Estee Lauder Cos. Inc (EL) — Q1 2025 Earnings Call Transcript

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

Thank you, Rainey, and hello to everyone. For the first quarter, we anticipated a challenging start to fiscal year 2025. Our results today are largely consistent with the outlook for the quarter we offered in August. Organic sales decreased 5% at the low end of the expected range, driven by double-digit declines in mainland China, global travel retail primarily owing to Asia, and Hong Kong SAR. Excluding these three areas, sales in the rest of our global business rose 1% both on a reported and organic basis, while retail sales growth accelerated sequentially from 2% to 3%. A number of markets continue to deliver organic sales growth in our first quarter, led by Japan, where we gained prestige beauty share. The developed markets in EMEA and our emerging markets also grew organically, while North America declined modestly as it compared to a big innovation launch calendar in the previous year. While we are not satisfied with our organic sales performance, we are encouraged by initial results from several pillars of our strategy reset that we announced in August, which I'll elaborate on in a few minutes. Despite a lower level of total company-reported sales, adjusted gross margin expanded by over 300 basis points. Initiatives of the PRGP drove improvements, as Tracey Travis will describe. We strategically increased AAP spending as a percentage of sales in support of our robust innovation pipeline to realize over 100 basis points of adjusted operating margin expansion, despite significant operating leverage. We delivered adjusted EPS of $0.14, better than $0.11 in the year-ago period, and $0.04 above the high end of our outlook range. Looking ahead, as the quarter evolved and through October, it became increasingly apparent that we are facing greater macro headwinds for fiscal year 2025 than we expected in August. First, the prestige beauty industry-reported retail sales in mainland China further weakened sequentially, from a 10% decline in our fourth quarter to a mid-teens percentage decrease. Importantly, we gained share in prestige beauty in mainland China for the second consecutive quarter, driven by industry-leading share gains in skincare and a return to share gains in makeup. Consumer sentiment in mainland China weakened further in our first quarter. While we believe the new economic stimulus measures present medium-to-long-term potential for stabilization and then, ultimately growth in prestige beauty, we anticipate still strong declines near-term for the industry. Second, the prestige beauty industry in Asia travel retail continues to be significantly pressured, as commercial levels are still far lower than pre-pandemic. Third, the U.S. prestige beauty industry retail sales slowed sequentially, from high single-digit growth in our fourth quarter to mid-single-digit growth, as elevated levels of inflation-driven pricing fade. While this is still good growth, the months of August and September possess lower growth than July. Encouragingly, although the U.S. prestige beauty industry's retail sales growth decelerated sequentially, our company's retail sales growth accelerated. And we further reduced our prestige beauty share loss. We believe we are well on our way to stabilizing shares in the U.S. as we increase our exposure to high growth channels, and we have our sights set on a return to prestige beauty share growth. With this complex industry landscape, including the particularly difficult difficulty in forecasting the timing of market stabilization and recovery in China and Asia travel retail, and in the context of the retirements of Tracey and myself, we are solely issuing an outlook for the second quarter and withdrawing our fiscal year 2025 outlook. Additionally, we are reducing our dividends to a more appropriate payout ratio, which will also create more financial flexibility for our incoming leadership team to re-accelerate our profitable growth trajectory. Our second quarter outlook reflects the extensive headwinds at retail in China and Asia travel retail, as we do not expect to see benefits from the stimulus in the near term. We intend to continue investing behind our strategic reset, especially in support of our rich innovation pipeline and expanded consumer reach. Our strategic reset at this point in time is focused on continuing to rebalance our regional growth, evolving our exposure to China market volatility, which has already come down by nearly 10 percentage points since fiscal year 2022. At the strategic reset, core is the PRGP aimed at restoring sustainable long-term organic sales growth. In part through generating reinvestment opportunities as well as rebuilding profitability and increasing agility. For fiscal year 2025, we are focused on executing the PRGP with excellence. During the first quarter, the focus and dedication of our teams around the world enabled us to establish a strong foundation for delivery for the plan. We have made good progress in operationalizing the PRGP, evident in our gross margin expansion despite the pressure to mix from skin care decline as well as beginning to rightsize areas of our organization and address expenses to reflect the lower-than-expected sales growth in the last two fiscal years. As you know, our strategic reset for fiscal year 2025 also has the following five priorities: Bring it skin care, capitalize on the multiple growth drivers of high-end fragrance, move faster in leveraging winning channels, launch accretive innovation, inclusive of new big opportunities, a modernized precision marketing by leveraging data and AI, the latter of which we call our consumer-centric growth model. Today, let me share our progress across skin care, fragrance, as well as leveraging winning channels. For skin care, we began to realize our ambitions to drive consumer demand in the ritual of nighttime skin care as we brought exciting innovation to market, appealing to a diverse range of consumer segments. Our Estee Lauder brand has long been a leader in the science of skin recovery with its advanced serum. Its new advanced repair overnight treatment drove expanded regimens by both loyalists and new consumers. This launch, coupled with a brand-new moisturizer in the supreme franchise focusing on improving signs of collagen loss with overnight visible line reductions led to high single-digit organic sales growth in skin care in the markets of EMEA. La Mer further contributed to our momentum in nighttime skin care. Its new rejuvenating night cream exceeded our expectations in Asia Pacific, driven by the product's resounding appeal in China, where we saw excellent new consumer acquisition trends and La Mer realized strong share gains in prestige skin care. For Clinique, among its nighttime innovations is the Smart Clinical repair AM, PM retinoid-balanced stick. It has been very well received in its initial markets, demonstrating its ability with nighttime skin care to attract consumers and draw them into the brand with an approachable price point and unique formula. Both this brand and the franchise's new overnight recovery cream plus mask have compelling green stories and strong clinical results, which Clinique scientists recently featured in the prestigious dermatology conference in Amsterdam. Indeed, Clinique's focus on nighttime skin care builds upon the strategy it has deployed earlier this calendar year to double down on its authentic dermatologists' brand heritage. This strategy has been highly successful, evidenced by Clinique's fifth consecutive month of prestige beauty share gains in the U.S. through September. Turning to fragrance. Our confidence in the category's promising growth opportunity remains strong. For the first quarter of our fiscal year 2025, excluding global travel retail, our luxury and artisanal brands delivered mid-single-digit organic sales growth, fueled by gains in every region. Le Labo, Jo Malone, and Kilian Paris were standouts, with significant double-digit growth in China from Le Labo to Jo Malone London's impressive results, expanding with the male consumer to Kilian Paris’ highly sought-after innovation. We are thrilled to have launched Valmont Beauty during the first quarter, beginning with a sophisticated collection of eight fragrances, four of which are Valmont's legacy scents reinvented for the modern era. As we enter the highly important holiday gifting season for fragrance, we are complementing the strength of our luxury and our seasonal portfolio with activations and innovations from Estee Lauder and Clinique to reaccelerate their growth as we aim to better capitalize on opportunities in the prestige tier brands. Let me now move to our pillar of leveraging winning channels. From the Amazon Premium Beauty store in the U.S. to TikTok Shop in Southeast Asia, many of our brands expanded their reach to attract new consumers. Alongside these launches, we also strategically expanded the freestanding store footprint of our luxury and artisanal fragrance portfolio, offering elevated experiential shopping. This exciting work continued into the second quarter when last week, our flagship Estee Lauder brand launched in the U.S. Amazon Premium Beauty store. Before I close, I want to highlight that we recently published our fiscal year 2024 social impact and sustainability report. As detailed in the report, we achieved several sustainability goals, some ahead of schedule, including surpassing our water withdrawal targets, publishing our first corporate ingredient glossary, and reaching our palm oil objectives before our 2025 deadline. For the fifth year in a row, we achieved carbon neutrality across our Scope 1 and Scope 2 greenhouse gas emissions and sourced 100% renewable electricity globally for our direct operations. Along with the report, we also published an update to our climate transition plan, which describes our recent progress and evolution towards our 2030 science-based targets across our climate action work streams. Let me now close by recognizing the evolution of the company's leadership following the retirement announcement of Tracey and myself. As you know, tomorrow Akhil Shrivastava becomes the company's CFO. Akhil has been a proven leader at the company for nearly a decade with demonstrated financial acumen and we look forward to what he will accomplish. On behalf of the company, I extend our deepest gratitude to Tracey for her significant contributions. Tracey embodies the very best qualities of a leader and we are a far stronger organization today given her dedication to all of us. We wish her every joy in her well-earned retirement. Yesterday, marked an exciting milestone in our company with 75 years of history as we announced the promotion of Stephane de La Faverie to be our next President and CEO. I'm thrilled to welcome him into his role as of January 1 and look forward to supporting a seamless transition for the next several months. Stephane’s deep knowledge of our company and the industry, exceptional strength as a leader, and unique ability to combine inspiration, authenticity, and strategic insights to drive profitable growth will enable him to move us forward with speed and agility. To our employees, thank you for your passion for our company and its incredible brands. I'm confident that you and this company that I love will be in great hands. I will now turn the call over to Tracey.

Thank you, Fabrizio, and hello, everyone. I'll begin by reviewing our financial results for the first quarter, followed by the outlook that we are prepared to share today. As Fabrizio mentioned, our first quarter organic net sales declined 5% at the lower end of our expectations. Our adjusted earnings per share was $0.14, which exceeded our initial outlook for the quarter, primarily due to the timing of certain expenses. Starting with our regions. Organic net sales in our Asia Pacific region decreased 11%, mainly driven by further softening in overall prestige beauty due in large part to our consumer sentiment in mainland China. In addition, we experienced a net sales decline in Hong Kong SAR, where sales were pressured by lower spending from traveling consumers as well as reduced foot traffic at retail. These declines were partially offset by continued strength in Japan, where domestic and traveling consumers drove double-digit growth in both brick-and-mortar and online channels. Organic net sales in our Europe, the Middle East and Africa region decreased 4%, driven largely by the ongoing challenges in our Asia travel retail business. Our global travel retail net sales decreased double digits due to lower replenishment orders in Asia travel retail. This reflected the further retail market deceleration and worsened consumer sentiment in China, resulting in lower conversion rates. Consequently, while we managed to reduce our overall initial inventory levels in the trade, it was at a slower pace than we initially expected. Elsewhere in EMEA, net sales grew low single digits, benefiting from commercial activations like Estee Lauder's #NightDoneRight campaign as well as both existing products and new product launches, including the Clinique caplet franchise. Luxury fragrances were also strong, led by Le Labo. Retailer and pure-play sites drove overall double-digit growth from online channels. Organic net sales in the Americas decreased 1%. In North America, our retail sales in the U.S. accelerated sequentially. However, our soft retail sales from M·A·C, TOM FORD, and Too Faced led to overall lower net sales, reflecting fewer replenishment orders for these brands. A strong competitive environment and the continued moderation of growth in prestige beauty in the U.S. also contributed to the net sales decline. Our team remains focused on evolving our channel distribution mix towards fast-growing channels with the consumer, as evidenced by the launch of seven brands in the last eight months in Amazon's U.S. premium beauty store, including our most recent launch of Estee Lauder, as Fabrizio mentioned. This strategic pivot drove our double-digit online growth in the U.S. In Latin America, continued net sales growth in Brazil, led by makeup drove double-digit increases in our freestanding stores and specialty multichannels. From a category standpoint, organic net sales declined 8% in skincare and 6% in hair care. In skincare, the organic net sales decline was largely due to the pressures in Asia Pacific and in our Asia travel retail business, which more than offset the growth we experienced in the Americas and the markets of EMEA, including from Estee Lauder with its successful nighttime activations and shipments for the products launched in Amazon's U.S. Premium Beauty store. Organic net sales in makeup decreased 2%, driven by declines from M·A·C and Too Faced primarily reflecting the brands' retail softness in North America. These declines were partially offset by standout performance from Clinique, which saw strong overall double-digit net sales growth, driven by contributions from all regions. The brand's existing products and new innovation in its Clinique Pop and Almost Lipstick product franchises, along with its launch in Amazon's U.S. Premium Beauty Store in fiscal 2024 primarily drove the brand's growth in the quarter. Organic net sales in fragrance decreased 1%, mainly due to declines from TOM FORD, Clinique, and Estee Lauder, driven by pressures in both our Asia travel retail business and North America. These decreases were partially offset by growth from the rest of our luxury fragrances, particularly in the Asia Pacific region and the markets of EMEA driven by products, new innovation, and targeted expanded consumer reach. Our gross margin expanded 310 basis points compared to last year, largely due to a reduction in obsolescence charges as we better aligned our inventory on hand with our shipments throughout last year. We also better capitalized on our strategic pricing initiatives by reducing discounts related to excess production and promotions while leveraging our pricing power ahead of inflation through a more granular pricing methodology. This was partially offset by the unfavorable change in mix, particularly the decline in skincare and the corresponding fixed deleverage. Our gross margin for the quarter also improved 90 basis points sequentially versus our fourth quarter. With this progress, we are pleased that key initiatives under the PRGP are beginning to address the specific pressures to gross margin that we experienced over the past two years, including the sales pressure we continue to experience in the quarter. We obviously still have much more to do, and the company remains focused on controlling excess and obsolescence through our integrated business planning process to better align our forecast accuracy and demand planning, as well as addressing other cost opportunities in the supply chain. Operating expenses increased 190 basis points as a percent of sales during the quarter, primarily driven by selling expense deleverage and advertising to support new product launches. This deleverage offset the net benefits and expenses realized under the PRGP in the quarter. As I mentioned in August, most of the PRGP's estimated net benefits this year are expected to be realized in improving our gross profit margin, with approximately 20% of the benefits realized in reducing certain operating expenses. We expect to achieve greater net benefits and operating expenses for the remainder of the year from the plan as initiatives are further operationalized and as benefits from our restructuring program progress. Operating income increased 33% to $144 million, and our operating margin expanded 120 basis points to 4.3% compared to 3.1% last year. Our effective tax rate for the quarter was 38.8% compared to 17.9% last year. The increase is mainly due to the lower tax base in the prior year, which included the utilization of income tax credits and benefits from previously issued stock-based compensation. Diluted EPS was $0.14 compared to $0.11 last year, due to the improving operating profit performance. Our plans under our previously communicated PRGP are on track and advancing well. We also continue to explore additional savings initiatives to offset some of the impacts from the incremental sales pressure we are experiencing globally, as well as mitigate the impact of reduced volume on certain initiatives within the PRGP. As it relates to our restructuring program, to date, we have taken $221 million of charges primarily related to initiatives designed to optimize and rightsize our value chain by reducing spans and layers. Additionally, we intend to expand our shared services capabilities to streamline and standardize key processes that should enable us to better leverage our sales growth as it occurs. During the quarter, we utilized $670 million in net cash flows from operating activities compared to $408 million last year. The increase in net cash utilization is mainly due to lower net earnings compared to last year and higher taxes paid. In addition, from late August through October of this year, we entered into agreements with certain plaintiff law firms to settle approximately 70% of pending talcum powder cases and established annual capped amounts with each participating law firm for potential future claims over the next five years, starting on January 1, 2025. As a result, we recorded a charge of $159 million related to these agreements. We entered into these agreements in response to the rising number of cases brought against the company as well as to proactively help mitigate the future risk from the evolving litigation landscape related to talc. We invested $141 million in capital expenditures, and we returned $240 million in cash to stockholders through dividends. As you read in our press release this morning, we declared a quarterly dividend of $0.35 per share, a reduction from our previous quarterly dividend of $0.66 per share, as we reduce our dividend to a more appropriate payout ratio given our earnings outlook. And now turning to our outlook. As Fabrizio mentioned, we have made the decision to withdraw the full-year outlook we provided in August and are only providing an outlook for the near-term second quarter today. We have not made this decision lightly and believe it is the right action given the current environment, including the difficulty in forecasting the timing of market stabilization and recovery in China and Asia travel retail and in the context of upcoming leadership changes. Let me expand on some of these incremental pressures on the business. First, as we discussed in August, our initial outlook anticipated pressures in both mainland China and Asia travel retail, expecting these changes to significantly impact our first-quarter results, but moderate sequentially throughout the year, including a modest return to net sales growth in the second quarter. While our first-quarter results are generally aligned with those expectations, the worsening consumer sentiment in these areas has been greater than anticipated and is also now expected to persist in the near term. Although we are cautiously optimistic about the potential medium to long-term opportunities presented by the new economic stimulus measures in China, we believe both the timing and the magnitude of their impact on our business in the region are uncertain. As a result, we now anticipate continued near-term net sales declines in these areas of our business and overall for the second quarter, adding pressure to our EPS. Second, the continued normalization of prestige beauty growth in other markets post-pandemic, along with near-term residual impacts of the previous inflationary period on consumer sentiment has created some uncertainty about the level at which market stabilization will occur and is expected to further pressure our second-quarter results. As mentioned earlier, we remain focused on realizing net benefits from our PRGP initiatives, given the anticipated incremental sales pressure we acknowledge the need to continuously evaluate the plan and, more importantly, take decisive action to maximize its benefits, identify new opportunities for growth, and pursue additional savings initiatives. Using October 24 spot rates of $1.078 for the euro, $1.293 for the pound, $7.126 for the Chinese yuan, and $1.380 for the Korean won, currency translation is not expected to have a material impact on reported sales and EPS for the second quarter. We now expect organic net sales for our second quarter to decrease 6% to 8% compared to the prior year period, largely due to the ongoing challenges in Mainland China and in Asia Travel Retail, as we have discussed, as well as persistent low conversion rates by trailing consumers in Hong Kong SAR. In terms of gross margin, we expect expansion in the second quarter compared to last year, although it is not expected to be at the same magnitude as the level of expansion we saw in the first quarter. Recall that last year's first-quarter gross margin was the lowest of the fiscal year as it was more affected by high obsolescence charges and discounts than in the other three quarters, and it did not reflect the benefits of the strategic actions we implemented later in the year to address these pressures and improve gross margin. We now expect our second-quarter effective tax rate to be approximately 43% compared to 37.7% last year. The increase primarily reflects the unfavorable impact of previously issued stock-based compensation, which tends to have a disproportionate effect in the second quarter due to the timing of equity award vesting and our estimate of lower earnings compared to last year. We now expect second-quarter adjusted EPS of $0.20 to $0.35, for a decrease between 60% to 77% versus prior year. This has undoubtedly been a challenging period for our teams and all of us to manage through. However, as Fabrizio mentioned, we are encouraged by some bright spots that we are starting to see from proactive measures we have taken previously. There is clearly more to be done, and we have confidence in our teams, including our new leadership team, to continue to drive progress forward. As I close this earnings call, I want to express my sincere gratitude to our dedicated employees. Your steadfast commitment, hard work, incredible passion for our brands, and resilience have been vital to our success over these years and certainly will be in the future. And reflecting on my past 12-plus years with the company, I am immensely proud of the many things that we have accomplished together. To our valued investors, thank you for your continued support. Your patience and confidence in our long-term growth strategy and initial PRGP actions have been instrumental as we navigate through this intense period of volatility and the resulting impact it has had on our performance. I am optimistic in the company's ability to continue to take the appropriate decisive actions to manage through this prolonged period of volatility and, supported by the PRGP and the strong results of our employees, to progressively return to more consistent and sustainable sales growth and stronger profitable recovery. Thank you, and that concludes our prepared remarks. So we'll be happy to take your questions at this time.

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

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

I want to emphasize that in addition to the funds we need to reinvest, we are focused on enhancing the quality and returns of these investments, which we are addressing as part of the PRGP initiative. This includes a strategy to boost our precision marketing and consumer-focused marketing, recognizing the improvements needed in digital and social media as we approach every market globally. We are seeing exciting progress, evidenced by market share gains from innovations implemented using these precision marketing techniques. Additionally, successfully accelerating our presence in rapidly growing channels is crucial. By increasing our brand visibility and clarity in these channels, we enhance the returns on our investments. Therefore, it's about not only investing more, as Tracey mentioned, but also ensuring that each dollar spent yields greater results.

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

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

In terms of market share, I could discuss our plans for every global region, but let’s concentrate on the major markets like China, the U.S., and Japan. In China, despite a declining market this quarter, we demonstrated that by focusing on our strategy—emphasizing skincare, particularly nighttime products, excelling in growing channels, enhancing our precision marketing, and leveraging strong innovation—we can still achieve market share growth even in tough conditions. Specifically, we gained over one full percentage point in skincare market share driven by significant innovations such as those from the La Mer brand. We also saw an increase in makeup market share, although our efforts were not as extensive in that area. This clearly indicates the strength of our brand equity, which can drive market share growth when executed effectively. We are optimistic about future opportunities in China. Japan serves as another excellent example, where we dedicated efforts to our fragrance portfolio, particularly with the new Le Labo and Jo Malone flagship stores in Tokyo. This focus led to an impressive gain of 200 points in fragrance market share, making us the number one fragrance company in Japan in just one quarter. These results underline the effectiveness of our strategic focus in achieving outstanding outcomes. In America, retail trends have shown strength, improving from 2% to 3% this quarter in a declining growth market. As Tracey Travis noted, market growth has slowed from 9% to 5%, yet we have outpaced this decline in our growth. Clinique, a long-established market leader in skincare, has seen a five-month streak of market share gains thanks to its major repositioning and trends in mask skincare, alongside notable success in makeup. This growth has been particularly strong at Ulta, demonstrating that platforms like Amazon are not just repeating our existing customer base but also attracting new customers. We aim to continue accelerating market share gains in China and Japan while working towards stabilization and further growth in the U.S. Additionally, we've seen progress in various emerging markets over the past year, and we will maintain our focus on increasing both the investment and precision of those investments. Even amid challenging market conditions in China and Travel Retail, we are committed to recovering market share across all markets.

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

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

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

First of all, we need to recognize that there has to be a change in our business approach. We have introduced what we believe is a strategic reset, and we are dedicated to rebalancing the company's growth model to avoid future reliance on areas of the global market that may become too unstable or unpredictable. This rebalancing is crucial for ensuring consistent growth. For instance, this applies to various sectors, including how we engage with growth trends internationally, how we manage different channels, and how we target consumer segments. A key focus right now is addressing the volatility in Asia Travel Retail and the overall Chinese market, where we have already made a 10-point shift in just two years, with more adjustments to come this year. We are also refining the mix between global department stores and other channels that are currently expanding more rapidly. Additionally, our strategy involves understanding and connecting with younger consumers, which is essential for our future direction. To navigate these changes effectively, we need leadership that possesses a strong grasp of global market dynamics and consumer behavior while ensuring that we remain focused on significant shifts affecting consumers worldwide. Our leadership must prioritize brand development and innovation that cater to various target markets, emphasizing local relevance, which has become increasingly vital. Examples of this include establishing research centers in Shanghai and building factories in Asia to enhance our talent pool in the future. We also need to accelerate our strategies and improve our organization’s responsiveness to trends. This requires agility and speed in decision-making and alignment with necessary changes. I am pleased that the board has chosen to promote from within for this leadership role, as internal leaders are typically more adept at driving the organization toward critical changes effectively and swiftly. It’s crucial that our new leadership understands how to allocate resources wisely in response to evolving global trends. In summary, we require brand builders who act with urgency and courage to implement these necessary changes. I will support this transition alongside our team, and we are eager for the new leadership to make an immediate impact while appreciating the strengths that have been established in our company over the years. We will retain our historical strengths, such as brand quality and heritage, while adapting quickly to new realities. I believe the new leadership team will be capable of delivering the improvements and acceleration you expect from us in the coming years.

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

We have already lowered our capital expenditures from what we initially planned to invest this year. This is definitely one of the areas we are focusing on regarding cash, along with improvements in working capital. Last year, we made significant strides in inventory management, and our inventories are in good condition. However, due to the ongoing sales declines, we are prioritizing our ability to react quickly to changes in the market while tightly controlling obsolescence and discounting. We've improved our planning processes and strengthened our connection with our supply chain to ensure we are making informed decisions about production and overall network management.

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

We have definitely reduced inventory levels in the trade compared to last year and even from the previous quarter. While we made some progress, market deceleration has slowed our expected improvements, meaning it is taking longer than anticipated. Although we are not offering specific guidance for the second half of the year, we do expect to make further progress with inventory in Q2, assuming no major changes from our current guidance. The situation is largely influenced by market volatility. We have effectively managed down the excess inventory accumulated during the pandemic years, but current market fluctuations are affecting our inventory levels. Overall, we are in a much better position than we were a year ago, thanks to significant measures we implemented in the first half of the year.

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

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

I will begin with the gross margin. We anticipate that the gross margin will continue to improve in the second quarter. Although, as I mentioned earlier, it will not show as much year-over-year improvement as in the first quarter. Nonetheless, we do expect further enhancement in the gross margin from the first quarter to the second quarter, even with a 6% to 8% decline in sales, particularly in China and Travel Retail. This situation puts strain on our expense base, which we've noted in previous discussions, as both China and Travel Retail have historically been profitable for us due to high productivity per door in those regions. This added pressure on expenses is balanced by selectively protecting investments in areas of the business that are performing well. The upcoming quarter is significant for us, especially with the holiday season approaching. We are implementing innovative advertising strategies targeted at our faster-growing segments to ensure that we maximize our holiday performance despite the sales decline and the implications of 11/11, as well as looking ahead to the second half of the year. Advertising is one of the areas we are managing carefully, alongside ensuring we have the appropriate staffing in our brick-and-mortar channels to drive sales. Another strategically protected area this year, which we will continue to assess based on performance, is store investments. Brands like Le Labo and Jo Malone, which operate freestanding stores along with other distribution channels, are performing well, so we are investing in their store presence. Primarily, these are the investment areas we are focusing on. Regarding the PRGP, we anticipated that the first half of this year would yield benefits in our gross margin, which we are seeing, and we expect additional advantages in the second half due to various restructuring efforts under the program. The timing of expense recognition will be affected by the sales declines observed in the first half of the year, reflecting more in the second half. However, it’s important to note that mid-single-digit declines in overall business do create additional pressure on the entire operation. While the PRGP is providing some assistance, the overall business is still facing challenges.

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