The Estee Lauder Companies' Q1 Fiscal 2025 Earnings Release and Conference Call begins with an operator's introduction, followed by Rainey Mancini, the Senior Vice President of Investor Relations. She introduces the company's executives, Fabrizio Freda and Tracey Travis, and mentions that the call will include forward-looking statements, with references to the company's press release and SEC filings for factors that may affect actual results. The financial discussion will exclude certain charges and adjustments, and online sales will encompass direct consumer sales and those from third-party platforms. The Profit Recovery and Growth Plan (PRGP) will be discussed, and during the Q&A, participants are requested to limit themselves to one question each. The call is then handed over to Fabrizio.

In the first quarter of fiscal year 2025, Fabrizio Freda reports that while organic sales overall decreased by 5% due to significant declines in mainland China, global travel retail in Asia, and Hong Kong SAR, there was a 1% sales growth in other global regions. Japan led with sales growth in prestige beauty share. Although North America saw a slight decline, EMEA's developed and emerging markets experienced organic growth. Despite not being satisfied with the overall sales performance, some strategy reset initiatives showed positive early results. The company reported over 300 basis points in adjusted gross margin expansion and increased AAP spending to support innovation, achieving an adjusted EPS of $0.14, surpassing expectations. However, they anticipate more significant macroeconomic challenges in the fiscal year than initially expected.

The prestige beauty industry is facing challenges, with retail sales in mainland China declining further and continued pressure on travel retail in Asia, which remains below pre-pandemic levels. Consumer sentiment in China is weak, though economic stimulus may stabilize and eventually grow the market. In the U.S., the growth in prestige beauty sales has slowed due to fading inflation-driven pricing, but the company has managed to accelerate its sales growth and reduce share loss, aiming to stabilize and grow its market share. Due to uncertainty in market recovery timing and notable retirements in the company, they've only issued a short-term outlook for the second quarter and withdrawn their fiscal year 2025 forecast.

The company is adjusting its dividend payout to enhance financial flexibility for new leadership, aiming to reignite profitable growth. Despite challenges in Chinese and Asian retail markets, the company is committed to its strategic reset, focusing on regionally balanced growth and reducing dependency on China. The PRGP initiative is central to achieving sustainable long-term sales growth by reinvesting, improving profitability, and increasing agility. For fiscal year 2025, the company aims to excel in executing PRGP, emphasizing skincare revitalization, exploiting high-end fragrance growth, leveraging effective channels, launching innovative products, and modernizing marketing through AI and data-driven strategies. Progress is noted in gross margin expansion and organizational adjustments in response to lower sales growth.

The paragraph outlines the progress in the skin care sector, emphasizing innovations in nighttime skin care. Estee Lauder introduced a new advanced serum and moisturizer that contributed to significant sales growth in EMEA. La Mer's rejuvenated night cream performed exceptionally well in Asia Pacific, particularly in China. Clinique launched the Smart Clinical Repair AM/PM retinoid-balanced stick and an overnight recovery cream that integrate well with its dermatological brand heritage, leading to market share gains in the U.S. The emphasis has been on appealing to diverse consumer segments and expanding consumer acquisition through effective, clinically proven nighttime products.

The paragraph outlines the strong growth prospects and achievements of a company's luxury and artisanal brands in the first quarter of fiscal year 2025, highlighting significant sales growth in various regions, including China. Brands like Le Labo, Jo Malone, and Kilian Paris showed impressive performance, with a focus on innovation and market expansion. Valmont Beauty was launched with new fragrances. The company is gearing up for the holiday gifting season by enhancing its luxury offerings and leveraging channels like Amazon Premium Beauty and TikTok to reach new consumers. The Estee Lauder brand recently debuted on Amazon in the U.S. The paragraph concludes with the company's fiscal year 2024 social impact and sustainability report achievements, surpassing several sustainability goals ahead of schedule.

The company has achieved carbon neutrality for its Scope 1 and Scope 2 emissions for the fifth consecutive year and uses 100% renewable electricity for its direct operations. The climate transition plan update details progress towards 2030 targets. Leadership changes include Akhil Shrivastava as the new CFO and the retirement of Tracey, who is praised for her contributions. Stephane de La Faverie is announced as the next President and CEO, effective January 1st, noted for his leadership qualities. Appreciation is extended to the employees, and the transition details are discussed. Tracey Travis then begins discussing the financial results and outlook.

In the first quarter, the company's organic net sales declined by 5%, with adjusted earnings per share surpassing expectations at $0.14 due to delayed expenses. The Asia Pacific region's sales fell 11% due to weakened consumer sentiment in China and decreased spending in Hong Kong, though Japan saw robust growth. Sales in Europe, the Middle East, and Africa dropped 4%, influenced by difficulties in Asia's travel retail sector. Despite inventory challenges, parts of EMEA experienced growth due to campaigns and new product launches. The Americas saw a 1% sales decrease, with North American retail in the U.S. improving sequentially.

The paragraph discusses a decline in overall net sales for certain beauty brands like M A C, TOM FORD, and Too Faced due to soft retail sales and fewer replenishment orders amid a competitive environment and slowed growth in the U.S. prestige beauty market. The company is shifting its distribution strategy towards faster-growing channels, such as launching seven brands in Amazon's U.S. premium beauty store, which fueled double-digit online growth in the U.S. Net sales in Brazil saw growth driven by makeup, while overall organic net sales declined 8% in skin care and 6% in hair care because of challenges in the Asia Pacific and Asia travel retail markets, despite some growth in the Americas and EMEA. M·A·C and Too Faced saw a decrease in makeup sales, partially balanced by Clinique’s strong double-digit growth across all regions, bolstered by existing and new products, along with its presence in Amazon's beauty store.

In the article paragraph, it is reported that organic net sales in fragrance declined by 1%, mainly due to decreases in the Asia travel retail business and North America for brands like TOM FORD, Clinique, and Estee Lauder, though offset by growth in the Asia Pacific and EMEA markets. The company's gross margin improved due to reduced obsolescence charges, strategic pricing initiatives, and better inventory alignment, despite a decline in skincare and a shift in product mix. The initiatives from the PRGP program show initial success in addressing past margin pressures, although challenges remain, particularly in sales pressure. Operating expenses rose due to increased selling and advertising costs for new product launches, which counteracted some benefits achieved under the PRGP program. The company continues to focus on improving forecast accuracy, demand planning, and cost management within the supply chain.

The paragraph discusses the expected benefits of the PRGP plan, highlighting improvements in gross profit margin and reductions in operating expenses. Operating income increased by 33% to $144 million, with a rise in operating margin from 3.1% to 4.3%. The effective tax rate increased to 38.8% from 17.9% due to a lower tax base last year. Diluted EPS improved to $0.14 from $0.11. The PRGP is progressing well, with additional savings initiatives being explored to counter sales pressure and reduced volume impacts. The restructuring program has incurred $221 million in charges to optimize the value chain and expand shared services. Net cash utilization increased to $670 million from $408 million, mainly due to lower earnings and higher taxes.

The company has settled about 70% of its ongoing talcum powder lawsuits by making agreements with certain law firms and set annual capped amounts for future claims starting in 2025. This led to a $159 million charge. Additionally, they invested $141 million in capital expenditures and returned $240 million to shareholders through dividends. They announced a reduced quarterly dividend of $0.35 per share due to a more realistic payout ratio considering their earnings outlook. The company has withdrawn its full-year outlook, focusing only on the near-term second quarter, due to uncertainties in market stabilization, particularly in China and Asia travel retail, and upcoming leadership changes. They previously expected pressures in these markets would ease throughout the year.

The company's first quarter results aligned with expectations, but worsening consumer sentiment and continued challenges in specific regions, mainly Mainland China and Asia Travel Retail, are expected to lead to a 6% to 8% decrease in net sales for the second quarter. The company is cautiously optimistic about the medium to long-term impact of China's economic stimulus but acknowledges uncertainty about the timing and magnitude of this impact. Furthermore, the normalization of prestige beauty growth post-pandemic, coupled with residual effects of previous inflation, adds uncertainty to market stabilization and pressures second-quarter results. The company remains focused on maximizing PRGP initiatives and identifying new growth opportunities. Using October 24 currency rates, currency translation is not expected to materially impact sales and EPS. However, gross margins are expected to expand compared to the previous year.

The company anticipates a lower gross margin improvement in the second quarter compared to the first, due to previous high obsolescence charges and discounts. The effective tax rate is expected to rise to 43% from 37.7% last year, mainly due to stock-based compensation timing and lower earnings. The adjusted EPS is projected to decrease by 60% to 77% from the previous year. Despite challenges, there are positive signs from past strategic measures, and the company remains confident in its leadership and team. The speaker expresses gratitude to employees and investors, reflecting pride in achievements over the past years.

The paragraph highlights the company's acknowledgment of external challenges affecting the beauty sector, particularly in China and Asia Travel Retail. In response, the company expresses appreciation for stakeholder support during volatility, emphasizing confidence in its long-term growth strategy and PRGP actions to navigate this period. Tracey Travis addresses a question about the internal response to these challenges, noting the exploration of additional actions beyond PRGP due to ongoing business pressures. She acknowledges the need for potential cost structure adjustments and underscores the company's commitment to evaluating necessary reinvestments to drive sales recovery amidst current industry conditions.

The paragraph discusses efforts to identify cost savings in response to early-year pressures and ongoing plans under the PRGP to enhance investments. It highlights a focus on consumer-facing areas such as marketing and selling, with continued actions expected in upcoming quarters. The emphasis is on freeing up costs to improve margins and fuel brand growth. Fabrizio Freda adds that reinvestments will focus on improving investment quality and returns, particularly through precision marketing and digital strategies, which have shown positive market share results, and accelerating success in growing channels.

The paragraph discusses the company's market share trends and regional performance expectations amidst market volatility. Tracey Travis highlights that the company does not typically provide regional guidance but overall expects a 6% to 8% decline in organic growth for the second quarter. This decline is attributed to continued pressure from the Chinese market and travel retail, along with a deceleration in other markets like North America and APAC, which had previously seen double-digit growth. The uncertainty remains regarding whether these markets will continue to decelerate in the second quarter.

The paragraph discusses the company's market share growth strategies and successes in key markets like China and Japan. In China, they achieved significant market share growth in a declining market by focusing on skincare, innovative products, and precision marketing. They also gained market share in makeup, highlighting the strength of their brand. In Japan, their emphasis on expanding the fragrance portfolio, including new flagship stores for Le Labo and Jo Malone, led to impressive market share gains, making them the top fragrance company in the region within one quarter. Overall, the focus and execution of their strategies have yielded strong results.

The paragraph discusses the positive performance of a brand, particularly highlighting its growth in the American market despite overall market growth slowing. The brand has successfully increased its market share, driven by strong retail trends, effective repositioning strategies, and leveraging current skincare and makeup trends. The success is attributed to multiple distribution channels, including Amazon and Ulta, which have introduced new customers to the brand. The company is committed to continuing its market share growth in the U.S. and expanding further in key markets like China and Japan.

The paragraph addresses questions from Lauren Lieberman about a recent dividend cut. Lauren inquires about the timing and underlying reasons for the decision, especially since China's situation worsened but not drastically enough to affect dividends. She questions whether the cut relates to the earnings recovery timeline, cash reinvestment needs, or new leadership. In response, Tracey Travis clarifies that reducing the dividend is not a reflection of their long-term growth outlook. The change was due to unexpected pressures in the second quarter, differing from expectations in August.

The paragraph discusses the company's decision to adjust its dividend due to ongoing market uncertainties and lower earnings. Despite not having a liquidity problem, the company believes it's prudent to reduce the dividend to preserve cash for potential future actions under the PRGP and investments for growth. The aim is to balance total shareholder return by ensuring a good dividend yield while being prepared for market pressures. It ends with a question from Bryan Spillane asking about qualities and skills being sought in new management, given the company's changing landscape.

In the paragraph, Fabrizio Freda discusses the need for strategic changes in the company's growth model to address global market volatility and uncertainty. He highlights the strategy reset aimed at balancing growth by reducing overexposure to volatile regions and diversifying across countries, sales channels, and consumer segments. A specific focus is on managing volatility in the Asia Travel Retail and China markets while shifting focus to faster-growing sales channels. Additionally, he emphasizes the importance of appealing to younger consumers and suggests that leadership capable of implementing these strategic rebalancing efforts is crucial.

The paragraph discusses the company's focus on understanding global market dynamics and consumer trends to drive growth and adapt to changing consumer segments. It emphasizes the importance of brand building, innovation, and local relevance, highlighting actions like establishing research centers in China and factories in Asia. Furthermore, it stresses the need to accelerate strategies, increase organizational speed and agility, and make faster decisions to stay aligned with global changes.

The speaker expresses satisfaction with the board's decision to select an internal candidate for leadership succession, emphasizing the advantages of internal leaders in driving timely and necessary changes within the organization. The speaker highlights the importance of agility, resource allocation, and understanding of internal systems. They stress the need for leaders who can make urgent and courageous changes while maintaining the company's core strengths and values. The speaker is committed to supporting the transition and is optimistic that the new leadership team will bring improvements and positive impact in the future. After this statement, the operator introduces a question from Rupesh Parikh of Oppenheimer.

The paragraph discusses financial strategies being considered by a company in response to weaker earnings. Tracey Travis highlights efforts to reduce capital expenditures (CapEx) from the initially planned levels and improve cash flow and working capital, particularly focusing on agile inventory management to respond quickly to sales declines. The company has made significant improvements in inventory management, aiming to control obsolescence and discounting more tightly. In response to Bonnie Herzog's question about inventory levels in Asia Travel Retail, Tracy mentions that inventory levels have been lowered compared to last year and last quarter, demonstrating progress in managing inventory in the trade.

The paragraph discusses the challenges in reducing inventory and trade levels in the Asia Travel Retail market due to market deceleration and volatility. Although progress has been slower than expected, the company anticipates some improvement in Q2, assuming no significant market changes. Fabrizio Freda and Tracey highlight that while inventory levels have decreased from pandemic highs, the market remains tougher. The company emphasizes its focus on maintaining healthy inventory levels and adapting to market trends. Olivia Tong from Raymond James asks about the Q2 profit outlook, specifically regarding deleveraging, investment maintenance, and potential difficulties in achieving savings through the PRGP.

The paragraph discusses the financial outlook for the company, explaining that while gross margins are expected to improve in the second quarter, there's a challenge due to a 6% to 8% decline in sales, particularly in China and Travel Retail sectors, which are typically profitable. This decline affects the expense base, but the company is strategically protecting investments in areas that are performing well. They are focusing on innovative advertising and maintaining staffing levels in brick-and-mortar stores to ensure a successful holiday season despite declining sales. Additionally, they are continuing to invest in store development, although these investments are being rationalized based on performance.

The paragraph discusses the performance and strategic focus of specific brands like Le Labo and Jo Malone, emphasizing investment in their store expansion. It covers the expected benefits of the PRGP program on gross margins, with more restructuring benefits anticipated in the year's second half. While there are mid-single-digit business declines leading to deleveraging, the PRGP helps alleviate this. Fabrizio Freda adds that the decline is significant in key markets like China and Travel Retail Asia, where they hold substantial market shares, making the impact more severe due to these markets' profitability and scale.

The operator concludes the question-and-answer session and the conference call, thanking the attendees and instructing them to disconnect their lines.

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