Estee Lauder Cos. Inc (EL) — Q3 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 results today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the non-comparable impacts of acquisitions, divestitures, brand closures and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures in our press release and on the Investors section of our website. As a reminder, reference to online sales include sales that we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. And now I'll turn the call over to Fabrizio.

Thank you, Rainey and hello to everyone. We are pleased to be with you today to review our third quarter results and discuss our strategic initiatives. For the third quarter, we delivered organic sales growth of 6% at the high end of our outlook, exceeded expectations for profitability and continued to significantly improve working capital. We achieved stronger-than-anticipated performance beginning with gross margin. Results benefited from a greater than expected mix of skin care. Moreover, we made great strides in reducing the pressure on excess and obsolescence, driven by our now lower inventory levels and in realizing strategic pricing. Further contributing to the outperformance, we managed expenses with discipline across multiple areas of the business and have shifted certain advertising spending to the fourth quarter to support our rich innovation pipeline and expanded consumer reach. Encouragingly, with our third quarter results and fourth quarter outlook, we are confident that the second half of fiscal year 2024 will indeed prove to be an inflection point for the company, representing a renewed sales and profit growth trajectory. First, momentum in organic sales growth is primed to accelerate in the fourth quarter for a strong second half. Second, we continue to expect operating margin in the second half of fiscal year 2024 to be higher than the first half and to expand from the year-ago period. Third, with a profit recovery plan designed to deliver $1.1 billion to $1.4 billion of incremental operating profit in fiscal year 2025 and 2026, we are well positioned to rebuild our profitability. And with the profit recovery plan also expected to generate savings to reinvest in our brands and consumer-facing initiatives, we are well-positioned to accelerate sustainable sales and profit growth as a faster and leaner organization with stronger leverage from our future growth. During the third quarter, we accomplished much to solidify the inflection point of the second half. Indeed, we made progress in achieving targeted trade inventory levels in Asia travel retail. We are encouraged by the evolution of our Asia travel retail business this fiscal year as we execute our priority to reduce trade inventory in alignment with retailers and the efforts by various local authorities to contain a structured market activity. Retail sales growth in Asia travel retail significantly improved sequentially, returning to growth in the third quarter. This improving retail sales trend near travel retail complemented double-digit retail sales growth we continue to see in EMEA and the Americas travel retail. So far this fiscal year, we also invested in the long-term growth opportunities of traveling consumers evidenced by our brands having moved within Hainan and Sanya International Duty-Free shopping complex to the Galleria's new Global Beauty Plaza. The larger elegant new stores expand upon the high-touch services and experiences that we offered at the previous locations in the complex from Estée Lauder announcing its new Skin Longevity Institute to La Mer cabin offering bespoke spa services and KILIAN Paris Juice and cocktail bar featuring fragrance-inspired cocktails. We also made great progress in advancing strategic initiatives and launching exciting innovation to fuel North America, reaccelerate growth in Mainland China, and drive momentum in markets that are strong across developed and emerging markets in Asia Pacific, EMEA and Latin America. Let me begin with Clinique where we had a robust quarter of progress as the brand doubles down on its authentic dermatologists' brand heritage. Clinique deepened its relationship with the medical community returning to the American Academy of Dermatology Annual Meeting with high-impact engagements. The brand also established the Clinique Dermatologist Creator Council, a collection of doctors who are amplifying the sharing of science and dermatological insights on their own social channels, as well as informing Clinique's narrative on its social platforms. Impressively, Clinique's influence earned media value for skin care in the US showed 80% during the quarter, leaping 33 spots in rank. We believe this is just the beginning of the success Clinique will realize by communicating its dermatological education and clinically proven solutions for skin care and makeup. Moreover, having started with Clinique in March, we are thrilled to be strategically expanding our consumer reach in the US as a select few brands will open dedicated storefronts in Amazon's fast-growing premium beauty store over the coming months. Clinique's launch capitalized on its renewed dermatologists-guided branding with striking creative assets and elevated storytelling. Impressively, Clinique's store has exceeded our retail sales expectations so far and already contributed in March to the brand's share gains in US prestige skin care, as well as in US prestige makeup. We also successfully accelerated our innovation in the quarter. For the Estée Lauder brand, we brought to market breakthrough innovation across franchises. For its luxury renewed franchise, the brand was inspired by its over 15 years of skin longevity research, with its new Ultimate Diamond transformative brilliance of cream and serum cream foundation. The impact of these launches is powerful beyond contributing to the brand growth; they firmly established our leadership in the science of skin longevity and visible age reversal. For Estée Lauder's Supreme franchise, the brand leveraged its decades of repair expertise in collagen research with the new revitalizing Supreme night bounce cream, which first launched to rave reviews in Asia Pacific and is expanding globally in the coming months. We believe this launch holds great promise, serving to strengthen the brand's leadership in nighttime science and skin care across subcategories. La Mer extended its winning streak of innovation with the most rising fresh cream which, along with its Icon Hero products, drove the brand to be the strongest contribution to the company's growth for the quarter. Beyond these strategic innovations and go-to-market activations across active derm, longevity, night skincare, M·A·C introduced newness in makeup to jump-start our rich innovation pipeline in the category for the second half. M·A·C launched Macximal silky matte lipstick to greater acclaim, successfully modernizing its iconic M·A·C lipstick with nourishing ingredients and bolder packaging. From Seoul to Berlin to New York City, Macximal pop-up events drove strong engagement and earned media value. M·A·C remastered studio 6 fixed fluid foundation came to market in April, delivering a new soft matte finish enhanced with new skincare ingredients at even more shades. This highly sought innovation proved the enduring love of M·A·C consumers, as the brand celebrates its 40 years in 2024. Looking at fragrances, over the last couple of months, we have expanded our consumer reach in the high-potential Asia Pacific region, opening spectacular flagship stores for Jo Malone London and Le Labo, each unique with locally relevant features. We are incredibly excited about the evolution in luxury and artisanal scents as together with Valmond, we introduced Valmond Beauty this September. Across our brands and around the world, we are focused on leveraging technology, including AI, in support of our enduring strengths and high-touch experiences and high-quality products. We continue to partner with leading technology companies from Microsoft, with whom we are collaborating to embed AI to drive faster speed to market, to Google Cloud, as we strive to enhance customized targeting of media at scale. Turning to the regions, we have spoken about our focus on driving momentum in markets that are strong. To that end, we have delivered terrific results across many markets, reflecting the desirability of our brands, a compelling innovation which I described, and strong go-to-market execution. We see this across our developed and emerging markets around the world. Beginning in Asia Pacific, Hong Kong SAR, and Japan have each prospered with double-digit organic growth in the quarter and year-to-date, and we are excited about what's to come, including the launch of The Ordinary in Japan during the fourth quarter. Moving to EMEA, Germany and Italy have consistently contributed to growth in the region each quarter. Mexico, Brazil, and India saw strong double-digit growth in the third quarter, fueling excellent performance in our emerging markets year-to-date. For North America, we delivered sequentially improved organic sales trends in the third quarter, driven by the multi-faceted strategic plan we first discussed with you in August. We are pleased with the results we are seeing in our areas of strategic focus. Skin Care grew organically in North America for the third consecutive quarter, driven by Estée Lauder and The Ordinary, while hero products' innovation and go-to-market activation excelled. Our luxury and our seasonal fragrances grew double digits organically, fueled by Jo Malone London, KILIAN PARIS, and TOM FORD. Across our brand portfolio in North America, we are realizing success as we focus on deepening consumer engagement on social platforms, where so much discovery in beauty takes place. The Ordinary has long been a pioneer with an outstanding social engine, and more of our brands have enhanced their engagement with consumers this year. We are also successfully expanding our consumer reach to better serve new consumers from Clinique's new storefront in the US Amazon Premium Beauty store, to expansions early this fiscal year as the Estée Lauder brand entered into more Ulta Beauty stores, and KILIAN PARIS entered into additional Sephora stores. For Clinique, as the number one dermatology beauty brand in the US Prestige, we are optimistic for the positive impact that its launch on the US Amazon Premium Beauty store will have for the fourth quarter and in initial performance in March. For Mainland China, we returned to organic sales growth, albeit at a slower pace than expected amid an overall soft prestige beauty industry. Retail sales for prestige beauty were strong in January but moderated in February and March, due in part to the Chinese New Year clashing with Valentine's Day this year, which limited gifting. This certainly impacted the industry, but also many of our brands had a strong presence in gifting. Our focus remains on bringing irresistible newness to consumers to best create growth opportunities. Here our innovations in Estée Lauder Nutriv and Supreme franchises, as well as La Mer and M·A·C, were well received across the third quarter, and we have more compelling launches in the fourth quarter. One in particular from Estée Lauder's Perfectionist Pro franchise is especially exciting as it is among the first products created in our China innovation labs and addresses local demand for SPF 50 plus UV protection that is suitable for sensitive and post-derm procedures on the skin. With the fourth quarter innovation pipeline standing on the launches throughout the third quarter and the key shopping moments of 618 approaching, we are increasing our investment in advertising and go-to-market activation to sustain retail. Since we spoke with you in February, we also made important progress in all work streams across the pillar of the profit recovery plan, of which I'm pleased to share a few examples with you today. For one, our integrated business planning process, which has now rolled out globally, is contributing to operational inventory improvements. Our enterprise-wide integrated business planning will serve as the foundation to drive better demand planning and reduce excess obsolescence. It is complemented by advanced planning technologies, including AI, to statistically elevate forecast accuracy and dynamically position and deploy inventories. We have refined and optimized our innovation pipeline for fiscal year 2025 and 2026 to best focus on accretive innovation, bringing to market products that create and drive trends locally and globally across categories. Innovation in fiscal year 2025 is still expected to be even bigger and stronger than in fiscal year 2024, with more breakthrough innovation and expansion into white space opportunities. We also announced plans to streamline manufacturing and distribution on a campus through realigning ship schedules, consolidating operations into fewer buildings, and shifting powder manufacturing to trusted third-party partners. This strategic initiative accomplished multiple objectives; in addition to consolidating capacity and optimizing costs, we also expect greater speed to market by leveraging external innovation with a global leader in powder. Before I close, I want to speak to the exciting milestones in our brand portfolio during the fourth quarter. First, a few days ago marked the one-year anniversary of our Tom Ford acquisition. This transformational deal, where we evolved from licensees of Tom Ford Beauty to the owner and licensor, solidified a coveted brand in the company's luxury portfolio for the long-term and created a new royalty revenue stream. Moreover, it afforded us strategic synergies which we are now unlocking, demonstrated by the recent launch of brand.com in the US and UK as just one example. And with the Ermenegildo Zegna Group and Marcolin, we are capitalizing on the power of the brand modern luxury glimmer across fashion, eyewear, and beauty, connecting these three verticals in compelling new ways to drive growth. In February, for Fashion Weeks from Milan to London, Paris, and New York, we orchestrated the first-ever 360-degree cross-category campaign and secured a blockbuster fragrance launch. Later this month, we are thrilled to be further solidifying our brand portfolio in yet another way as we acquired the remaining interest in DECIEM, completing the deal we made three years ago when we became a majority owner. During these three years, DECIEM Inc. and its beloved brands, The Ordinary, have soared to new heights, ranking top five in prestige skin care in many markets, including top two in its home markets of Canada and the US. Together, we have successfully invested to scale innovation for The Ordinary and have increased the ordinary innovation as a percentage of sales from 5% to over 25% expected this fiscal year, expanded the brand globally from India to the Middle East to South Africa, and improved its profitability by driving operational efficiencies in the supply chain. With that said, we believe The Ordinary and DECIEM still have bigger opportunities in front of them and we are excited for what the future holds. Finally, we are pleased to see our initiatives and progress in sustainability recognized. Since we spoke with you in February, we were included in the CDP's Climate A list for 2023. Overall, we received our best-ever collective scores in 2023 from CDP, scoring A- in each of the water security, forest timbers, and forest palm oil categories. In closing, we are at an inflection point in our company performance, primed for a strong second half of organic sales growth and improved profitability. With our profit recovery plan, we are well positioned to meaningfully rebuild our profitability in fiscal year 2025 and 2026 while also generating savings to reinvest in our brands and consumer-facing initiatives. We are confident in our strategy to realize the promising growth opportunities in global prestige beauty, leveraging the strengths of our diversified brand portfolio, rich innovation pipeline, and the superior quality of our products. I extend my gratitude to our employees for the significant contributions you have made in bringing us to this inflection point of a renewed sales and profit growth trajectory. I will now turn the call over to Tracey.

Thank you, Fabrizio and hello everyone. Our third quarter organic net sales increased 6% at the higher end of our expectations. As Fabrizio mentioned, we are pleased with the progress we've made thus far in Asia travel retail, with reducing retailer inventory and the corresponding return to net sales growth. These achievements in the quarter were a bit earlier than expected and led to a partial shift in the expected timing of the resumption of replenishment orders from the fourth quarter to the third. Partially offsetting this growth was lower-than-expected net sales in Mainland China, reflecting the impact of ongoing softness in the overall prestige beauty, in part due to subdued consumer confidence and softness during holiday and key shopping moments. Our earnings per share of $0.97 exceeded our outlook for the quarter, due to the acceleration of skin care, the return to net sales growth in our Asia travel retail business, tighter expense management, and a lower tax rate. The reduction in our tax rate was largely driven by the shift in our geographical mix of business. Regarding our regions, organic net sales in our Europe, the Middle East, and Africa region increased 12%, driven largely by the growth in our Travel Retail business. Our Travel Retail net sales increased strong double digits, returning to growth after seven consecutive quarters of decline given the sequential acceleration of retail sales and shipments, as well as the anniversary of lower shipments last year, which were pressured by transitory headwinds in Hainan and Korea, as well as limited international flights, visas, and group tours from China to other markets last year. Elsewhere in EMEA, organic net sales in our priority emerging markets increased strong double digits where we drove growth from most brands and in most channels of distribution given our strategic initiative to expand consumer reach, particularly for our fragrance and skincare brands. Our results in mature markets were mixed, resulting in overall flat growth. Organic net sales in our Asia Pacific region increased 3%, led by Hong Kong SAR, Mainland China, and Japan reflecting mid-single-digit net sales growth in skin care and high single-digit growth in fragrance. Organic net sales in the Americas increased 1%, largely due to Latin America where continued growth in Mexico and Brazil, led by makeup, drove double-digit increases in department stores and freestanding stores. Organic net sales in North America were flat in the quarter as growth in fragrance and skin care was offset by declines in makeup and hair care. The double-digit growth in specialty-multi driven by Estée Lauder and M·A·C was offset by softer performance in department stores and direct-to-consumer channels. From a category standpoint, organic net sales in skin care rose 9%, largely driven by our Asia travel retail business as well as from Hong Kong SAR and Mainland China. Organic net sales from La Mer and Estée Lauder propelled the category's growth led by strong campaigns behind our hero product franchises with new product innovation and increased in-store activations. Organic net sales in makeup increased 4%, largely driven by our Asia travel retail business and by Latin America. Net sales from Estée Lauder and Clinique led the category's growth fueled by ongoing activations behind our hero product franchises. This was partially offset by a prior year benefit from changes made to M·A·C's take-back loyalty program. Excluding the impact from the prior year benefit, M·A·C net sales increased mid-single digits with growth across all regions mainly driven by new product innovation. Organic net sales in fragrance increased 1% and in hair care declined 4%. In fragrance, net sales growth was driven by our luxury and artisanal brands led by Jo Malone London and Le Labo. Jo Malone London grew double digits in travel retail and specialty-multi. Le Labo saw double-digit growth in our direct-to-consumer channels, particularly in freestanding stores, driven by both same-door growth and targeted expanded consumer reach. Partially offsetting these increases was a decline from Estée Lauder due to retail softness during holiday and key shopping moments. Our gross margin increased 280 basis points compared to last year. This reflects positive impacts from changes in category mix driven by the acceleration of skin care, lower obsolescence charges given the reduction in excess inventory compared to last year, and stronger strategic price realization through lower levels of promotion. These improvements were partially offset, as expected, by the impact of the previous pull down of production that triggered a requirement to recognize the related manufacturing costs in the current period instead of when products are sold, resulting in a 215 basis point headwind to gross margin. Foreign currency also pressured gross margin in the quarter. Operating expenses decreased 290 basis points as a percent of sales during the quarter, driven by the sales growth leverage and expense management including advertising and promotional expense, which decreased approximately 240 basis points compared to last year. This reduction reflects the anticipated shift in certain spending from the third quarter to the fourth to support innovation launches in key holiday moments in the fourth quarter. Operating income increased 75% to $554 million, and our operating margin expanded 570 basis points to 14.1%, compared to 8.4% last year. Our effective tax rate for the quarter was 30.5%, compared to the elevated rate of 43.1% last year. The decrease in the effective tax rate was primarily driven by a lower effective tax rate on our foreign operations due to the difference in the timing of the estimated change in our full year geographical mix of earnings in the current and prior year periods. This was partially offset by the unfavorable impact associated with previously issued stock-based compensation. Diluted EPS was $0.97 compared to $0.47 last year, largely due to the increase in sales improvement in gross profit margin and a lower tax rate. The impact from the business disruptions in Israel and other parts of the Middle East was $0.01 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 royalties on the beauty business. For the nine months, we generated $1.5 billion in net cash flows from operating activities compared to $1 billion last year. The increase from last year reflects lower working capital, which was largely due to the actions we have taken to reduce in-house inventory levels primarily finished goods and semi-finished goods resulting in a significant improvement in our days to sell. We invested $702 million in capital expenditures and returned $710 million in cash to stockholders through dividends. As Fabrizio mentioned, our plans under the profit recovery plan are progressing and are on track. This quarter we began taking charges under the restructuring program and expect approval to accelerate in the fourth quarter of this year and throughout fiscal 2025 with meaningful benefits beginning to flow into our fiscal year 2025 results. Turning now to our outlook for the remainder of fiscal 2024. We are pleased with our progress thus far in reducing inventory levels, resuming replenishment shipments in Asia travel retail, accelerating innovation, and selectively expanding our consumer reach. These efforts have led to sequential improvements in both net sales and operating margin from the first half of the year, culminating in our return to profitable net sales growth this quarter. With these results and our outlook for the fourth quarter, we continue to expect a stronger second half compared to last year, underscoring that we believe we are at a sales and profitability inflection point. While we delivered on the high end of our third quarter expectations, we are lowering our fiscal 2024 organic net sales outlook range to reflect continued risks from evolving macroeconomic volatility, including continued softness in Mainland China and geopolitical tensions in certain areas around the world. In Asia travel retail, we are also mindful of potential short-term volatility in retail sales related to actions certain retailers are taking to increase their profitability. With the recalibration between our third and fourth quarters, we discussed earlier, we are maintaining our full year operating margin expectation and are increasing our EPS outlook slightly to reflect disciplined expense management year-to-date, somewhat offset by our plans to strategically invest in key areas of our business in the fourth quarter to continue to drive profitable growth, reflecting incremental headwinds from foreign currency translation. The combination of our third quarter performance and outlook for the fourth quarter results in a strong second half compared to the first half with improvements in net sales and operating margin. Excluding the in-period charge we recognized in the third quarter, gross margin is also expected to improve in the second half. We believe our assumptions for the second half mark a meaningful turning point for the company, demonstrating the signs of our recovery and better positioning us along with our profit recovery plan initiatives to drive sales growth and profitability further in fiscal 2025 and beyond. Using March 29 spot rates of 1.079 for the euro, 1.262 for the pound, 7.227 for the Chinese Yuan, and 13.50 for the Korean won, currency translation is anticipated to negatively impact reported sales and diluted EPS for both the fourth quarter and the full year. We now expect organic net sales for our fourth quarter to increase 6% to 10%, with increased consumer-facing investments including shifts from the third quarter aligned to support innovation in key shopping moments in the fourth quarter. This growth also reflects the anniversary of some business disruptions we experienced last year, primarily in Hainan. In Mainland China, we expect the ongoing softness of overall prestige beauty to continue to pressure net sales. Currency translation is expected to be dilutive to reported net sales by one point. We expect fourth quarter adjusted EPS of $0.18 to $0.28, an increase of over 100%. Currency translation is expected to dilute EPS by $0.01, and potential risks of business disruptions in the Middle East are expected to be dilutive by $0.03. Adjusted EPS in constant currency is expected to range between $0.19 to $0.29. For the full year, we expect organic net sales to range between a 1% to 2% decline. Currency translation is expected to be dilutive to reported net sales by one point. 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. We continue to expect our full year effective tax rate to be approximately 35% compared to 26.5% last year. Diluted EPS is expected to range between $2.14 and $2.24 before restructuring and other charges. Currency translation and potential risks of business disruptions in Israel and other parts of the Middle East are expected to dilute earnings per share by $0.09 and $0.06 respectively. In constant currency, we expect EPS to decrease between 33% to 36%. Our fiscal 2024 outlook also assumes the purchase of the remaining outstanding equity interest in DECIEM, anticipated to be completed in May of 2024. In closing, our expected second half results starting with our strong third quarter performance demonstrate our progressive return to sales growth and profitability. We have navigated through numerous challenges over this past year with resilience and determination to take meaningful actions to begin to improve the trajectory of our business. Our results show we have made great strides and we have immense gratitude for the resolve and hard work of our teams globally. While we are pleased with our progress and results this quarter, we remain keenly aware of the additional work that lies ahead to continue down the path of restoring stronger profit margins. We are intensely focused on doing the necessary work to return to long-term sustainable growth and profitability supported by the profit recovery plan initiatives executed by our dedicated employees. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

Thanks, operator. Good morning, everyone. So Tracey, I just wanted to ask I guess a question about the Q4 guidance and what's implied. It seems like the implied margin in Q4 steps down from Q3, yet the revenue will be roughly the same. It just implies maybe there's not as much leverage. But can you just give us some perspective on the margin step down quarter-to-quarter? And then as we think about the run rate into 2025, is there anything that we should read into the fourth quarter guidance that would inform the exit rate for 2024 into 2025 in terms of organic sales and margins? Thank you.

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

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

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

Great. Thanks. I just had a question about spending levels. It was great. Tracey, thanks for being so specific on the advertising and the reinvestment this quarter and then shifted into Q4. But if I remember correctly, in Q3, there was also some timing shift on spend. So, I wanted to talk a little bit about maybe the decision tree of when to put that spending in? Is it because if it's shifting, is it about the pace of getting innovation ready and launched? Is it about the consumer environment, maybe avoiding putting money in play that would be like pushing on a string if the consumer isn't there? It feels like some of those spending plans are shifting quarter-to-quarter, and so I was curious if you could just comment on that. Thanks.

Yes, you mentioned a few reasons for our decision to adjust some of our spending. In the early to middle part of the quarter, we noticed that some holidays, especially in China, were not performing as we expected. We previously discussed key holidays for us like Chinese New Year and Valentine's Day, which are occurring closer together this year than in the past. Valentine's Day is an important gifting occasion in China, and our team excels at supporting it. Both of these holidays tend to be less promotional compared to others, but we did not observe the usual boost we anticipate from them and subsequent holidays in the quarter. Consequently, the China team decided it was best to redirect some of that advertising to the fourth quarter to prepare for upcoming holidays in May as well as the significant 618 holiday in June. We have consistently emphasized the flexibility we've developed in our advertising spending, allowing us to make such decisions to align our advertising efforts with when we believe consumers will engage with our gifting and innovation programs. This reflects the shift you noticed between Q3 and Q4.

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

Thank you for the question. I'd like to take this opportunity to discuss our profit recovery plan. We are consistently focused on profitable growth. The actions we are undertaking, both within this plan and beyond, are geared towards achieving that goal. The profit recovery plan serves as a catalyst for our growth, particularly in terms of improving our margins. We plan to provide more details in August when our plans are finalized, along with guidance for the upcoming year. The primary goal of the profit recovery plan is to restore our gross margin. We are aware of changes in category and channel mixes compared to historical trends. We have seen growth in our fragrance line, especially in the artisanal and luxury segments, which is significant. We are also working to revive our makeup growth and are pleased to see the accelerating growth in our skincare category, which we anticipate will continue. Our gross margin has been a considerable concern, especially after the pandemic, and it remains our main focus. We are dedicated to achieving price realization, which will be supported by our inventory management efforts aimed at controlling discounts and excess stock. You may have noticed some results from these efforts in Q3, and we expect even more progress in fiscal 2025. Restoring our gross margins is a key aspect of our profit recovery strategy. Additionally, we are working on improving supply chain efficiencies and fostering innovation that contributes positively to our margins. As highlighted in Fabrizio's prepared remarks, we are implementing various processes to strengthen this effort. Another crucial focus for us is leveraging our expense base more effectively. We are accelerating savings in indirect procurement and have made difficult decisions regarding rightsizing and streamlining certain areas of our organization, part of the restructuring program we previously mentioned. This combination is expected to generate an additional operating profit of $1.1 billion to $1.4 billion over the next two years, with slightly more impact in fiscal '25 than in '26. Most of the recovery is anticipated from gross profit margin improvements, as well as from our operating expenses. However, I want to highlight that the profit recovery plan will also allow for additional investments in growth, particularly in consumer activation. We expect to save more than the $1.1 billion to $1.4 billion we are targeting for operating profit improvement, enabling us to increase our advertising expenditures and selectively enhance our retargeting strategies as we capitalize on current business momentum. We aim to streamline and reduce the complexity that has accumulated in our processes over time, which should enhance our speed, agility, and overall effectiveness in the market. Our team is particularly excited about the potential benefits of this initiative. It's a strong program, and I appreciate you bringing it up. Once we execute all components of the plan, we will share additional modeling information in August.

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

Yes, sure. At this moment, the slowdown and softness is in the overall prestige market. That's softer than what we originally expected and that is what is impacting Mainland China. I want to clarify that we need to look at the Chinese consumers in total and not only the segmentation that the market does. So there are consumers from Mainland China, there are Hong Kong SAR consumers, and there is TR China, which includes Hainan, for example, and other parts, and there are the international travelers, who travel for tourism or business from China to Tokyo, Paris, etc. We see actually progress in total Chinese consumer consumption on our brands, and they are very solid. When you combine Mainland China with the progress in Hong Kong SAR, plus the retail progress from TR China, plus the success we see from our brands internationally, such as with Chinese travelers in Japan and Paris, we find solid metrics. While there is softness in Mainland, we also have positive indications. Retail growth and sell into replenishments is based on decreased inventory levels compared to the past. The softness is particularly in the middle class consumer sentiment, and they tend to shop more in Mainland. The drivers of softness are twofold. One key driver is that post-COVID, consumers focus more on experiences rather than products. This spending behavior is evolving into a more balanced approach. The second key driver is the pace of innovation. We have invested in a R&D center in China, and the first innovations coming from that center will be hitting the market in quarter four. Consumers are responding positively to high-quality, locally-relevant innovations. The promotional market is also changing, as government actions are reducing promotional pressure, which ultimately may balance the structure in the market more favorably for the long-term. So despite the short-term softness, we feel positive trends with overall consumption and innovation in China.

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

Yeah, no, I want to clarify that we actually reached our objectives for inventory in trade in Asia travel retail a bit earlier than expected, so we did that in the third quarter before we anticipated. So the reason that we had higher shipments in the third quarter was that we accomplished those levels earlier. We will expect the retail sell-through in the fourth quarter, but given some of the disruptions we had last year, we may see some disconnect between retail and net for a couple of quarters. Retail will maintain the inventory levels as agreed with our retailers.

Yes, and on Clinique's Amazon launch, I want to highlight that the team has made great strides in building on Clinique's heritage in active derma and relaunching the brand in North America and the UK. The introduction on Amazon in the US aligns with this big launch, as many new consumers who are high consumers of active derma are on this chart. Amazon provides expanded consumer reach, and we expect to recruit, engage, and educate new consumers through this channel. Amazon is a fast-growing online platform in the US, and their premium beauty store has contributed significantly to overall market growth and has been a vital brand discovery portal for new consumers. The initial results are very promising, and we have high expectations for continued growth.

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

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

Yes. Actually, North America in quarter three has been growing low single-digits. If you exclude the M·A·C loyalty program, it's getting closer to mid-single-digits. So, there is growth in North America in quarter three. That said, there is softness in consumer sentiment at this moment and the market growth is moderating in North America. So, obviously there is pressure, particularly in certain channels. Overall, quarter three aligns with our goals, and the positive is that we had a subsequent positive impact on Clinique in March. You can expect that in quarter four, we will see the impact of Clinique on Amazon, for example, which will be a positive element in the mix.