Estee Lauder Cos. Inc (EL) — Q4 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 report filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release. Unless otherwise stated, all organic net sales growth also excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of foreign currency translation. You can find reconciliations between GAAP and non-GAAP measures on our press release and on the investors section of our website. As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our discussion, our Profit Recovery and Growth Plan will be referred to as our PRGP. During the Q&A session, we ask that you please limit yourself to one question, so we can respond to all of you within the time scheduled for this call. And now, I'll turn the call over to Fabrizio.

Thank you, Rainey, and hello to everyone. Today, we will review our results for fiscal year 2024, which was a challenging year for the company, and discuss our strategy reset aimed at improving performance in fiscal year 2025 and beyond. After a tough first half, we experienced top-line growth in the second half of fiscal year 2024, with organic sales growth increasing from 6% in the third quarter to 8% in the fourth quarter. We achieved an adjusted operating margin of 11.6%, which was better than the first half and improved from the second half of fiscal year 2023. Overall, for fiscal year 2024, our organic sales dropped by 2%, we saw slight gross margin improvement, but the adjusted operating margin decreased by 120 basis points to 10.2%. These outcomes were consistent with the updated outlook we provided in May for sales and exceeded our expectations for operating profitability, despite the continued decline in the prestige beauty industry in China and Asia travel retail. However, we are not satisfied with this performance. Looking ahead, our fiscal year 2025 outlook indicates ongoing declines in the prestige beauty industry in China and Asia travel retail. The PRGP, which remains on track with our previously set goals, helps mitigate the impact on profitability from declines in areas of our business where skincare has a high presence, but it will result in a slower pace of operating margin expansion for fiscal year 2025 than we had initially anticipated when we expanded the PRGP in February. For fiscal year 2025, we plan to enhance performance across our global business in both developed and emerging markets. To support this, our strategic priorities include reigniting skincare, taking advantage of various growth drivers in high-end fragrance, accelerating our efforts in successful channels, launching innovative products, and improving our precision marketing capabilities for more effective consumer investments. The PRGP facilitates these strategic priorities and serves as the foundation to restore sustainable long-term organic sales growth and rebuild our operating profitability. We are also working to create a more agile organization that can quickly adapt to market changes and capitalize on future growth. While our sales and profit expectations for fiscal year 2025 are disappointing, we anticipate making significant progress this year as we roll out our strategy reset to rebalance regional growth, achieve better annual profitability, and enhance our go-to-market and innovation capabilities to improve our performance in a more competitive environment. These initiatives are intended to position us for stronger performance in the prestige beauty industry in fiscal year 2026 and to accelerate profit growth. Let me now discuss the factors influencing our fiscal year 2025 outlook before elaborating on our strategic priorities. The prestige beauty industry reported a further weakening in retail sales in mainland China during the fourth quarter, dropping from mid-single-digit declines in the third quarter to low double-digit decreases. With consumer confidence still low, we managed to gain market share in the prestige beauty sector in mainland China during the fourth quarter, primarily driven by La Mer and Estee Lauder's advancements in the largest skincare category. Retail sales in the prestige beauty industry within Asia travel retail also saw no improvement in the fourth quarter, particularly in Hainan, where beauty market sales fell over 40% despite a more favorable comparison to the previous period as the quarter progressed. In Hainan and Asia travel retail overall, while foot traffic returned, conversion rates remained significantly lower than pre-pandemic levels due to weak consumer sentiment reducing basket sizes and, to some degree, consumers prioritizing spending on experiences. In the US, retail sales growth in the prestige beauty industry increased consistently throughout the fourth quarter, growing at a compelling rate of mid-to-high single digits. Encouragingly, our company retail sales also rebounded. Although we faced market share loss in the prestige beauty sector largely caused by our exposure to slower growth channels, we managed to reduce this loss in the fourth quarter, thanks to our growing presence in high-growth channels like Amazon and specialty-multi. This trend continued in July, with our company retail sales showing mid-single-digit growth driven by double-digit growth in fragrance and hair care. Furthermore, by July, our retail sales in skincare improved to mid-single-digit growth, and we gained market share in that category. For fiscal year 2025, we anticipate the global prestige beauty industry will grow by 2% to 3%, reflecting ongoing strengths in many developed and emerging markets. The western market, which exited fiscal year 2024 on a positive note, is expected to enhance industry performance. Meanwhile, the eastern markets are anticipated to face challenges as growth in Japan and Southeast Asia offsets ongoing declines in mainland China and Asia travel retail. We project the global prestige beauty industry will return to historical mid-single-digit growth in fiscal year 2026, assuming a gradual stabilization and return to growth in China. Considering the industry landscape and the size of our business in the most challenged areas, our organic sales growth outlook for fiscal year 2025 ranges from a decline of 1% to an increase of 2%. This forecast indicates acceleration in several business areas, though it is partially offset by declines in mainland China and Asia travel retail. Our organic sales outlook points to further challenges in the first quarter, which Tracey will detail shortly. For fiscal year 2025, we intend to refocus our consumer-facing investments on our biggest opportunities and streamline our organization to increase agility and support organic sales growth momentum across many areas of our business in both developed and emerging markets. We also aim to strengthen our position in North America by leveraging our leading brands in prestige makeup and skincare, where we have the top two brands in makeup and four of the top five in skincare. Additionally, we will capitalize on market strengths across different age demographics to contribute to balanced industry growth. Our strategic priorities for fiscal year 2025 begin with skincare, which accounts for over 50% of our sales and is our most profitable product category. Our initiatives will leverage our top-ranked global prestige skincare portfolio to attract new customers and engage loyal ones through enhanced precision marketing, an innovative product pipeline, and expanded reach in high-growth channels. This begins with The Ordinary, which entered fiscal year 2025 with strong momentum, having grown its organic sales by over 20% in fiscal year 2024. The Ordinary is at the forefront of capitalizing on growth opportunities in various products, channels, and regions. In the fourth quarter, The Ordinary launched its first lip care product, conducted a very successful TikTok Shop Super Brand Day campaign in the US, and established a presence in Japan. For fiscal year 2025, The Ordinary is entering the body care subcategory and preparing to expand further into emerging markets following successful launches in India, the Middle East, and South Africa over the past two years. Among our incubated brands, NIOD showed notable success in fiscal year 2024 and has a promising future. Clinique is also making significant progress, focusing on its dermatologist heritage and expanding globally after successful launches in the US and UK earlier this year. Clinique has returned to growth in the US prestige skincare market, achieving three consecutive months of gains through July, and its performance in US retail was especially strong in July, where it regained the top rank in overall prestige beauty. La Mer, along with Estee Lauder and the Re-Nutriv brand, is central to our luxury skincare strategy, with both brands set to build on their previous successes. For Re-Nutriv, we plan to expand the product line with a focus on skin longevity and visible age reversal through the new moisturizer and serum foundation launched this year. With The Ordinary, Clinique, Estee Lauder, and La Mer, we will bring a rich innovation pipeline to the market in fiscal year 2025 that emphasizes nighttime skincare rituals and educates consumers on additional usage. Our brand portfolio is strategically aligned to address diverse skin concerns and types with specific ingredients and offers that appeal to various consumer segments at different price points. Next, we will focus on capitalizing on high-end fragrances, where our luxury and artisanal portfolio, including Jo Malone London, TOM FORD, Le Labo, KILIAN PARIS, Frederic Malle, and AERIN Beauty, grew organically in the mid-single digits in fiscal year 2024. The luxury tier of the fragrance market, where we hold the top position, was the best-performing category in retail sales last fiscal year, and we anticipate this trend will continue into fiscal year 2025. We are determined to harness the growth potential of high-end fragrances, benefiting from broad trends worldwide to enhance our company's scale. From Le Labo's strong performance in fiscal year 2024 in the Asia Pacific region, where organic sales nearly doubled, to Jo Malone London's innovative campaign with Tom Hardy, we are well-positioned to maintain our momentum. Our brands are set for distribution expansion and compelling new offerings, enticing consumers to the luxury segment, and we are excited about the upcoming launch of Balmain Beauty in the fragrance category. We are also concentrating on accelerating sales growth in the prestige tier with our Estee Lauder and Clinique brands, with rich go-to-market activations planned for this quarter and beyond. Our strategic priority also involves winning in fast-growing global channels. We are embracing a bolder approach to merchandising our brands where consumers are increasingly discovering and shopping for beauty, while maintaining our high-touch strategy. Although this includes both physical and online retail, I will share online examples today. In the US, our launches of Clinique, Too Faced, and Bumble and bumble on the Amazon Premium Beauty store in the latter half of the year exemplify this approach. Clinique introduced a skin analysis tool in March and later expanded to offer live chat with a Clinique ambassador in June, while Bumble and bumble provided extensive hair education from expert stylists. All three brands have started strong performances in the US Amazon Premium Beauty store, with Clinique and Bumble and bumble also attracting male consumers. Encouragingly, after a full quarter of performance for Clinique, we see high levels of consumer subscriptions and repeat purchases. So far in fiscal year 2025, Dr.Jart+, Smashbox, and Lab Series have opened storefronts in the US, with more launches to come. Globally, we are generating growth momentum through social commerce, targeting new consumers by engaging them through the platforms they frequent, utilizing a content-focused strategy involving live streaming and short videos, and integrating social media with commerce. In China, we have achieved strong growth and have more brand launches planned for fiscal year 2025. In Japan and Korea, we are unlocking opportunities on platforms like Line and Rakuten, enhancing social commerce on Kakao with a gifting focus. Finally, we aim to enhance our precision marketing capabilities to better focus on acquiring new consumers. This framework, which spans brand equity, product range, distribution, and media, allows us to target new customers effectively while improving acquisition efficiency. Our strategy leverages data, including over 200 million consumer profiles built over time and exclusive partnerships with AI innovators. Our precision marketing capabilities also enable us to quickly respond to trends. During fiscal year 2024, we began pilot studies in various markets to merge trends with our extensive product portfolio and activate against them swiftly, yielding promising results, including successes with the peach makeup and bronzing trends. We have formalized this process and developed a trend AI tool to empower our brand teams worldwide in quickly activating trends. In conclusion, our strategy reset is designed to position the company for a stronger future. We are dedicated to executing effectively across these initiatives and our PRGP to realize the company’s proven performance once again. I want to express my sincere gratitude to our employees for their dedication during this challenging period. Now, I'll hand the call over to Tracey.

Thank you, Fabrizio, and hello, everyone. We faced another difficult year across several areas of our business and took specific actions to improve our sales and profit results sustainably, as the recovery we anticipated was impacted by greater volatility. While we returned to growth in the second half, primarily due to resumed shipments in Asia travel retail, we are not satisfied with our overall full-year results. The global prestige volatility and our strategic execution did not meet our expectations in some key business areas. During the year, we also largely completed the basic design and began implementing our multiyear PRGP to achieve stronger results against our expectations for more gradual sales growth and increased profitability. Before I discuss our fiscal 2025 outlook, let me first share our fiscal 2024 fourth-quarter and full-year results. Our fourth-quarter organic net sales increased by 8% compared to last year, matching our expectations, albeit with a different geographical mix than we anticipated, primarily reflecting lower results in mainland China and North America due to further softness in overall prestige beauty in these markets. Tentative consumer sentiment in China and consumer inflationary pressures in North America contributed to the slowdown in both areas. Diluted EPS rose to $0.64 from $0.07 last year, exceeding our expectations because of our operating performance and the reduction in our full-year effective tax rate. From a geographic perspective, organic net sales rose 32% in EMEA, mostly driven by our Asia travel retail business, given the favorable comparison to the previous year when shipments were extremely low. Additionally, organic net sales increased in both our developed European and priority emerging markets. Organic net sales in Asia Pacific decreased by 4% due to ongoing softness in overall prestige beauty in mainland China and lower shipments in Hong Kong SAR as we anniversary the initial sales surge post-border reopening last year. Outside of these markets, net sales surged in Japan, boosted by favorable currency, strong in-market activation, and increased consumer reach, enhancing growth across nearly all product categories and distribution channels. In the Americas, organic net sales fell by 5%, primarily due to the decline in North America, reflecting a highly competitive environment and an overall growth slowdown in prestige beauty, particularly in brick-and-mortar channels, which notably affected our skincare and makeup categories. However, online sales in the region grew mid-single-digits, aided by retailer.com growth and the launch of select brands, including specialty Clinique on the US Amazon Premium Beauty store. From a product category standpoint, skincare organic net sales rose by 15%, largely due to increased shipments within the Asia travel retail business driving net sales growth from both La Mer and Estee Lauder. Organic net sales from The Ordinary also saw an increase across all regions. Makeup organic net sales rose by 1%, with net sales from Estee Lauder benefiting from resumed shipments in our Asia travel retail business and the continued global success of the Double Wear product franchise. Clinique’s net sales experienced strong double-digit growth, fueled by the Almost lipstick product franchise. We also faced declines from M·A·C and TOM FORD. Organic net sales grew by 2% in hair care and 1% in fragrance. Fragrance net sales growth was driven by ongoing consumer interest in Le Labo’s unique products and targeted expanded consumer reach for Jo Malone, although this was partially offset by declines in Estee Lauder and Clinique. Our gross margin improved by 380 basis points to 71.8% compared to last year, mainly reflecting lower obsolescence and overhead charges, as well as higher skincare sales. Operating expenses decreased by 340 basis points as a percentage of sales to 62.7%, driven largely by the increase in net sales, improved gross margin, and reduced general and administrative expenses. During the quarter, we recorded $471 million in impairment charges related to Dr.Jart+ due to lower-than-expected growth and profitability. We decided to exit the brand from its heavily discounted travel retail channel and prioritize investments in more profitable areas, such as mainland China and Western markets where the brand’s broader assortment resonates well with consumers. Operating income rose to $349 million, and our operating margin expanded by 700 basis points to 9% in the quarter. Our effective tax rate for the quarter was 22.8%, compared to a negative 17.9% last year, which reflected a significant year-end adjustment to align with our final effective tax rate for fiscal year 2023. Our current rate was better than anticipated this year, mainly due to a shift in our geographical mix of earnings. Diluted EPS increased to $0.64 from $0.07 last year, mainly due to improved operating results, although partially offset by an unfavorable impact from the rise in our effective tax rate. Foreign currency translation resulted in a $0.03 dilution to EPS for the quarter, and the business disruptions in Israel and other regions of the Middle East led to an additional $0.02 dilution. Looking at our full-year results, despite growth in the second half, our overall performance reflects both volatility and challenges in specific key business areas. Factors such as pressure in mainland China from ongoing softness in prestige beauty, actions taken in Asia travel retail during the first half to reduce high inventory levels in a soft retail environment, and competitive pressure in North America outweighed solid growth in our EMEA and LatAm markets. Organic net sales fell by 2% mainly due to the ongoing softness in prestige beauty in mainland China, resulting in a 3% decline in Asia Pacific. The challenges in Asia travel retail also pressured sales, leading to a 2% decline in EMEA, as our return to growth in Asia travel retail in the second half could not offset the initial decline due to retail deceleration throughout that period in China. Net sales in the Americas were flat compared to last year. In terms of categories, skincare net sales decreased by 3%, largely due to declines in mainland China and Asia travel retail, while makeup saw a decline of 1%, reflecting these challenges alongside a prior-year benefit from M·A·C's loyalty program revisions. Hair care net sales decreased by 4%, while fragrance rose by 2%. In light of the ongoing volatility this year, our teams aimed to balance cost efficiency measures with consumer-facing investments to support growth. Net sales with our specialty multi-retailers and in our freestanding stores each experienced double-digit growth. Global travel retail accounted for 19% of our reported sales in fiscal 2024, while online net sales made up 28%. Our gross margin improved by 30 basis points to 71.7% compared to 71.4% last year, thanks to initiatives to reduce excess inventory and changes in brand mix. However, foreign currency effects and under-absorption of overhead due to necessary production cuts earlier in the year partially offset this progress. Operating expenses rose by 160 basis points to 61.5% of sales due to the sales decline and investments supporting growth in areas where we had momentum. Operating income fell by 13% to $1.6 billion from $1.8 billion last year, while our operating margin contracted by 120 basis points to 10.2% for the full year. Our effective tax rate for the year was 31%, compared to 26.5% last year due to a higher effective tax rate on foreign operations stemming from the geographical mix of our earnings and unfavorable impacts related to previously issued stock-based compensation. Net earnings amounted to $935 million, and diluted EPS reached $2.59, both down by 25% compared to last year. The effects of foreign currency translation were a $0.10 dilution to EPS, while business disruptions in Israel and the Middle East contributed $0.06 to the dilution. We generated $2.4 billion in net cash flows from operating activities, compared to $1.7 billion last year. This increase is due to improvements in working capital, primarily from actions taken to reduce in-house inventory levels. We utilized $919 million for capital investments and returned $947 million to stockholders through dividends. After initially investing in DECIEM in 2017 and increasing our stake to become the majority owner in 2021, we successfully acquired the remaining equity interest in DECIEM this past May for $859 million, with $829 million paid as of June 30, 2024. Looking ahead to our fiscal 2025 outlook, we recognize some initial strengths in our strategy, but we are aware that overall global prestige beauty growth has slowed in recent months, evident in the current declines in mainland China and Asia travel retail, especially Hainan. Prestige beauty growth has also moderated in major markets like North America. While we believe we have the right priorities for growth, we remain aware of the ongoing variability in many markets. Thus, we are projecting a more subdued recovery of growth in fiscal 2025, as detailed in this morning's press release. The PRGP is a crucial component of our plan to achieve margin expansion and establish the cost structure needed to enhance leverage in our business, even under lower-than-normal growth expectations this year. This is expected to yield significant profit flow-through benefits as net sales gradually return to higher growth in subsequent years. In fiscal 2024, we had already initiated actions to address overcapacity in our supply chain, including streamlining manufacturing and distribution costs for quicker responses and simplifying certain overhead structures. Our PRGP initiatives focus on three main benefit areas: first, accelerating margin expansion through gross margin recovery and additional expense leverage while generating more cash; second, fueling growth through targeted investments in consumer activities; and third, simplifying processes to enhance agility and speed in execution. We have commenced many initiatives within these three benefit areas for the company. In terms of margin expansion, our significant production reductions at the start of last year have already yielded cash benefits in fiscal 2024, along with benefits from lower discounts and obsolescence costs, with reductions expected to continue into fiscal 2025. Additionally, we plan to achieve greater net benefits from our strategic pricing actions by reducing discounts and promotions while emphasizing precise marketing. These measures, combined with the advantages of innovative products, particularly in skincare, should support our expected gross margin expansion this year. Regarding expense leverage, with the anticipated slower return to growth, there is more pressure from fixed costs. We are actively carrying out our restructuring program and have approved initiatives to reduce spans and layers in specific business areas. Furthermore, we are enhancing our shared services capabilities to simplify and standardize key processes and accelerate scaling, as well as rationalizing our distribution across our brand portfolio. We have negotiated savings across several spending areas and are already seeing cost reductions in areas like transportation. We are taking this opportunity with the PRGP to streamline decision-making and boost our agility and execution speed in the dynamic global prestige beauty landscape. More updates will come in future earnings calls. We expect that about 80% of the net benefits from the PRGP in fiscal 2025 will be directed towards improving gross profit, with the remaining 20% aimed at reducing certain operating expenses. This mix may shift in fiscal 2026 as more expense actions positively affect our overall structure, depending on the initiative timeline. We also anticipate restructuring and other charges between $100 million and $120 million in fiscal 2025 from approved initiatives, with additional charges likely as more initiatives are finalized and approved. However, with modest sales growth expected in fiscal 2025, we will unfortunately face a greater amount of fixed expense de-leverage along with unfavorable mix pressures from weaker performance in some higher-margin categories and regions. As previously mentioned, we are reserving a portion of the savings from the PRGP to reinvest selectively in advertising and store activation to support growth in our brands and regions where we have momentum, as well as to aid the growth we are seeing in active derm, luxury fragrance, and distribution expansion in faster-growing channels. We started this fiscal year with our team fully engaged and dedicated to executing initiatives across all areas of the PRGP now that we have completed the design phase. We aim to deliver approximately $1.1 billion to $1.4 billion in incremental operating profit from the full PRGP. While we plan to realize slightly more than half of the net benefits in 2025, additional savings initiatives may be necessary due to lower anticipated sales volumes. Overall, we expect to see accelerated margin expansion as a result of the plan, aiming for annual margin expansion exceeding our pre-pandemic historical average, including creating additional growth fuel at an increased pace as well. Therefore, fiscal 2025 is projected to be a transition year for the company, navigating ongoing macroeconomic challenges while accelerating growth in areas where we have momentum and executing against our PRGP initiatives to realize anticipated benefits. Our strategic focus for the year centers on leveraging the strengths of our brands, categories, regions, and talented employees. In the coming years, Western markets and Asia Pacific markets outside of China are poised to drive a larger share of our long-term profitable growth as we focus on fast-growing channels within these regions. We aim to leverage our skincare brands with strong luxury and active derm appeal, expand our luxury fragrance portfolio's consumer reach, respond to relevant trends with our makeup brands, and revitalize our hair care offerings, all while attracting new consumers and retaining loyal ones. Additionally, we plan to leverage our regional manufacturing and distribution network in Asia for greater inventory flexibility as demand fluctuates. With this context and using updated exchange rates, full fiscal year organic net sales are projected to range from a 1% decline to a 2% increase. Throughout the past fiscal year, to mitigate expected pressures, we accelerated implementing initiatives under our PRGP, which we believe, combined with our sales growth range, will lead to most margin expansion being realized in gross margin for the full year. Our effective tax rate for the upcoming year is forecasted to be around 32%. We expect diluted EPS to range between $2.75 and $2.95 before restructuring and other charges, including around $0.03 dilution from currency translation. In constant currency, we anticipate EPS growth of approximately 7% to 15%. Net cash flows from operating activities are expected to fall between $1.8 billion and $2 billion, with capital expenditures planned around 5% to 5.5% of forecasted net sales. Our first-quarter results will likely be pressured by the ongoing challenges in mainland China and Asia travel retail that we experienced at the end of fiscal 2024, primarily due to subdued consumer sentiment, more spending on experiences, and lower conversion rates. Nevertheless, we are observing early signs of progress, particularly in North America, as mentioned by Fabrizio, with our strategic adjustments and the anticipated gradual recovery of prestige beauty sales growth in mainland China and Asia travel retail. We expect overall improvement as the year progresses. For the first quarter, we currently expect organic net sales to decline by 3% to 5%. At this time, we anticipate first-quarter diluted EPS to be between $0.02 and $0.10 before restructuring and other charges, including an approximate $0.01 benefit from currency translation. In constant currency, we expect EPS to range from $0.01 to $0.09. Assuming a full-year global prestige beauty performance of 2% to 3% in fiscal year 2025, we expect our other three quarters to meet or slightly exceed this growth, aligning with our goal of surpassing the average of global prestige beauty growth by at least one percentage point. With the implementation of PRGP initiatives, if global prestige beauty accelerates further in fiscal year 2026, the combination of increased sales momentum and margin leverage from PRGP should further propel us towards a more sustainable sales and profit growth trajectory. In summary, although our fiscal 2024 performance was disappointing, we remain focused on navigating the current volatile dynamics of global prestige beauty while leveraging our brands' long-term strengths. We are confident in our strategic adjustments and in executing our PRGP to drive profitable growth in fiscal 2025 and beyond. I want to extend my gratitude to our global teams for their resilience and commitment during another challenging year. Before I turn the call back to Fabrizio for final comments, I want to mention that I've announced my planned retirement at the end of this fiscal year. I congratulate Akhil Srivastava on his appointment as CFO, effective November 1, and I look forward to collaborating with him during this transition period and appreciate his dedication to the company and its ongoing success.

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

Thank you very much. There’s a lot to discuss. Fabrizio, let's continue from where you left off, as you and Tracey have highlighted a very challenging and transformative period for the company. As you look ahead at the priorities for Estee Lauder, what are the key attributes you would consider important in your successor? How involved will you be in the process of finding that successor in the coming months and quarters?

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

Hi, thanks, operator. Good morning, everyone. To provide some perspective on fiscal '25, Tracey, could you share your thoughts on how our earnings power might have looked if China hadn't slowed down since your last update? Or, in other words, how do you think the changes in your forecast this year and the trend in China impacted our earnings power for fiscal '25?

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

Great, thanks. Good morning. I wanted to follow up on what you just shared about earnings growth even if sales are flat or declining. You mentioned halting some activities and protecting certain investments while noting the expense reductions. How should I interpret this without being concerned about constrained investments this year? The market is constantly evolving, especially in North America, which is becoming more competitive. Other companies, whether global or local in markets like China, are likely not reducing their investments. Everyone will want to capture market share even when the overall market is struggling. How can we be sure that there won't be insufficient investment directed towards 2025 just to achieve some earnings growth? Additionally, when we revisit this discussion next year, there will be new leadership in place and a strategic reset, but it’s uncertain if there will be another reset after that. I understand that's a lot to unpack, but those are my thoughts, and I would appreciate hearing both of you weigh in on them. Thanks.

Of course, Lauren. If you think about when we first described the PRGP, we said we have gross savings, and we are investing some of those gross savings to fund the program as well as create fuel for some of our consumer-facing investments. So when you think about the cadence of results and savings that we expect from the program, there are benefits in the first quarter, but that will progressively improve through the course of the year as our actions materialize. We are funding some consumer-facing investments out of the gross investments in our PRGP. I mentioned that even in fiscal '24, where we had green shoots, many of those strategies were put in place before some of the innovations we came out with and some of the plans we had to expand in faster-growing channels. So we have tried to protect some of the consumer-facing investments, and as we see growth happening in certain areas, we will certainly fund more of it based on some of the savings generated throughout this year in the PRGP.

Also, Lauren, I wanted to add a concept here, which is my intention also in announcing the retirement at the end of the fiscal year is to work together with the Board, together with the team, and when announced together with my successor, on making sure that we put the company in a position to leverage growth momentum in general in all the areas where the opportunity will be in the China market where today we see declines to continue to grow market share; that's the focus. In terms of the PRGP, we aim to ensure that we have sufficient investments in all the key areas of the business where this momentum has to be preserved in the future. Those are key goals that we are going to pursue. I hope that the strategic reset we explained indicates not only the numbers but the content on which we want to invest. We have extraordinary strengths in our brands, brand equity, and in our portfolio. We continue to have great, high repeat rates because our products resonate with consumers. Our innovation is getting much stronger in many areas. We have two big strategic reset areas: one is lowering the exposure to declining markets and channels, substituting this with high-growth markets and channels; the second is actually improving the effectiveness of our marketing plans and recruitment strategies. We aim to focus more than ever on new consumers, and I believe that will make a big difference. All I just said is really the purpose of the transition, and it will be tailored to that.

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

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

I want to add the perspective that this is a big priority for us: better stock normalization in travel retail in the future. Retail in quarter four went down much more than expected, which created temporary stock levels. We are already reacting in quarter one, readjusting it. That should be seen as better management of this in the future. We are also preparing to build a distribution center in Hainan that will further shorten the time between orders in travel retail and delivery, making this process better over time.

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

Travel retail will be lower than it was in fiscal '24 because we're expecting it to be negative all year. It will be a lower percent of our mix. As Fabrizio mentioned, part of what is happening is we're seeing channel shifts. We're seeing some of the travel retail business go to other regions, whether it's remaining within mainland China or traveling back to international markets. We expect that it will continue to shrink as a percent of our mix, at least in fiscal 2025 and hopefully see some stabilization after that. In terms of the faster growth channels we are pivoting to, they represent growth. Different channels have different margins. As you know, we don't give specific channel margin information. However, those channels are allowing us to recruit new consumers in a margin accretive way for the company overall when we see the kind of reversal that we saw even in the last few months, launching on Amazon with Clinique. That’s something we are focused on. Fabrizio spoke about other platforms, with online being a big focus for us from a strategic perspective, particularly in other parts of the world that represent growth and consumer recruitment. This is a significant area of strategic pivot for us that we expect will be margin accretive overall.

I want to add that as you have heard from our examples today, much of this channel rebalancing is also between online and brick-and-mortar. The online is very efficient for many reasons. Over the last few years, we've developed online platforms that we are now in a condition to scale and leverage in our activations across various online channels. When you invest in a high-growth channel where consumers are particularly active, especially younger consumers, the return on investment in advertising and the ability to recruit new consumers increases while the cost of recruitment tends to be higher in declining channels. This overall move for us will be positive in the long term, and we are managing this with profitability mix in mind, one of the key things that we need to achieve.

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

I'll start, and then Tracey will respond. I assume when you say category growth, you define the category as the prestige global market in total. That's what I understood for your question. The overall category growth of the luxury prestige part of the beauty business has historically grown in the mid-single-digit range. The factor today with China and travel retail Asia declining double digits in those markets is reflected in our forecasting of the 2% to 3%. That forecast does not assume a stabilization of that. Thus, it's our attempt to avoid guessing the future, which currently is very difficult to predict due to the volatility. The difference between stabilized Chinese consumers and the market with stable growth in China has been mid-single-digit growth, and that's the difference between the 2% and the 5%. If we expect the overall global category, as you define it, to benefit from the stabilization of the China retail consumption market, then it will make the category stronger. Assuming historical performance where we saw declines, the market typically bounces back the year after. The demographic fundamentals for long-term development of this category remain intact globally. Still presenting strong opportunities in places like Asia ex-China and parts of Europe and America, despite gradual reductions in growth. As a company, we believe our strategy reset and the ability of our PRGP to place us back on track for leverage will put us in a condition to grow at least one point ahead of the market long-term and to reestablish the way we think of our long-term growth algorithm as growing ahead of the market.

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

In our guidance, we reflect the current moderation of growth because again, we are not guessing at the future. The moderation of that growth, however, brings the market still in the mid-single digit growth. It's not a bad market; the US has been weaker in the past. It’s still a relatively strong growth market today. In this relatively solid market, we are working on dramatic improvements. In the fourth quarter, we saw progress. Retail grew, even with net difficulties. But retail continues to grow. In July, our retail accelerated further, encouragingly reflected in many improvements across our brands. For example, Clinique is showing very exciting progress, which is super encouraging. All brands where we have started implementing a new strategy are seeing extraordinary progress, validating that once we implement improvements across the portfolio, we could achieve stabilization, which is the first goal we have in mind. So in summary, we are cautious of the overall market in the US, but we are optimistic about our progress in executing an improvement strategy.