnerships and ingredient communication. Clinique has also announced the establishment of the new Mt. Sinai Clinique Healthy Skin Dermatology Center. The Center’s research is expected to produce breakthrough advancements in the study of allergic skin and premature aging. Next month, Clinique will return to the American Academy of Dermatology annual meeting to showcase its derm level science formulations, as well as its unique eye safety promise. All of this is coupled with Clinique’s continued innovation of allergy-tested and 100% clinically proven products, evidenced by Clinique’s new post-procedure relevant claim on powerful products, including Smart Clinical Repair lifting face and neck crème. Turning to the Estée Lauder brand, for over 50 years it has been a pioneer in longevity age reversal research, a frontier of skin biology for its Re-Nutriv luxury franchise. Last August, I spoke with you about how Re-Nutriv should be built upon its successful Ultimate Diamond Transformative Brilliant Serum with compelling innovation. The franchise breakthrough, Soft Clean, with cutting-edge patented SIRTIVITY-LP technology for visible age reversal is now launching globally. In addition, there is a companion serum crème foundation amplifying the franchise skin longevity science across categories. We are encouraged by the global appeal of this innovation from China to Japan to the U.S. While early, the franchise is welcoming new consumers at compelling rates, and we look forward to all that is to come for Re-Nutriv as launch events continue around the world. Moreover, the brand is collaborating with the Stanford Center of Longevity as the inaugural sponsor of a new program of aesthetics and culture. Beyond Re-Nutriv’s striking innovation, we have more standout launches across brands in the third quarter, led by MAC and Tom Ford. The new MACximal Silky Matte lipstick modernizes the MAC icon with a new silky matte finish, lip conditioning benefits, and elevated packaging. For Tom Ford, Oud Minerale is primed to carry forward the brand’s winning streak of innovation from Café Rose in the first half. In the second half, we expect these initiatives and new product launches to build upon the strong momentum of several brands. Indeed, The Ordinary, La Mer, and Le Labo, among others achieved terrific performance in the second quarter. The Ordinary delivered an excellent first half as the brand again realized double-digit organic sales growth in the quarter. Its new soothing and barrier support serum, which launched during the first quarter, is the brand’s most successful launch ever and is already among the top 10 ranked products in the U.S. prestige serum category. The Ordinary continues to excel in specialty retail globally and is also realizing very promising uptake on the new TikTok shop in the United States through engaging live streaming and creator content. La Mer further contributed to our strong underlying fundamentals in skin care. The brand’s luxurious high-quality product from the iconic Crème de La Mer to the new lifting firming serum, along with its exceptional services, proved highly sought after by discerning consumers around the world. In mainland China, La Mer grew double digits at retail to realize strong share gains in prestige skin care. Our luxury and seasonal fragrances also performed quite well. Le Labo led the broad-based trends as Jo Malone London, Tom Ford, Kilian Paris, and Editions de Parfum Frederic Malle each rose organically, fueling double-digit organic sales growth in Asia-Pacific and gains in the Americas. For the second half, we expect to return to organic sales growth in mainland China driven by a rich innovation pipeline for a greater contribution to sales from new products in the second half than the first half, and we are investing in exciting go-to-market initiatives across brick-and-mortar and online. Impressively, we entered the third quarter in mainland China with momentum in brick-and-mortar, having expanded our prestige beauty share offline in the second quarter, driven by strong double-digit retail sales growth in each of department stores, specialty retail, and freestanding stores. For online, while the channel was especially pressured by softness in overall prestige beauty and the 11/11 global shopping festival, our brands performed strongly, rising triple digits organically to partially offset lower sales for the event. The Estée Lauder brand ranked number one in prestige beauty and also ranked number one for store live streaming. For the fiscal year, we remain focused on North America returning to organic sales growth and are encouraged by the low single-digit growth delivered in the first half. While makeup was pressured in the second quarter by the cadence of major new product launches, we are very excited about the innovation coming to market across the second half, beginning with MAC’s MACximal Silky Matte lipstick we launched last week. Moreover, skin care grew for the second consecutive quarter in North America, driven by The Ordinary and Estée Lauder. Our luxury fragrances rose double digits in the quarter as our strategic initiatives from expanded consumer reach with Kilian Paris to strong engagement on TikTok are proving successful. In closing, we are at an inflection point, poised to return to organic sales growth in the second half and deliver sequentially stronger profitability than the first half, as well as expansion compared to the year ago. We are well positioned to deliver stronger profitability in fiscal year 2025 and 2026, given the initial progress we have made from our profit recovery plan as well as its new restructuring program, and we are well positioned to invest in consumer-facing areas to capture exciting growth opportunities in global prestige beauty. I wish to extend my gratitude to our leaders and their amazing teams for the hard work and dedication that has taken us to this inflection point on a renewed sales and profit growth trajectory. I will now turn the call over to Tracey.

Thank you, Fabrizio, and hello everyone. I’ll start by reviewing our second quarter financial results, followed by a third quarter and full year outlook. I’ll also provide details on our expanded profit recovery plan. As Fabrizio mentioned, our second quarter organic net sales decline of 8% met our expectations. Additionally, through tighter expense management and despite experiencing a higher tax rate due to the shift in our geographical mix of business, our earnings per share of $0.88 exceeded our initial outlook for the quarter. From a geographic standpoint, organic net sales in our Europe, Middle East and Africa region declined 14%, mainly attributable to the persistent challenges in our Asia travel retail business. The impact from business disruptions in Israel and other parts of the Middle East accounted for a 2% reduction in the region’s overall net sales growth. The markets in the region had mixed results, leading to overall flat growth across all markets. Organic net sales in our Asia-Pacific region fell 7%, reflecting continued challenges in mainland China. While our results on Douyin nearly doubled, our total online sales declined due to softer than expected performance on TMall during the 11.11 event. The overall online performance more than offset the increase in brick-and-mortar sales, which was led by double-digit growth in our freestanding stores. In the rest of the region, we saw strong organic net sales growth led by double-digit growth in Hong Kong SAR and Korea, as well as high single-digit growth in Japan. Our luxury fragrance brands Le Labo, Jo Malone London, and Tom Ford drove double-digit fragrance growth in the region, which was fueled by both effective commercial activations as well as compelling holiday product offerings. Organic net sales in the Americas declined 1%, driven by a prior year benefit from changes made to MAC’s take-back loyalty program in North America last year. Excluding this benefit, net sales were relatively flat in North America, reflecting growth in specialty retail and our freestanding stores, offset by softer performance experienced in department stores and online. In Latin America, organic net sales rose double digits, reflecting continued growth in nearly every market and strong performance during holiday and key shopping moments. From a category standpoint, organic net sales fell 10% in skin care and 8% in makeup. In skincare, the ongoing challenges in Asia travel retail and mainland China drove the majority of the decrease. Organic net sales from The Ordinary and La Mer grew across every geographic region. The Ordinary saw double-digit growth in specialty retail, including ongoing expansion, and continued its focus on education-first content to drive successful social media activations. Net sales from La Mer increased both online and in brick-and-mortar, benefiting from captivating social media and holiday product activations. In makeup, the persistent challenges in Asia travel retail were compounded by the prior year benefit from MAC that I previously mentioned. Organic net sales fell 6% in hair care and were flat in fragrance. Net sales from La Labo grew double digits, fueled by both targeted expanded consumer reach and same-store sales. The brand’s ethos and high touch services consistently attract both new and loyal consumers, as evidenced by the double-digit net sales growth in our freestanding stores as well as strong performance during holiday and key shopping moments. For Jo Malone London, results from the brand’s holiday collection were strong and net sales increased in nearly all channels of distribution. This growth was offset by a decline from Estée Lauder due to the timing of holiday shipments compared to last year. Our gross margin decreased 60 basis points compared to last year. The positive impacts from brand mix and net strategic pricing actions were more than offset by higher costs due to promotional items and foreign currency. Operating expenses increased 260 basis points as a percent of sales, driven largely by the reduction in sales. Selling, advertising, promotional activities, and innovation collectively accounted for 160 basis points of the increase compared to last year as we supported retail growth while also continuing to destock certain accounts in Asia travel retail. Operating income declined 25% to $577 million, and our operating margin contracted to 13.5% from 16.6% in the prior year. Our effective tax rate for the quarter was 37.7% compared to 24.9% last year. The increase in rate was primarily due to a true-up in the quarter to reflect the now higher estimated tax rate on our foreign operations for fiscal 2024 as a result of the change in our geographical mix of earnings. This also reflects an unfavorable impact related to previously issued share-based compensation. Diluted EPS of $0.88 decreased 43% compared to last year, including a dilutive impact of $0.19 from the change in the effective tax rate. The impact from business disruptions in Israel and other parts of the Middle East was $0.02 dilutive to EPS in the quarter. The acquisition of the Tom Ford brand was neutral to EPS as interest expense related to our debt financing was offset by the combined benefits derived as the licensor of the brand from royalty revenue this year and savings from no longer having to pay licensee royalties. During the quarter, we generated $937 million in net cash flow from operating activities compared to $751 million last year. The increase from last year reflects lower working capital partially offset by the decline in net earnings. The favorability from working capital was largely due to the actions we have taken to reduce inventory, primarily finished goods and semi-finished goods, that resulted in a significant improvement in our days to sell. We invested $527 million in capital expenditures and we returned $474 million in cash to stockholders through dividends. Turning now to our outlook for the remainder of fiscal 2024, which excludes the impact from the remaining payment for the outstanding Decium equity anticipated to occur in May 2024 and includes Clinique’s heightened focus in active derma, while we delivered on our Q2 expectations, we are lowering the high end of our fiscal ’24 organic net sales outlook range to reflect continued risks from evolving macroeconomic volatility and geopolitical tensions in certain areas around the world. Despite this change to our sales outlook, we are maintaining our full year operating profitability expectation. Furthermore, we are updating our EPS outlook primarily to reflect the increase in our estimated full year effective tax rate, largely due to the anticipated geographical mix of our earnings. This is expected to more than offset the EPS benefit from foreign currency translation. Using December 29 spot rates of 1.107 for the euro, 1.273 for the pound, 7.109 for the Chinese yuan, and 12.90 for the Korean yuan, currency translation is anticipated to negatively impact reported sales for the third quarter and diluted EPS for both the third quarter and the full year. We expect organic net sales for our third quarter to increase 3% to 5% as both our businesses in Asia travel retail and in mainland China are expected to return to growth. In Asia travel retail, this growth assumes the continued reduction in retailer inventory as well as the anniversary of some business disruptions we experienced last year. Currency translation and the potential risks of further business disruptions in the Middle East are each expected to be dilutive to reported net sales by one point. We expect third quarter adjusted EPS of $0.36 to $0.46, for a decrease between 3% to 24%. Currency translation and the potential risk of further business disruptions in the Middle East are each expected to dilute EPS by $0.03. Adjusted EPS in constant currency is expected to range between an increase of 3% to a decline of 18%. For the full year, we expect reported and organic net sales to range between a decline of 1% and an increase of 1%. Our plants have been running at reduced capacity, reflecting the pull-down of production in line with our lower shipments and to support the reduction of inventory levels both in-house and in the trade. This has resulted in inefficiencies in some of our manufacturing locations and may trigger a requirement to recognize the related manufacturing costs as in-period costs instead of when products are sold. We have reflected this potential expense and the corresponding pressure to gross margin in our outlook for the balance of the fiscal year, primarily in the third quarter. Our full year operating margin outlook remains unchanged and is expected to be between 9% and 9.5%, a contraction from 11.4% last year, and planned to partially offset the incremental pressure to gross margin through disciplined expense management. We now expect our full year effective tax rate to be approximately 35% compared to 26.5% last year. The increase reflects a larger mix of our expected fiscal 2024 earnings in higher tax jurisdictions as well as the unfavorable impact of previously issued share-based compensation. Diluted EPS is expected to range between $2.08 and $2.23 before restructuring and other charges. The potential risks of further business disruptions in Israel and other parts of the Middle East and currency translation are expected to dilute earnings per share by $0.08 and $0.07 respectively. In constant currency, we expect EPS to fall between 34% to 38%. Given the progress we have made in strategic initiatives in the first half of the year, we expect to return to organic net sales growth and stronger operating profitability in the second half. In November, we announced a profit recovery plan to support the progressive rebuilding of our profit margins in fiscal years 2025 and 2026. Today, with the announcement of a two-year restructuring program, we have further expanded this plan. As Fabrizio mentioned, we are focused on strategically leveraging our strengths to accelerate our return to more sustainable profitable growth while elevating our consumer activations and increasing our operating agility. The restructuring program is designed to right-size and streamline select areas within our organization, which unfortunately necessitates us making the difficult decision of an expected net reduction in positions globally of 3% to 5%. The restructuring program is expected to begin in the third quarter and continue for the duration of the profit recovery plan. We expect to take charges of between $500 million and $700 million and generate annual gross savings of $350 million to $500 million before taxes. A portion of these savings is expected to be reinvested in consumer-facing activities to drive long-term sustainable profitable growth. We now expect to drive incremental operating profit through all initiatives under the profit recovery plan of $1.1 billion to $1.4 billion, inclusive of net benefits from the restructuring program announced today. The plan is expected to yield almost all of the anticipated benefits by the end of fiscal year 2026, with slightly more than half of these benefits realized and contributing to operating profitability in fiscal 2025. In closing, we express our sincere gratitude to our teams around the world as they work tirelessly to execute against our priorities and drive our business forward. We believe that with the work that is being done to position us to return to growth in the second half of the fiscal year and beyond, and with the successful execution of our expanded profit recovery plan, we will be better positioned to return our company to long-term sustainable growth and profitability. That concludes our prepared remarks. We’ll be happy to take your questions at this time.

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

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

On the topic of China, we have experienced some soft consumer sentiment recently, which has led to lower prestige sales growth. However, we remain very optimistic about the long-term opportunities in China and are committed to investing for growth. Regarding brand health, our brands are very strong, with retail sales growth significantly outpacing net growth, showing extraordinary double-digit growth in many of our brands, especially in luxury, such as La Mer, Tom Ford, Jo Malone, Bobbi Brown, Kilian, Frederic Malle, and Aveda, while Le Labo also continues to perform well. In terms of market share, we gained share over the fiscal year, particularly in skincare, fragrances, and healthcare, even though there was a slight dip in market share during the second quarter. Many of our brands achieved top ranks during the 11.11 sales event. Additionally, our freestanding stores in mainland China experienced double-digit growth, both in total and in live doors, and we saw substantial market share growth in Hong Kong, reflecting success with Chinese consumers. Looking ahead, we will continue to invest in China, as we have a great team there committed to building market share for the long term. A key step involves enhancing our distribution and winning in online channels, which will continue to accelerate in the short term, along with increasing market share in new brick-and-mortar locations. Notably, we saw substantial growth in our brick-and-mortar market share in China during the second quarter. We will also capitalize on the current trend of strong retail sales and support robust holiday plans, due to the high concentration of sales in China during various holiday periods throughout the year. There is a strong opportunity in the luxury sector, particularly with our successful luxury brands, including the Estée Lauder Re-Nutriv launch that was mentioned earlier. La Mer, Tom Ford, Le Labo, and Bobbi Brown have aggressive plans in place, and we are poised for strong innovation in the second half, leveraging our new laboratory in Shanghai, which presents a significant opportunity for us. You've asked about changes in other aspects, particularly our relationship with travel retail and how we manage pricing and promotions within the Chinese consumer market. We have made substantial improvements to the process involving our China team and the PR team in making promotional, pricing, and channel prioritization decisions, yielding better results for the future. Regarding local brand development, we recognize that they are primarily focused on the mass market now. We acknowledge that local brands will continue to evolve, and the strength of our innovation and brand differentiation will be critical. As such, we will keep investing in these areas. Our investment in the local lab will drive local innovation, which is essential for competing in this evolving market. Lastly, we are streamlining our supply chain with a factory in the Asia Pacific region, enabling better alignment with demand and a more agile response. This enhanced capability will significantly increase the flexibility and adaptability of our China team to meet market demand. Overall, we are confident in our strong business and market share in China, with a commitment to continued long-term investment in the region.

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

Yes, absolutely. Your question provides me with the chance to share an overview of our current initiatives. We believe that our efforts over the past several months have reached a pivotal moment. We recognize the necessity for significant changes to align with future opportunities and address our key challenges stemming from the post-COVID landscape. First, I want to summarize our actions and then assess our progress. We are focusing on the need for change and tackling the main issues at hand. Our first priority is the meaningful advancements we've made regarding retail stocks in Asia, which should be aligned as of April. This alignment is crucial for both our retail operations and the overall industry. Another critical aspect is improving our gross margin and reorganizing our cost structure to enhance profitability. Our profit recovery plan, which has been significantly advanced, along with further restructuring efforts, is enabling us to restore profitability more rapidly. This plan also aims to better support our future growth strategies and enhance our responsiveness in the market. We intend to evaluate our agility in terms of resource allocation in this increasingly volatile environment and the speed at which we can bring innovations to market to compete effectively with local brands. Additionally, it is essential that we restore growth in skincare to support our profitability, as we've noted before. I want to emphasize that we saw strong skincare growth in the Americas, EMEA, and APAC excluding China in the second quarter. While skincare did not grow in China during quarter two, we increased our market share significantly. We are committed to seizing skincare opportunities with innovative products that we are introducing, like Estée Lauder and De La Mer’s upcoming innovations, along with Clinique’s repositioning and the global expansion of The Ordinary. These initiatives are critical for our long-term skincare growth, especially now that retail stocks in Asia are stabilizing. Another priority is focusing on growth in China and ensuring long-term success in that market. I believe I addressed that previously. We also need to expedite our plan to stabilize our market share in the U.S., where we are actively pursuing opportunities in active dermal care, utilizing Clinique's strong reputation and The Ordinary's remarkable success. We are refining our distribution mix to enhance consumer growth as well. In the region, our fragrance sales are also accelerating, and it’s worth noting that we hold the top two brands in skincare and makeup. With the addition of The Ordinary, we now have four of the top five skincare brands in the market, and The Ordinary gained 200 points of market share in prestige skincare just in the second quarter. We are firmly addressing the future prospects in North America. Furthermore, we are keen to build on our strengths. Currently, we see significant potential in APAC excluding China, particularly with the recovery in Hong Kong compared to the COVID period. In EMEA, we continue experiencing robust growth in skincare across several markets like Germany, Italy, Spain, and Turkey. Our emerging markets have seen growth in the mid-double digits, where we boast strong market share positions that offer excellent growth prospects. Our direct-to-consumer business and freestanding stores are also growing in double digits, reinforcing our brand equity. We remain confident in the prestige beauty market’s future, which is still very appealing. We are committed to focusing on high-growth markets within the consumer goods industry, and ultimately, our profit recovery plan and restructuring efforts will be essential to realizing all these strategies. We recognize that we are at a turning point and will assess ourselves based on our recovery speed, our return to sustainable growth, our investments in brand development, and the necessary changes in our organization to improve our resource allocation efficiency and market response times.

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

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

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

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

There are two key measures of agility that we consider vital. The first is our ability to respond to volatility by reallocating resources more swiftly. An example of this is our effort to shorten our supply chain in Asia, and various aspects of our repositioning strategy. We are capitalizing on the established reputation of Clinique and focusing more on active derma products, as well as leveraging the strength of The Ordinary in this area. This highlights how we are effectively addressing the consumer trend towards active derma. Our aim is to enhance our capacity to perform these actions more quickly in the future. The second aspect of agility pertains to our market approach, including our response to new platforms. We are gaining experience in operating with TikTok on a global scale, and we're placing more emphasis on earned media value, along with re-evaluating our resource allocation and training efforts across various models. This initiative is being implemented simultaneously in all global markets. We are modernizing our promotional strategies to align better with current consumer trends, while also improving our overall responsiveness to trends. We are focusing on two types of trends in our organizational development. One is long-term trends reflecting fundamental changes in consumer preferences, where we have historically seen strength and are refining our skills. The other is short-term trends that can shift rapidly, sometimes within a week or a month, influencing online popularity in specific regions. We have developed enhanced models to address these short-term trends effectively through our brands and resource allocation. Additionally, our work on the profit recovery plan is also crucial in enhancing our agility in resource allocation and in responding to trends and new marketing models globally.

Hi, good morning Fabrizio and Tracey. As you consider pricing and your upcoming launches, how do you approach pricing for both existing popular products and new ones, and how is that evolving? Additionally, as you improve the specialty multi distribution, how do you engage with department stores, and how does that relevance shift? Thank you.

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

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

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

That’s correct.

Okay, great. I guess the question is how do you protect against the objective you mentioned today. How do you ensure that the incremental profits are not offset by additional investments that arise over that time? Investors today expect profit to be a solid target, but how do you prevent other costs from sneaking into the model over the next couple of years?

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

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

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

Thanks Lauren, I’ll begin with the retail and organic aspects. In the second quarter, during significant events like 11.11 and the holiday period, when things don't go as anticipated, retailers tend to reduce orders, which leads us to cut back on some shipments. This can create some fluctuations from one quarter to the next, but overall, it balances out over the year. We are not experiencing issues in other markets that would be a concern, unlike what we have seen in Asia travel retail.

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