The opening remarks for The Estee Lauder Companies Fiscal 2024 Fourth Quarter and Full Year Conference Call are given by Senior Vice President of Investor Relations, Rainey Mancini. She introduces the President and CEO, Fabrizio Freda, and the Executive Vice President and CFO, Tracey Travis. Mancini reminds listeners of the forward-looking statements and provides information on how to access reconciliations between GAAP and non-GAAP measures. She also mentions the company's Profit Recovery and Growth Plan (PRGP). Freda then begins his remarks.

Fiscal year 2024 was a difficult year for the company, but they saw a return to top line growth in the second half with organic sales increasing. Despite a decline in organic sales, there was modest gross margin expansion and adjusted operating margin improved compared to the first half. However, the company remains unsatisfied with their performance and expects continued declines in the prestige beauty industry in China and Asia travel retail in fiscal year 2025. The PRGP will help offset this pressure, but it will result in a slower pace of operating margin expansion. The company plans to focus on improving performance in both developed and emerging markets in fiscal year 2025.

The company has set strategic priorities to increase sales and profitability, including focusing on skin care, high-end fragrance, and leveraging different channels. They are also implementing a new organizational structure to better adapt to market changes and improve execution. While their sales and profit outlook for fiscal year 2025 is disappointing, they aim to outperform the industry in fiscal year 2026 through these efforts. In the fourth quarter, the prestige beauty industry in mainland China and Asia travel retail saw a decline in retail sales, but the company was able to gain market share in mainland China due to their success in the skin care category.

The Hainan and Asia travel retail markets saw a decline in beauty sales due to weak consumer sentiment and reduced basket sizes. However, the US prestige beauty industry experienced growth each month in the fourth quarter, with the company's retail sales returning to growth and gaining share. The global prestige beauty industry is expected to grow 2-3% in fiscal year 2025, with the western markets driving growth and the eastern markets experiencing some declines. The industry is expected to reaccelerate to mid-single-digit growth in fiscal year 2026, assuming China stabilizes and returns to growth.

The company's fiscal year 2025 organic sales growth outlook is projected to be in a decline of 1% to an increase of 2%, with a focus on accelerating growth in certain areas while facing challenges in mainland China and Asia travel. The company plans to refocus consumer investment, streamline their organization, and leverage their strengths in North America to drive growth. In particular, they will focus on their top-ranked skin care portfolio, with initiatives such as precision marketing, innovation, and expansion into high-growth channels. The Ordinary brand, which saw a 20% increase in organic sales in fiscal year 2024, will play a significant role in capitalizing on new opportunities in products, channels, and geographies.

In the fourth quarter, The Ordinary launched a lip care product and had a successful campaign on TikTok. They also expanded into Japan and plan to enter the body care market and more emerging markets in the future. NIOD had a successful year in skincare and Clinique is focusing on its dermatologist heritage. La Mer and Re-Nutriv had exceptional growth in luxury skincare and plan to continue expanding their product portfolios. In fiscal year 2025, the company will focus on promoting the benefits of nighttime skincare rituals.

The company's brand portfolio is strategically designed to target various skin concerns and types in order to appeal to a diverse range of consumers. The company's luxury and artisanal fragrance brands have seen strong growth, with a focus on further expanding in the luxury tier and driving growth in the prestige tier. The company is also focused on winning in fast-growing channels and adapting to the changing ways consumers shop for beauty.

The company's focus on online sales has led to successful launches of Clinique, Too Faced, and Bumble and bumble on the Amazon Premium Beauty store in the US. These brands have seen strong performance and are also appealing to male consumers. The company plans to continue expanding its online presence, with new storefronts already opened and more launches planned. Social commerce is also a key focus, with a content-focused approach and integration of social media and commerce. In China, the company has seen strong growth and plans to launch more brands. Precision marketing is also a priority, with a focus on new consumer acquisition and efficiency in spending.

The company has developed a capability to leverage data and partnerships with AI leaders for precision marketing. They have successfully piloted this approach and have now formalized it with a trend AI tool to drive trends to action. The company's strategy reset is focused on executing these initiatives and they are grateful to their employees for their commitment. However, the company faced challenges in some areas and their full year results were not as expected.

The company completed the design and implementation of a multiyear plan to improve sales and profitability. In the fourth quarter of fiscal year 2024, organic net sales increased by 8%, with higher growth in EMEA and declines in mainland China and North America. Diluted EPS also exceeded expectations due to operating performance and a lower effective tax rate. The increase in EMEA was driven by Asia travel retail, while Asia Pacific saw a decrease due to softness in mainland China and lower shipments in Hong Kong SAR. Japan saw strong double-digit growth due to favorable currency and increased consumer reach.

In the Americas, organic net sales decreased due to intense competition and a slowdown in prestige beauty in brick-and-mortar stores. However, online sales grew and skincare saw a 15% increase in net sales. Makeup and hair care also saw slight increases, while fragrance saw a 1% increase. The company's gross margin and operating expenses also improved.

In the quarter, the company recorded impairment charges related to Dr.Jart+ due to lower growth and profitability. They decided to exit the brand from discounted travel retail and focus on other profitable areas. Operating income and margin improved, but the effective tax rate increased. Diluted EPS also increased, but was impacted by foreign currency translation and business disruptions. For the full year, the company faced challenges in Mainland China, Asia travel retail, and North America, but saw growth in EMEA and LatAm markets.

Organic net sales for the company decreased by 2%, with declines in Asia Pacific and EMEA due to softness in the prestige beauty market and challenges in travel retail. Skincare and makeup categories were the most affected, while hair care and fragrance saw mixed results. The company focused on balancing cost efficiency and consumer-facing investments. Sales in specialty multi-retailers and freestanding stores grew, while global travel retail and online sales represented a significant portion of overall sales. Gross margin improved due to inventory management, but was partially offset by currency impact and under-absorption of overhead costs. Operating expenses increased due to the sales decline and investments in expanding consumer reach and supporting growth.

Operating income for the company declined by 13% and the operating margin contracted by 120 basis points for the full year. The effective tax rate was higher due to the mix of earnings and stock-based compensation. Net earnings and diluted EPS also declined by 25%. The company generated $2.4 billion in net cash flows, utilized $919 million for capital investments, and returned $947 million to stockholders through dividends. The company completed the acquisition of the remaining equity interest in DECIEM for $859 million. Looking ahead, the company acknowledges some positive developments in their strategy, but also recognizes that global prestige beauty growth has slowed in recent months.

In fiscal year 2025, the company is expecting a more subdued recovery of growth due to the implementation of the PRGP. This program aims to reduce costs and increase profitability through margin expansion, targeted investments, and process simplification. The company has already begun executing initiatives within these three areas, resulting in cash benefits and reduced expenses. They also plan to see further benefits from strategic pricing actions and precision marketing.

The company is taking actions to support gross margin expansion and expense leverage, including restructuring, reducing spans and layers in certain areas, expanding shared services, and negotiating savings. They are also using this opportunity to improve decision-making and agility. 80% of the net benefits from these actions are expected to improve gross profit, with the remaining 20% reducing certain operating expenses. The company expects to take restructuring and other charges of $100-120 million in fiscal 2025, with additional charges expected as more initiatives are finalized and approved.

In fiscal 2025, the company expects modest sales growth and increased fixed expenses, leading to margin expansion. They plan to reinvest some savings from the PRGP into advertising and store activation to fuel growth in certain categories and regions. The company is fully committed to executing the PRGP and expects to see significant operating profit from it. They may need to implement additional savings initiatives due to lower sales volumes. Fiscal 2025 will be a year of transition, with a focus on leveraging the company's strengths to navigate challenges and accelerate growth.

The company expects to see growth in Western and Asia Pacific markets outside of China in the next few years, driven by skincare, luxury fragrance, makeup, and hair care brands. They plan to leverage their regional manufacturing and distribution network in Asia to improve inventory management. The forecast for the full fiscal year includes a decrease of 1% to an increase of 2% in organic net sales, with most of the margin expansion coming from gross margin. The effective tax rate is expected to be 32%, with diluted EPS ranging from $2.75 to $2.95 before restructuring and other charges. Net cash flows from operating activities are expected to be between $1.8 billion and $2 billion, with capital expenditures at approximately 5% to 5.5% of net sales.

The company expects their first quarter results to be impacted by challenges in mainland China and Asia travel retail, but they are seeing progress in North America and anticipate overall improvement throughout the year. They expect a 3-5% decrease in organic net sales and diluted EPS of $0.02 to $0.10 before restructuring and other charges. They anticipate meeting or slightly exceeding global prestige beauty growth in the remaining three quarters and are confident in their strategic pivots and PRGP to drive profitable growth in fiscal 2025 and beyond.

The speaker thanks their global teams for their hard work and announces their planned retirement at the end of the fiscal year. They congratulate the new CFO and express their commitment to the company's success. The speaker also announces their intention to work on a strategy reset and ensure a smooth transition for their successor. They express their passion for the company and their confidence in its future. The speaker concludes their prepared remarks and opens the floor for questions.

Fabrizio Freda, CEO of Estee Lauder, discusses the company's challenging and transformational time and the search for his successor. He will be involved in the process, but the Board has the ultimate responsibility. The successor must be a strong leader, understand the company's key elements of brand building and driving global growth, and be able to reshape the cost structure. The Board is well advanced in the search and all potential successors possess these characteristics. A question is then asked by Bryan Spillane from Bank of America.

In this paragraph, Tracey Travis is asked about the impact of China's deceleration on the company's earnings power in fiscal year 2025. She explains that China and travel retail are important growth drivers for the company, and their decline has put pressure on earnings. However, the company's profit and recovery growth plan is offsetting some of this pressure, and other markets are expected to grow. She also mentions that some expenses need to be added back to accurately assess the company's earnings.

The company's EPS is expected to be slightly lower this year due to various factors such as currency fluctuations and negative mix impact. However, they have taken actions to improve margins and protect investments in key categories like fragrance and active derm. Despite sales being flat or down, the company is still confident in its ability to grow earnings. There may be some concerns about constraining investments, especially in a competitive market like North America, but the company is focused on maintaining its momentum and gaining share.

Tracey Travis, speaking about the company's performance and strategic plans, acknowledges concerns about potential underinvestment and the possibility of another strategic reset in the future. She explains that the company is using gross savings to fund the PRGP, which will generate more savings and allow for increased consumer-facing investments. She also mentions that the company has protected consumer-facing investments in the past and will continue to do so as growth occurs and more savings are generated through the PRGP.

Fabrizio Freda, CEO of Estée Lauder, announced his retirement at the end of the fiscal year in order to work with the Board and his successor to ensure the company is in a strong position for growth by 2025. This includes investing in key areas of the business, such as the China market, to maintain momentum and improve marketing effectiveness. The company will also focus on recruiting new consumers to drive growth. This strategic reset aims to reduce exposure to declining markets and channels and increase recruitment efforts.

The company's transition in the travel retail business will be tailored to the current market conditions. The industry decelerated in terms of sell-through, but the company saw double-digit growth due to low shipments in the prior year. Inventory levels were higher than desired and managing stock normalization in the future is a priority for the company.

The company experienced a decrease in retail sales in the fourth quarter, leading to higher temporary stocks. They are making adjustments to improve this in the future and are building a distribution center in Hainan to shorten the time between orders and delivery. In terms of distribution channel shifts, the company expects travel retail to be lower in fiscal 2025 due to negative performance. They are seeing channel shifts to other regions and expect travel retail to shrink as a percentage of their mix. The company is focusing on faster growth channels, which may have different margins.

The company does not give specific channel margin information, but they have seen a reversal in their margins due to launching on Amazon with Clinique. They are focused on online platforms and other growth opportunities for recruiting new consumers. The CEO also adds that the company has invested in online platforms in recent years and the move towards high-growth channels will have a positive impact in the long term. The company is managing this with profitability in mind. The next question is about the slower progress in China and Asia travel retail.

The speaker discusses the expected category growth in the prestige global market, which historically has been in the mid-single-digit range. However, due to the current decline in China and travel retail in Asia, the forecasted growth is only 2-3%. The speaker clarifies that this forecast does not assume a stabilization of the Chinese market, and if that were to happen, it could lead to a stronger category growth of 5%.

The company expects the global beauty market to return to 5% growth, as the fundamental demographics driving the category remain strong. The market has bounced back from previous recessions and the company believes their strategy will enable them to grow 1 point ahead of the market in the long term. In North America, the company is facing strong competition, but the current guidance reflects the current moderation in the market, which is still expected to be in the mid-single-digit growth range.

The speaker discusses the current state of the US market and acknowledges that it has been weaker in the past. They mention progress made in quarter four, with retail growth despite difficulties. They also mention exciting progress in brands where a new strategy has been implemented, and express cautiousness about the overall market in the US but positivity about their progress in executing an improvement strategy. The operator then concludes the call and provides information for those who were unable to participate.

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