The Estée Lauder Company's fiscal 2024 second quarter conference call is being recorded and webcast, with opening remarks and introductions by Senior Vice President of Investor Relations, Rainey Mancini. The call includes President and CEO Fabrizio Freda and CFO Tracey Travis. Forward-looking statements are referenced, and organic net sales growth is discussed. Online sales are defined and a reminder to limit questions to one is given. Fabrizio thanks everyone for joining and mentions exceeding expectations for adjusted diluted EPS.

Organic sales in the global travel retail business decreased by 28%, but retail sales trends were better due to efforts to reduce trade inventory and containment of market activity by local authorities. Progress was made in reducing inventory levels in Asia travel retail and overall global business decreased by 3%. Slow-down in prestige beauty in mainland China was a major factor, but retail sales growth in other regions was positive. Progress was made in strategic priorities such as reducing inventory and managing expenses. Outlook for full year has been revised due to potential macroeconomic volatility and higher tax rate, but operating profitability is expected to remain the same. The company is expected to return to organic sales growth in the third quarter and accelerate in the fourth quarter.

The company is expecting stronger profitability in the second half of the fiscal year and is planning to accelerate profit rebuilding in fiscal years 2025 and 2026. They have identified opportunities to enhance profitability and are expanding the profit recovery plan to include a restructuring program. This will support sales growth and increase agility and speed to market. The plan is expected to deliver incremental operating profit of $1.1 billion to $1.4 billion in fiscal years 2025 and 2026, with more than half in fiscal year 2025. The company has engaged a consulting firm to help execute this plan with excellence.

The company will be working with strategic advisors to drive profitability and has plans for growth in North America, China, and other markets. The Clinique brand will focus on its dermatologist heritage and education, including partnerships and ingredient communication. They have also established a new dermatology research center and will showcase their products at a dermatology conference. The Estée Lauder brand will continue to focus on longevity and age reversal research, building upon the success of their Ultimate Diamond Transformative Brilliant Serum.

The Re-Nutriv franchise is launching globally with its cutting edge patented SIRTIVITY-LP technology for visible age reversal and is receiving positive reception from consumers. The brand is also collaborating with the Stanford Center of Longevity and has several standout launches planned for the third quarter, including MAC's new MACximal Silky Matte lipstick and Tom Ford's Oud Minerale. Other brands such as The Ordinary, La Mer, and Le Labo also achieved strong performance in the second quarter. The Ordinary's new soothing and barrier support serum is their most successful launch yet and is among the top 10 ranked products in the U.S. prestige serum category. La Mer also contributed to the strong performance in the skin care category.

The brand La Mer has seen strong success in the global market, particularly in mainland China where it has experienced double-digit growth and gained market share in the prestige skin care category. Its luxury products and fragrances have performed well, with strong organic sales growth in Asia Pacific and the Americas. In the second half of the year, the brand expects to continue this growth through new product launches and investments in offline and online sales channels. Despite challenges in the online market during the 11/11 shopping festival, the brand's sales still saw triple-digit growth. In North America, the brand is focused on returning to organic sales growth and has seen low single-digit growth in the first half of the fiscal year.

In the second quarter, the company experienced pressure on makeup sales due to new product launches, but they are excited about upcoming innovations. Skin care and luxury fragrances saw growth, and the company is at an inflection point, poised to return to organic sales growth and deliver stronger profitability. The CEO expresses gratitude to the teams for their hard work. The CFO reviews the second quarter financial results, which met expectations with an 8% decline in organic net sales. The company also exceeded its initial earnings per share outlook through expense management.

In the Europe, Middle East, and Africa region, organic net sales declined 14% due to challenges in the Asia travel retail business and business disruptions in Israel and other parts of the Middle East. The region had mixed results, with flat growth overall. In the Asia-Pacific region, net sales fell 7% due to challenges in mainland China, but there was strong growth in Hong Kong, Korea, and Japan. In the Americas, net sales declined 1%, but there was double-digit growth in Latin America. Organic net sales also fell in skincare and makeup due to challenges in Asia travel retail and mainland China.

Organic net sales from The Ordinary and La Mer saw growth in all geographic regions, with The Ordinary experiencing double-digit growth in specialty multi and La Mer benefiting from social media and holiday activations. Hair care and fragrance saw declines, while La Labo and Jo Malone London saw strong growth. Gross margin decreased due to higher costs, and operating expenses increased due to reduced sales and promotional activities. As a result, operating income declined and operating margin contracted.

The company's effective tax rate for the quarter increased due to a true-up in estimated tax rate on foreign operations and an unfavorable impact from share-based compensation. Diluted EPS decreased by 43%, with a dilutive impact from the change in tax rate and business disruptions in the Middle East. The acquisition of the Tom Ford brand had a neutral impact on EPS. The company generated a higher net cash flow from operating activities, primarily due to lower working capital. Capital expenditures were $527 million and $474 million was returned to stockholders through dividends. The company is lowering the high end of its fiscal 2024 organic net sales outlook range due to risks from macroeconomic volatility and geopolitical tensions.

Despite a change in sales outlook, the company is maintaining its full year operating profitability expectation. The EPS outlook is being updated to reflect an increase in the estimated effective tax rate, which will offset the benefit from foreign currency translation. Organic net sales for the third quarter are expected to increase due to growth in Asia travel retail and mainland China. However, currency translation and potential business disruptions in the Middle East may have a negative impact. Adjusted EPS for the third quarter is expected to decrease between 3% to 24%, and for the full year, reported and organic net sales are expected to range between a decline of 1% and an increase of 1%. The company's plants have been running at reduced capacity to support the reduction of inventory levels.

The company has faced inefficiencies in manufacturing, resulting in potential expenses and pressure on gross margin. However, their full year operating margin outlook remains unchanged and they plan to offset the pressure through expense management. The effective tax rate is expected to increase, and diluted EPS is expected to range between $2.08 and $2.23. The company expects to return to organic net sales growth and stronger profitability in the second half of the year. They have announced a two-year restructuring program to support the rebuilding of profit margins and are focused on leveraging their strengths to accelerate growth and increase operating agility.

The company is implementing a restructuring program to reduce positions globally by 3-5% and generate annual gross savings of $350 million to $500 million. They plan to reinvest some of these savings into consumer-facing activities and expect to see benefits by the end of fiscal year 2026. They express gratitude to their teams for their hard work and believe the program will lead to long term sustainable growth and profitability. The floor is now open for questions from investors. The first question is from Dara Mohsenian from Morgan Stanley, who asks for clarification on the restructuring and profit recovery program.

The company's profit recovery plan includes rebuilding gross margin, focusing on more profitable channels, controlling inventory, and implementing strategic pricing and expense reduction initiatives. The recent restructuring announcement is an additional element to the plan. In regards to China, there have been structural changes in the market, and the company is adjusting to these changes by focusing on opportunities for growth and addressing challenges such as changes in consumer perception and daigou selling.

Fabrizio Freda discusses the recent soft consumer sentiment in China that led to lower prestige sales growth, but remains optimistic about the long-term opportunity and continues to invest for growth. The company's brands have shown strong performance, with double-digit growth in luxury brands like La Mer, Tom Ford, and Jo Malone. The company gained market share in various categories and saw success in 11.11 and in freestanding stores in mainland China and Hong Kong. The company plans to continue investing in China, focusing on building distribution and winning online channels, as well as expanding into new cities through brick and mortar stores. In quarter two, the company saw substantial growth in brick and mortar market share in China.

The company plans to continue leveraging their strong retail sales and holiday plans in China, with a particular focus on luxury brands such as Estée Lauder, La Mer, Tom Ford, Le Labo, and Bobbi Brown. They have improved their decision-making process for promotions and pricing, and are investing in local brands and innovation through their new laboratory in Shanghai. Additionally, they are shortening their supply chain and increasing flexibility in responding to demand.

The speaker discusses the company's strong business in China and their determination to continue investing in the country. They then address a question about how they will measure their success in the next two years, given the current state of the company. The speaker explains that they have acknowledged the need for changes and are working to address key pressure points in order to align with future opportunities. They will measure their success based on these changes and addressing pressure points.

The company has made progress in aligning retail stocks in Asia and is addressing the need to improve gross margin and cost structure for profitability. The profit recovery plan is also focused on increasing agility and speed to market in order to compete with local brands. While skin care growth was strong in most regions, there was no growth in China, but the company did gain market share in the region.

The company is focused on addressing three main areas of growth: skin care, China, and stabilizing market share in the US. They are launching new skin care innovations and leveraging their existing brands to drive growth. In China, they are focusing on long-term growth and have seen success with their top brands. In the US, they are targeting the active derm market and improving their distribution mix. They are also seeing strong growth in APAC ex-China and EMEA, particularly in skincare.

The speaker discusses the company's growth in emerging markets and direct-to-consumer business, emphasizing their strong market position and plans for future acceleration. They also express confidence in the prestige beauty market and their focus on profitability, growth, and organizational changes. The speaker mentions their efforts to diversify distribution in the US, particularly in high-growth channels such as specialty stores.

The company is focusing on supporting their department store partners with high market share and accelerating their online growth. They also plan to implement a strategy for omnichannel growth in the next 12 months. During the Q&A, they discussed their priorities for agility, direct-to-consumer and digital, and community engagement. They are confident in their ability to bring down inventory levels in Asia travel retail and expect it to be a net sales accelerator in the second half of the year.

The company has been working on reducing inventory levels in both trade and in-house, which has resulted in improved cash flow. They have invested in tools to better manage inventory levels and have a shorter lead time in the Asia region. This will help them respond to future volatility and produce faster to meet market demand. The company is also focusing on increasing their agility by leveraging their strengths in active derma and responding to consumer trends in a timely manner. They are also working on improving their go-to-market strategy for new platforms.

The company is focused on learning how to operate with Tiktok globally and is modernizing its promotional models to be more relevant to current consumer trends. They are also working on improving their ability to react to both long term and short term trends in consumer preferences. The profit recovery plan is aimed at improving their agility in resource allocation and reacting to trends. When it comes to pricing, the company is considering both existing and new products, and as they expand into specialty multi distribution, they will also need to consider their relationship with department stores.

Tracey Travis discusses the company's pricing model for new product launches, which includes cutting some launches and re-evaluating the innovation pipeline to ensure profitability. The model takes into account competitive benchmarks, market positioning, and product differentiation. The company has several exciting new product launches planned for the second half of the year, tailored to different retail channels and consumer profiles.

The company's strategy is to tailor their approach to each channel in different countries in order to achieve growth. They aim to focus on the channels where consumers are and target specific types of consumers. The profit recovery plan is expected to result in $2.5-3 billion in operating profit by fiscal 2026, before factoring in underlying business growth. However, there is a concern about potential costs that could counteract these profits.

The company is realistic about the changes in regulations and inflation that may impact their base business, and they are working on making decisions about what to invest and dis-invest in. They have a strong project management office to track savings and meet base expectations for growth and margin expansion. The $1.1 billion to $1.4 billion in extra profitability will come from more savings, some of which will be reinvested in consumer-facing growth acceleration. The company plans to leverage existing capabilities rather than invest in new ones.

Lauren Lieberman from Barclays asks two questions during the Q&A portion of the conference call. The first question is about the disconnect between the reported mid-single digit increase in retail sales excluding China and travel retail, and the 3% decrease in organic sales excluding those markets. Lieberman also asks about the company's plans for unstructured markets in Asia, given recent regulatory changes in China and potential shifts in travelers and currency. Tracey Travis begins to answer the first question about retail and organic sales.

The company's focus is on increasing conversions from travelers and reducing the unstructured market, which has been decreasing due to government regulations and the company's efforts. Despite challenges in the second quarter, the company expects the market to continue to grow and improve over time.

The operator concludes the question and answer session and informs the listeners that a playback of the call will be available until February 12. To access the recording, listeners can dial a specific number and pass code. The operator thanks everyone for participating and wishes them a good day.

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