The operator introduces the conference call for The Estée Lauder Company's Fiscal 2024 First Quarter, and turns the floor over to Senior Vice President of Investor Relations, Laraine Mancini. Mancini reminds listeners of forward-looking statements and references to non-GAAP measures, and then hands the call over to President and CEO Fabrizio Freda to discuss first quarter results, revised outlook for fiscal year 2024, and the company's accelerated profit recovery plan for fiscal years 2025 and 2026.

The speaker expresses their condolences for the victims of recent terrorist attacks and discusses the company's first quarter results, which exceeded expectations for adjusted diluted EPS but saw a decline in organic sales due to the impact of the pandemic. They highlight strong growth in certain regions and disciplined expense management, but also mention external challenges that have led to a lowering of the company's fiscal year 2024 outlook.

The expected growth rate of prestige beauty in Asia travel retail and Mainland China has slowed, leading to a moderation of sales expectations for fiscal year 2024. Business disruptions in Israel and the Middle East are also a concern. However, the company is still expecting double-digit organic sales growth in the second half of the year and plans to rebuild profitability through strategic imperatives such as driving momentum in thriving markets and capturing demand from returning individual travelers in Asia travel retail. The company has also achieved impressive results in the EMEA markets in the first quarter.

The company saw balanced organic sales growth in both brick-and-mortar and online channels, with strong performance in Western Europe, India, Mexico, Brazil, Hong Kong, Japan, and Australia. The direct-to-consumer business also performed well globally. Despite pressure in the makeup category from global travel retail, the company saw high single-digit organic sales growth in the Americas, EMEA, and Asia Pacific regions. This was attributed to successful innovation, such as the M·A·C Studio Radiance Foundation and Estée Lauder Futurist SkinTint Serum Foundation.

In the fragrance category, the company is experiencing strong growth in the Americas and Asia Pacific due to their expert artists and use of social media. They believe there is still room for growth in Asia Pacific compared to Western Europe. In the U.S., they are focused on returning to growth through various strategies including launching new products, utilizing social media, and expanding their reach in specialty-multi. These efforts have already shown positive results in the first quarter.

The company has seen success in its various beauty brands, with Clinique, High Impact High-Fi Full Volume Mascara, and M·A·C Studio Radiance Serum Powered Foundation leading the way. The company has also seen growth in fragrance, driven by luxury and artisanal brands like Le Labo, Tom Ford, and Jo Malone London. The Ordinary has been a standout in skin care, with its scientific and ingredient-led approach attracting consumers. The company is also seeing progress in travel retail, with a focus on reducing trade inventory and investing in beauty advisors. The diverse brand portfolio has been a key factor in the company's success.

M·A·C's performance demonstrated the strength of the company's portfolio, while The Ordinary and Le Labo also contributed to growth. The company is focused on rebuilding profitability and expects to increase operating profit by $800 million to $1 billion in the next two fiscal years. This will be achieved through optimizing product mix, improving price realization and innovation, leveraging recent investments, and increasing cost efficiency. The company also released its fiscal year 2023 social impact and sustainability report, highlighting achievements in ESG areas and maintaining carbon neutrality and renewable energy usage.

The report states that the company has achieved its global gender pay equity target and made progress towards reducing water withdrawal and packaging. They will also publish their second climate transition plan and remain focused on driving momentum in their markets, returning to growth in the US, and expanding in China. The first quarter results showed a decline in organic net sales and earnings, with growth in the Americas and Latin America, but a decline in Asia Pacific due to slow recovery in China.

The rest of the region saw growth in Hong Kong, Japan, and Australia due to strategic investments and new product innovation. However, organic net sales fell in Europe, the Middle East, and Africa due to challenges in the Asia travel retail business. Developed markets such as the U.K., Germany, and France drove growth in the region, with fragrance and makeup being the top-performing categories. Hair care and skin care saw declines, but The Ordinary brand had strong growth. Overall, the gross margin declined compared to last year.

The company's strategic pricing actions at the beginning of the fiscal year were not enough to offset the under-absorption of overhead costs, leading to a decline in operating income and diluted EPS. The decrease in sales also resulted in an increase in operating expenses. The company's acquisition of the Tom Ford brand had a neutral impact on EPS. The company's net cash flows from operating activities decreased due to lower working capital levels. The company is lowering its outlook for the second quarter and full year due to slow recovery and external challenges.

The slower growth in prestige beauty and containment of market activity in Asia and China, as well as potential business disruptions and currency headwinds, are expected to result in a decline in sales and EPS for the second quarter and full year. Organic sales are expected to decline 8-10% in the second quarter and range from a decline of 1% to an increase of 2% for the full year. The operating margin is also expected to contract due to lower sales growth.

The company expects its full year effective tax rate to be around 28%, with diluted EPS ranging from $2.17 to $2.42. They have developed a multiyear profit recovery plan to rebuild margins and improve operational efficiencies, which is expected to generate $800 million to $1 billion in operating profit over the next 2 years. The plan prioritizes accelerating the rebuild of gross margin, optimizing category, product, and channel mix, and exercising pricing power to combat inflation.

The company plans to reduce excess inventory and increase operational efficiencies in order to improve profitability. They will also focus on reducing costs in areas such as head count, procurement, and transportation. However, macroeconomic and geopolitical challenges have slowed their anticipated recovery in certain markets, so they are implementing a profit recovery plan to rebuild profit margins over the next few years. They remain confident in the long-term prospects of the beauty industry and their ability to drive growth and gain market share. The profit recovery plan will be implemented in the second half of the year and is expected to support margin rebuilding and profit recovery in the future.

The speaker expresses gratitude to employees for their hard work during difficult times and concludes their prepared remarks. They then take questions from Dara Mohsenian from Morgan Stanley, who asks about the profit recovery program. The speaker explains that it is focused on generating savings and recovering from a depressed base, and that they are not currently planning a larger restructuring. Technical difficulties interrupt the call, but it is eventually reconnected and the Q&A session continues.

Dara Mohsenian asks for clarification on Estee Lauder's profit recovery plan and whether it is based on improving from a depressed fiscal base or implementing larger organizational changes. Tracey Travis responds that the plan is incremental to the expected growth from the current depressed level and that the company is looking at recovering gross profit margin as a priority. She also mentions that high levels of inventory have affected their ability to manage shocks to the system in the past. Mohsenian also asks why the company is not being more aggressive with larger restructuring, considering the changing external environment and internal issues.

The company plans to regionalize their supply chain and complete their manufacturing facility in Japan in order to reduce inventory and produce closer to demand. They have implemented an integrated business planning process to improve forecast accuracy and reduce excess inventory. They are also taking actions to improve gross margins, such as reducing production volume and going through a SKU rationalization program. They are also looking at their expense base and how they operate in light of their current sales level. These actions are still in progress and will have a greater impact in future years. A question was also asked about these plans during a conference call.

The speaker is asking for more clarification on the company's projected revenue and profitability for the second half of the year. They mention that the company will face headwinds in Asia travel retail and that the increase in revenue is expected to come from shipping more towards retail trends. The company is also facing challenges from policy changes in Korea and Hainan in the previous year.

The company is experiencing low shipments in some parts of their Travel Retail business due to policy changes. They are seeing a slow return of travel and lower conversion rates compared to pre-pandemic levels. However, they expect traffic and conversion to gradually improve in the second half of the year. This, along with a pickup in China, is expected to drive a significant increase in volume. The company's retail performance globally is in the mid-high single digits for the year so far, and they expect it to continue improving. The main challenge is adjusting inventory due to unpredictable policy changes, but the underlying fundamentals are strong.

Jason English asks Tracey Travis about the increase in costs despite retail sales being back to where they were in the first quarter of 2019. Travis explains that in fiscal 2019, gross margins were higher and costs were lower. However, due to the current situation, costs have increased. They had two cost-saving programs, but they were not enough to offset the increase in costs.

The company has successfully expanded operating margins through a program that allowed them to reinvest in digital marketing and create shared service structures. They have also invested in capabilities for regulatory and sustainability purposes. The profit recovery program will focus on both gross margin and expense areas, and more details will be revealed in the upcoming second quarter results. The company is committed to improving their P&L structure.

Fabrizio Freda, CEO of Estée Lauder, discusses the company's profit recovery plan and the two main areas of focus: rebuilding gross margin and aligning capabilities to current sales levels. He clarifies that the entire organization is aligned on the plan and teams are already working on it. He also mentions the success of past cost reduction programs and the company's investment in online progress. Olivia Tong from Raymond James follows up with a multipart question, including a clarification on the global retail number given by Freda of mid- to high single digits, asking if it is for Estée Lauder or the category.

Fabrizio Freda, CEO of Estée Lauder, discusses the company's retail sales and inventory in the travel retail sector. He mentions that retail sales have been solid and are expected to continue improving. The negative net sales in the first six months of the fiscal year are due to inventory readjustment. The company aims to have retail and net sales aligned by the end of the third quarter. They have visibility into their inventory in travel retail and are working with retailers to reduce stock and sell new products. The goal is to have retail and net sales aligned by the end of March.

Fabrizio Freda, CEO of a beauty company, addresses a question about a slowdown in the Chinese market. He explains that while the market is growing at 2%, their retail sales were flat in the first quarter but are still growing overall for the year. He also mentions that their estimate for the recovery of the beauty market was higher than 2%, but they are adjusting their projections for the year. He notes that local brands in mass and masstige categories are doing well, but the impact on their prestige category is limited. In response to a question about margins, Freda says they are focusing on cost management and productivity to maintain margins.

The company is uncertain about the future of travel retail due to the current shift in consumer behavior and the effects of COVID-19. They do not expect travel retail to return to previous levels, but are confident in their profit recovery plan and growth strategies for other markets and brands. Additionally, they note that their business in Mainland China has more than doubled since 2019, but their travel retail business is still below 2019 levels.

During the COVID-19 pandemic, the travel retail (TR) business saw a temporary increase due to Chinese consumers returning to Mainland China and the rise of unstructured business. However, as travel restrictions eased, this trend has been reabsorbed and the TR business has returned to pre-pandemic levels. The profile of the business in 2019 was mainly driven by sales in Mainland China and sales to Chinese consumers traveling abroad. However, during the pandemic, this consumption shifted back to Mainland China, resulting in a doubling of the business there. Some of this increase went into the TR sector, particularly in Hainan, while some went into the unstructured business, which is now decreasing. This has resulted in a more solid and sustainable business model in Mainland China, which the company is investing in for long-term growth. The volatile nature of the TR business during the pandemic has been reduced and the company aims to further derisk it in the current fiscal year.

The speaker summarizes the current state of the company, stating that they expect 2023 to be the final year of recovery from the effects of COVID-19. They express confidence in the company's strong fundamentals and solid retail sales performance. They also mention recent acquisitions, including Tom Ford and The Ordinary, which are helping to solidify their luxury strategy and contribute to the company's growth.

The company has a strong innovation pipeline for fiscal year 2024 and plans to expand into a new market in fiscal year 2025. They are working to align retail and net sales in China and focus on balanced growth by market and channel. They also have a profit recovery plan in place to rebuild gross margin and align expenses. The company is confident in their strategic focus and talent and aims to return to sustainable sales and profit growth. The conference call and presentation have now concluded.

This summary was generated with AI and may contain some inaccuracies.