The operator introduces the Estée Lauder Companies Fiscal 2024 Third Quarter Conference Call and turns the call over to Senior Vice President of Investor Relations, Rainey Mancini. She introduces the CEO and CFO, Fabrizio Freda and Tracey Travis, and reminds listeners of the forward-looking statements and non-GAAP measures. Freda then discusses the company's third quarter results, which included 6% organic sales growth and exceeded profitability expectations. The company also made significant improvements in working capital.

The company had stronger performance in the third quarter, with higher gross margin and reduced pressure on excess and obsolete inventory. They also managed expenses well and shifted advertising spending to support new products. The company is confident in an inflection point for renewed sales and profit growth in the second half of fiscal year 2024. They expect organic sales growth and operating margin to accelerate, and have a profit recovery plan in place to rebuild profitability and reinvest in their brands. Progress was made in achieving targeted trade inventory levels in Asia travel retail.

The company is pleased with the growth of their Asia travel retail business as they focus on reducing inventory and working with local authorities. Retail sales in Asia have improved, and there has been double-digit growth in EMEA and the Americas. The company has also invested in long-term growth opportunities, such as expanding their presence in Hainan and Sanya International Duty-Free shopping complex. They have also made progress in strategic initiatives and launching new products to drive growth in North America, Mainland China, and other markets. Clinique, in particular, has had a strong quarter and has deepened its relationship with the medical community.

In the US, Clinique has seen a significant increase in earned media value for its skin care products, thanks to its focus on dermatological education and clinically proven solutions. The brand has also expanded its reach by opening dedicated storefronts on Amazon's premium beauty store. Estée Lauder has also had success with new product launches, including the Ultimate Diamond transformative cream and serum and the revitalizing Supreme night bounce cream, which solidify the brand's position as a leader in skin longevity and nighttime science.

La Mer's innovative products, including the most rising fresh cream, contributed to the brand's success and drove overall company growth. M A C also introduced new makeup products, such as the Macximal silky matte lipstick, which received positive feedback and media coverage. In the fragrance category, the company expanded its reach in the Asia Pacific region and introduced Valmond Beauty in partnership with Valmond. The company is also leveraging technology, such as AI, to enhance its high-quality products and personalized targeting of media. Overall, the focus is on driving momentum in strong markets.

The company has achieved great results in various markets due to the appeal of their brands, innovative products, and effective marketing strategies. In Asia Pacific, Hong Kong and Japan have seen double-digit growth, and the launch of a new brand in Japan is anticipated. In EMEA, Germany and Italy have consistently contributed to growth, while Mexico, Brazil, and India have shown strong growth in emerging markets. In North America, there has been improved organic sales, particularly in the skincare and fragrance categories, due to successful social media engagement and expansion into new retail channels.

Clinique, the number one dermatology beauty brand in the US Prestige, is expecting a positive impact from its launch on the US Amazon Premium Beauty store in the fourth quarter. In Mainland China, the company saw a return to organic sales growth but at a slower pace due to a soft prestige beauty industry and the impact of Chinese New Year and Valentine's Day. The company's focus remains on bringing new and innovative products to consumers. In the fourth quarter, the company has compelling launches planned, including a product from Estée Lauder's China innovation labs. The company is also increasing its investment in advertising and go-to-market activations to sustain retail. Additionally, the company has made progress in its profit recovery plan, including improvements in operational inventory through its integrated business planning process.

The company's integrated business planning, which includes advanced technologies like AI, will help improve demand planning and reduce excess inventory. They have also optimized their innovation pipeline for the next two fiscal years and announced plans to streamline manufacturing and distribution. The company has also seen success in their brand portfolio, particularly with the acquisition of Tom Ford and partnerships with Ermenegildo Zegna Group and Marcolin to drive growth in the luxury market.

In February, the company had a successful cross-category campaign and acquired the remaining interest in DECIEM Inc. Over the past three years, The Ordinary has seen significant growth and profitability under the company's ownership. The company has also been recognized for its sustainability efforts. The company is optimistic about future opportunities for growth and profitability and has a profit recovery plan in place.

The company is confident in their strategy for growth and thanks their employees for their contributions. The third quarter saw a 6% increase in organic net sales, with progress made in Asia travel retail and a shift in the timing of replenishment orders. However, there was lower-than-expected sales in Mainland China due to softness in the prestige beauty market. Earnings per share exceeded expectations due to factors such as skin care growth and expense management. The Europe, Middle East, and Africa region saw a 12% increase in organic net sales, largely driven by growth in travel retail.

Travel retail net sales for the company increased significantly, returning to growth after a period of decline. This was due to increased retail sales and shipments, as well as improved conditions such as increased international flights and tourism from China. In EMEA, emerging markets saw strong double-digit growth, while mature markets were flat. In Asia Pacific, there was a 3% increase in net sales, driven by Hong Kong, China, and Japan. The Americas saw a 1% increase, with strong growth in Latin America offsetting flat growth in North America. Skin care saw a 9% increase in net sales, driven by the Asia travel retail business and key products from La Mer and Estée Lauder. Makeup also saw growth, largely due to the Asia travel retail business and Latin America.

In the category of net sales for Estée Lauder and Clinique, there was growth due to ongoing promotions and new product innovation. However, there was a decline in net sales for M·A·C due to changes in their loyalty program. Fragrance net sales increased due to growth in luxury and artisanal brands, while hair care saw a decline. Gross margin increased due to changes in category mix and lower obsolescence charges, but was partially offset by the impact of previous production pull down. Operating expenses decreased due to sales growth leverage and expense management.

In the third quarter, the company saw a reduction in spending, leading to a 75% increase in operating income and a 570 basis point expansion in operating margin. The effective tax rate decreased due to a change in the mix of earnings and the acquisition of the Tom Ford brand had a neutral impact on EPS. Net cash flows from operating activities increased due to lower working capital, and the company invested in capital expenditures and returned cash to stockholders. The profit recovery plan is on track.

The company has begun taking charges under their restructuring program and expects to see significant benefits in fiscal year 2025. They are pleased with their progress in reducing inventory levels and resuming shipments in Asia travel retail. They have seen sequential improvements in net sales and operating margin, leading to a return to profitable net sales growth this quarter. While they delivered on their third quarter expectations, they are lowering their fiscal year 2024 organic net sales outlook due to potential risks from macroeconomic volatility and geopolitical tensions. They are maintaining their full year operating margin expectation and slightly increasing their EPS outlook, but are also planning to invest strategically in key areas of their business in the fourth quarter.

The company's third quarter performance and outlook for the fourth quarter indicate a strong second half compared to the first half, with improvements in net sales and operating margin. Excluding a charge recognized in the third quarter, gross margin is also expected to improve. The company believes this marks a turning point for their recovery and positions them well for future growth. However, currency translation is expected to negatively impact reported sales and earnings per share. The company expects organic net sales to increase in the fourth quarter, but overall for the full year, a decline is expected due to currency translation.

The company's full year operating margin outlook remains unchanged and is expected to decrease from the previous year. The effective tax rate is also expected to increase. Diluted EPS is expected to range between $2.14 and $2.24 before restructuring and other charges. Currency translation and potential business disruptions in the Middle East may affect earnings per share. The company anticipates purchasing the remaining equity interest in DECIEM in 2024. The company has shown progress and gratitude for their teams' hard work, but acknowledges the work ahead to continue improving profit margins. They are focused on returning to sustainable growth and profitability with the help of their employees. The floor is now open for questions.

Tracey Travis responds to a question about the 4Q guide and explains that the implied margin in 4Q steps down from 3Q due to shifts in advertising expenses and earlier-than-expected shipments in Asia Travel Retail. The company is also facing softer growth in Mainland China, macro uncertainty, and higher currency, which is impacting EPS. However, expense savings are being used to offset these challenges and maintain the updated guidance range. Overall, the second half should be viewed together rather than comparing Q3 and Q4 separately.

The speaker discusses the improvement in retail inventory levels in travel retail, particularly in Hainan and Korea, and the growth in retail sales and traffic. They also mention their work on increasing conversion rates and the success of their activations. As a result, they have seen progress in reaching inventory targets and strong growth based on retail sales and replenishment.

The combination of spending levels for the company has been solid and is expected to continue according to their goals. During the question and answer session, Lauren Lieberman from Barclays asked about the timing of spending and whether it was related to innovation readiness, consumer environment, or shifting plans. Tracey Travis, the speaker, responded that some spending was shifted due to underperforming holidays in China, such as Chinese New Year and Valentine's Day, which are important gifting moments for the company. These holidays are less promotional compared to other holidays.

The company decided to shift some of their advertising spend from the third quarter to the fourth quarter in order to better match consumer behavior during upcoming holidays. This decision showcases the company's agility and ability to adapt to changing circumstances. In the long term, the company plans to reinvest in the business while also implementing cost-saving measures in order to achieve profitable growth.

The profit recovery plan is focused on profitable growth, particularly in restoring gross margins. This includes price realization through inventory management, supply chain efficiencies, and accretive innovation. The plan also aims to leverage expenses, with efforts in indirect procurement to accelerate savings.

The company has implemented a restructuring program that is expected to drive $1.1 billion to $1.4 billion of incremental operating profit over two years. This program will also fund additional investment in consumer activation and streamline the organization to increase speed and effectiveness. There has been a strong start in Mainland China in January, but a deceleration was seen in the exit rate.

Fabrizio Freda, CEO of a company, discusses the slowdown in the prestige market and the factors contributing to it. He clarifies that the slowdown is mainly seen in Mainland China, but when looking at the Chinese consumer as a whole, there is progress in consumption across different segments such as Hong Kong, TR China, and international travelers. Freda also mentions that there is positive growth expected in the future, and the trends are influenced by different channels.

The drivers behind the growth in Chinese consumer sentiment are the high-end and middle-class consumers who are shopping more in Mainland China. The overall progress and brand equity are strong, with certain brands experiencing growth and acceleration. The key drivers include the trend towards skin care and the focus on experiences rather than goods due to the post-COVID period. There is also an acceleration of innovation, with the company investing in a R&D center in China.

The company is seeing positive results from their innovation, with the first quarter of the R&D center's work expected to have a significant impact. The innovation is focused on meeting the needs of Chinese consumers and is expected to improve in terms of quality and relevance. Another driver of growth is promotional activities, although these have been impacted by COVID-19 in the short term. However, in the long term, this will help balance the proportion between structured and non-structured markets, which is in line with the company's goals. The company is also increasing its focus on promotional activities, particularly in the area of sampling and gifting. Despite some softness in the market, the overall trend for Chinese consumers is positive and expected to accelerate in the future.

Steve Powers asked Tracey Travis about their inventory in China and their plans for launching Clinique on Amazon. Tracey clarified that they had reached their inventory goals in Asia Travel Retail earlier than expected and that they are confident in their ability to ship to consumption across their total portfolio in the fourth quarter. She then passed the question on to Fabrizio to address the hurdles they had to overcome for launching Clinique on Amazon.

The company expects to reach its goals by April, and this may result in higher shipments in the third quarter. They anticipate an acceleration of retail sales in the fourth quarter, but there may be a disconnect between retail and net sales due to disruptions in the previous year. The company is also relaunching Clinique in North America and the UK and introducing it on Amazon, which will help reach new consumers and expand the brand's reach.

The early results of Clinique's partnership with Amazon are promising, with expectations of continued and accelerated success. The timing of the partnership was chosen due to a better fit between the brands and the platform, as well as the quality execution by the Clinique team. The initial results are confirming this decision. In regards to US sales, there has been a negative trend in the third quarter, but the company is investing in innovation and putting more money behind M·A·C and Clinique, which may lead to an acceleration in sales as the quarter ends. As for the profit recovery plan, the $700 million operating profit benefit will likely be spread with seasonality and may be back-half weighted.

The company will provide more information about their profit recovery plan in August. They are currently finalizing plans and will make decisions in the next few months. In quarter three, North America saw low single-digit growth, but it was closer to mid-single-digits when excluding the M·A·C loyalty program. There is some pressure due to consumer sentiment and moderating market growth, but the company saw positive impact on Clinique in the last part of March and expects this to continue in quarter four with the addition of Clinique on Amazon. The conference call has now concluded.

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