Q2 2024 The Estée Lauder Companies Inc Earnings Call
[music].
Good day, everyone and welcome to the Este Lauder companies fiscal 'twenty 'twenty four second quarter conference call.
Today's call is being recorded and webcast for.
For opening remarks, and introductions I would like to turn the call over to the senior Vice President of Investor Relations Ms Rainey Mancini.
Hello on today's call are for Brachial, Freda, President and Chief Executive Officer, and Tracey Travis Executive Vice President and Chief Financial Officer since many of our remarks today contain forward looking statements. Let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from those forward.
Looking statements.
To facilitate the discussion of our underlying business the commentary on our financial results and expectations is before restructuring and other charges and adjustments disclosed in our press release.
Unless otherwise stated all organic net sales growth also excludes the non comparable impacts of acquisitions and divestitures branch closures and the impact of foreign currency translation, you can find reconciliations between GAAP and non-GAAP measures in our press release and on the investors section of our website as a reminder, referenced as online sales include.
So we make directly to our consumers to our brand dotcom sites and through third party platforms.
It also includes estimated sales of our products, they're a retailer's website.
The Q&A session. We ask that you. Please limit yourself to one question. So we can respond to all of you within the time scheduled for this call and now I'll turn the call over to Fabrizio.
Thank you Ray and Hello to everyone. We appreciate you joining us today.
For the second quarter, we delivered our outlook for organic sales decline of 8% and exceeded expectations for adjusted diluted EPS.
Organic sales in our global travel retail business decreased 28% with retail sales trends better than organic performance, reflecting both the execution of our priority to the reduced trade inventory in alignment with retailers and exports I various local authorities to contain a structured.
Market activity.
We made meaningful progress with trade inventory levels in Asia travel retail.
<unk> to expect it to be at normalized trade inventory levels by the end of the third quarter of this fiscal year.
The entire rest of our global business decreased 3% organically. This decline was primarily driven by the slowdown of overall prestige beauty in mainland China, Although our retail sales trends, we are much better than our organic performance.
Our global retail sales growth, excluding travel retail in mainland China rose mid single digits.
So EMEA delivered mid single digit retail sales growth in Asia Pacific, Excluding mainland China Rose double digits SDC Lucky in America, showcasing strong fundamentals, so brand desirability and the success of our consumer engagement initiatives.
Encouragingly, we made progress across several strategic priorities in the first house.
Beyond reusing inventories in the travel in the trade of Asia travel retail.
We improved working capital realized higher levels of strategic pricing and managing expenses with discipline.
For the full year, we are revising our outlook as we have tightened the growth range for organic sales primarily to account for risks of microeconomic and volatility in some areas around the world and updated adjusted diluted EPS for an anticipated higher tax rate in this revised out.
Look we have maintained our prior outlook for full year <unk>.
Profitability.
Looking ahead, we are at an inflection point.
We are positioned to return organic sales growth for the total company in the third quarter, and we expect organic sales growth to sequentially accelerate in the fourth quarter.
Second we are positioned for stronger profitability in the second half.
This fiscal year compared to the first dose.
Third we are preparing to meaningfully accelerate the rebuild of our profitability in fiscal years 2025 and 2026.
Indeed, since we spoke with you in early November our teams have been actively engaged to personalize. The proceeds recovery plan in doing so we have identified further opportunities to enhance profitability, while also generating more resources to be invested in consumer.
Focus areas to drive long term growth.
As a result, we are expanding the proceeds recovery plan to include a restructuring program.
While this is a difficult decision. We believe it is now a lot of drift plan better position the company to restore stronger and more sustainable profitability, while also supporting sales growth acceleration and increasing agility and speed to market.
For the consumer we anticipate faster product and commercial innovation supported by strategic brand building distribution and go to market advancement with digital leadership, He's a cool.
Moreover, we intend to increase our speed and agility as an organization, enabling quicker and more localized decisions, making to better create and respond to consumer trends.
Yeah.
The proxy recovery plan is now expected to deliver incremental operating profit of one one to $1 $4 billion up from 800 million to $1 billion previously.
In terms of timing these incremental profit is anticipated to be realized in fiscal year, 2025, and 26 with more than house in fiscal year 2025.
We are confident that our multiple engines of growth strategy will be announced by the property quality plan, enabling our company to more fully capture promising long term growth opportunities and remain a leader in global prestige beauty.
And to reinforce our commitment to execute that is a lot of discipline with excellence, we have engaged a global consulting firm a valid inmarsat.
They will provide strategic advisory services partnering with us on our restructuring program is part of the policy recalled that he planned to drive the realization of the sustainable rebuilt our profitability.
For the second half of the fiscal year, we have strategic initiatives and exciting innovation to drive in North America Reaccelerate growth in mainland China and drive momentum in markets that are thriving across developed and emerging markets in EMEA, Latin America and Asia Pacific.
Let me begin with Clinique brand.
The brand will be doubling down on it our turnkey dermatologists brand heritage of over 55 years deepening its relationship with the scientific community strengthening eastern my messaging and engage new consumers.
First clinique will be dialing up is their medication and consumer communications, including social media brand Dot com any store with new dermatologists partnerships and ingredient communication.
Clinique is also announced the establishment of the new Mount Sinai Clinique healthy skin Dermatology Center centers research is expected to produce breakthrough advancement in the study of alleged scheme and premature aging.
Next month's Clinique will return to the American Academy of Dermatology annual meeting to showcase its derm level science at formulations as well as each unique eye safety promise.
All of this is coupled with clinique, continuing innovation of allergy tested at 100% stake and it's free products ebbed.
Sit by Clinique, New Pos brasilia relevant claim powerful products, including smart clinical repay lifting phase and clean.
Turning to the Este Lauder brand for over 15 years. It has been a pioneer in loan JBT age reversals research, it's wrong Kiddo scheme biology for each renewed trip luxury franchise last August I spoke with you about how they know trip.
Be a standing a pony successful how's the medallion touch format is brilliant and seed them with compelling innovation.
The franchise breakthrough South Korea, with cutting edge patent that Sir TVT L. Pic technology for VZ, both Asia reversal is now launching nobody.
And in makeup there is a companion serum cream Foundation I'm, please sign different sized Kindle JBT science across categories.
We are encouraged by the global appeal of this innovation from China to Japan to the U S. Why early different in China is welcoming new consumers a compelling rates and we look forward to all that is to come for renewal III as launch events continue around the world.
Moreover, the brand is collaborating with the Stanford Center of longevity as they now go to a sponsor of the new program of our safety culture.
Beyond great new teams striking innovation, we had more standout launches across brands in the third quarter led by Mac and Tom Ford.
The new Maximo silky matte lipstick modernizes, Mac I caught up with the new silicon Mac finish lip conditioning benefits and elevated package for.
Tom Ford or mineralogy is primed to carry forward the brand's witnessed streak of innovation from cats that rose in the first half.
In the second half, we expect these initiatives and new product launches to build upon the strong momentum of several class indeed, the ordinary la Mer and Le Labo among gathers achieved terrific performance in the second quarter.
D or denied he delivered an excellent first dose as the brand again realized double digit organic sales growth in the quarter.
It's new suiting and battery of support serum, which launched during the first of course. It is the brands. The most successful launch ever and he's already among the top 10 ranked products in the U S prestige serum category.
Ordinarily continues to excel in specialty multi globally and he's also realizing very promising uptick.
On the new digital shops in the United States through engaging livestream and creator of content.
La Mer further contributed to our strong underlying fundamentals in skincare, the brand's luxurious high quality product from the colony Creme de la Mer to the new listings serve serum along with its exceptional services proved highly sought after by discerning consumer.
Is it around the world in mainland China, La Mer grew double digits every T to realize strong share gains in prestige skincare.
Our luxury and artisanal fragrances also performed quite well.
The Bowl led it broke very strengths Jo Malone, London, Tom Ford helium parties and EU the profound Frederic malle, each rose organically fueling double digit organic sales growth in Asia Pacific and gains in the Americas.
Towards the second house, we expect to return to organic sales growth in mainland China, driven by a rich innovation pipeline for a greater contribution to sales from new products in the second half than the first south and we are investing in exciting go to market initiatives across brick and mortar and.
Your line.
Impressively, we entered the third quarter in mainland China with momentum in brick and mortar having expanded our prestige beauty share offline in the second quarter driven by strong double digit retail sales growth in each of department stores specialty multi freestanding stores.
Bottom line why the channel was especially pressured by softness in overall prestige beauty and the 11 11 Global shopping festival.
Our brands performed strongly although in rising triple digit organically to partially offset lower sales for the event.
Este Lauder brand ranking number one in prestige beauty under win adding also ranked number one for Stuart lifestream.
For the fiscal year.
We remain focus on North America, returning to organic sales growth.
And are encouraged by the low single digit growth delivered in the first house.
While makeup was pressured in the second quarter by the cadence of major New program launches. We are very excited but I didn't know they shouldn't come into market across the segment house.
Beginning with Mac Maximo Silicon matte Lipstick will launched last week.
Moreover, skincare grew for the second consecutive quarter in North America, driven by the ordinary and Este Lauder, our luxury and S. T cell fragrances rose double digits in the quarter.
Our strategic initiative from expanded consumer reach TD embodies two strong engagement on keep talk by Jo Malone, London are proving successful.
In closing.
We are at an inflection point.
Just to return to organic sales growth in the second house.
And delivered sequentially stronger profitability than the first south as well as expansion from a year ago.
We are well positioned to deliver stronger profitability in fiscal year 2025, 26, even the initial progress we have made for our property colleague plan as well as each new restructuring program.
And we are well positioned to invest in consumer facing areas to capture the exciting growth opportunities in global prestige beauty.
I wish to extend my gratitude to our leaders and their amazing teams for the hard work and dedication which has taken us to this inflection point, Oh, they're renewed sales and profit growth trajectory.
I will now turn the call over to Tracy.
Thank you <unk> and Hello, everyone.
I'll start by reviewing our second quarter financial results, followed by our third quarter and full year outlook.
Also provide details on our expanded profit recovery plan.
As Fabrizio mentioned, our second quarter organic net sales decline of 8% met our expectations.
Additionally, through tighter expense management, and despite experiencing a higher tax rate due to the shift in our geographical mix of business our earnings per share of 88 cents exceeded our initial outlook for the quarter.
From a geographic standpoint organic net sales in our Europe, the Middle East and Africa region declined 14%.
Mainly attributable to the persistent challenges in our Asia travel retail business.
The impact from business disruption in Israel and in other parts of the Middle East accounted for a 2% reduction in the regions overall net sales growth.
The market in the region had mixed results leading to overall flat from across all markets.
Organic net sales in our Asia Pacific region fell, 7%, reflecting continued challenges in mainland China.
While our results 1 billion more than double our total online sales decline due to softer than expected performance on tmall during the double 11 event.
The overall online performance more than offset the increase in brick and mortar sales, which was led by double digit growth in our freestanding stores.
In the rest of the region, we saw strong organic net sales growth led by double digit growth in Hong Kong, if they are and Korea as well as high single digit growth in Japan.
Our luxury fragrance brands Le Beau Jo Malone, London, and Tom Ford drove double digit fragrance growth in the region, which was fueled by both effective commercial activation as well as compelling holiday product offerings.
Organic net sales in the Americas declined 1% driven by a prior year benefit from changes made to Mac take best loyalty program in North America last year.
Excluding this benefit net sales were relatively flat in North America, reflecting growth in specialty multi and our freestanding stores and offset by softer performance experienced in department stores and online.
In Latin America organic net sales rose double digits, reflecting continued growth in nearly every market and strong performance during holiday in key shopping moments.
From a category standpoint, organic net sales fell 10% in skincare and 8% in makeup.
In skin care of the ongoing challenges in Asia travel retail and mainland China drove the majority of the decrease.
Organic net sales from the ordinary and La Mer grew across every geographic region. The ordinary saw double digit growth in specialty multi including ongoing expansion and continued its focus on education first content to drive successful social media activation.
Net sales from La Mer increase both online and in brick and mortar benefiting from captivating social media and holiday product activation.
In makeup the persistent challenges in Asia travel retail were compounded by the prior year benefit from Mac that I previously mentioned.
Organic net sales fell 6% in hair care and we're flat in fragrance net sales from all of them grew double digits fueled by both targeted expanded consumer reach and same store sales.
The brand ethos and high touch services persistently attract both new and loyal consumers as evidenced by the double digit net sales growth in our freestanding stores as well as strong performance during holiday and key shopping moments for.
Jo Malone, London results from the brand's holiday collection were strong and net sales increased in nearly all channels of distribution.
This growth was offset by a decline from Este Lauder due to the timing of holiday shipments compared to last year.
Our gross margin decreased 60 basis points compared to last year.
The positive impacts from brand mix and that strategic pricing actions were more than offset by higher costs due to promotional items in foreign currency.
Operating expenses increased 260 basis points as a percent of sales driven largely by the reduction in sales selling advertising and promotional activities and innovation collectively accounted for 160 basis points of the increase compared to last year as we supported retail growth while also continuing to do.
Destock certain accounts in Asia travel retail.
Operating income declined 25% to $577 million and our operating margin contracted to 13, 5% from 16, 6% in the prior year.
Our effective tax rate for the quarter was 37, 7% compared to 24, 9% last year. The increase in rate was primarily due to a true up in the quarter to reflect the now higher estimated tax rate on our foreign operations for fiscal 2024 as a result of the change in our geographical mix of earnings.
This also reflects an unfavorable impact related to previously issued share based compensation.
Diluted EPS of <unk>, 88, tenths decreased 43% compared to last year.
Including the dilutive impact of <unk> 19 cents from the change in the effective tax rate the impact from this business disruptions in Israel and other parts of the middle East with two cents dilutive to EPS in the quarter.
The acquisition of the Tom Ford brand was neutral to EPS as interest expense related to our debt financing was offset by the combined benefits derived as the licensed store of the brand from royalty revenue this year and savings from no longer having to pay license fees and royalties.
During the quarter, we generated $937 million and net cash flow from operating activity compared to $751 million last year.
The increase from last year reflects lower working capital, partially offset by the decline in net earnings.
The favorability from working capital was largely due to the actions we've taken to reduce inventory primarily finished goods and semi finished goods that resulted in a significant improvement in our days to sell.
We invested $527 million in capital expenditures, and we returned $474 million in cash to stockholders through dividends.
Turning now to our outlook for the remainder of fiscal 2024, which excludes the impact from the remaining payment for the outstanding Duffy I'm equity anticipated to occur in May 2024, and includes Clinique heightened focus in active derma.
While we delivered on our Q2 expectations, we are lowering the high end of our fiscal 'twenty four organic net sales outlook range to reflect continued risks from evolving macroeconomic volatility and geopolitical tensions in certain areas around the world.
Despite this change to our sales outlook, we are maintaining our full year operating profitability expectation.
Furthermore, we are updating our EPS outlook, primarily to reflect the increase in our estimated full year effective tax rate largely due to the anticipated geographical mix of our earnings.
This is expected to more than offset the EPS benefit from foreign currency translation.
Using December 29th spot rates of $1 107 for the Euro one point to seven three for the pound 7109 for the Chinese one and 12 90 for the Korean won currency translation is anticipated to negatively impact reported sales for the third quarter and diluted EPS for both the third quarter.
In the full year.
We expect organic net sales for our third quarter to increase 3% to 5% as both of our businesses in Asia travel retail and in mainland China are expected to return to growth.
In Asia travel retail this growth assumes the continued reduction in retailer inventory as well as the anniversary of some business disruptions, we experienced last year.
Currency translation and the potential risks of further business disruptions in the middle East are each expected to be dilutive to reported net sales by one point.
Currency translation and the potential risk of further business disruptions in the middle East are each expected to dilute EPS by <unk> <unk>.
Adjusted EPS and constant currency is expected to range between an increase of 3% to a decline of 18%.
For the full year, we expect reported and organic net sales to range between a decline of 1% and an increase of 1%.
Our plants have been running at reduced capacity, reflecting the pull down of production in line with our lower shipment and to support the reduction of inventory levels. Both in house and then the trained.
This has resulted in inefficiencies in some of our manufacturing locations and may trigger a requirement to recognize the related manufacturing costs and in period costs instead of when products are sold.
We have reflected this potential extent and the corresponding pressure to gross margin in our outlook for the balance of the fiscal year, primarily in the third quarter.
Our full year operating margin outlook remains unchanged and is expected to be between nine and nine 5% a contraction from 11, 4% last year and plan to partially offset the incremental pressure to gross margin through disciplined expense management.
We now expect our full year effective tax rate to be approximately 35% compared to 26, 5% last year.
The increase reflects the larger mix of our expected fiscal 'twenty 'twenty four earnings in higher tax jurisdictions as well as the unfavorable impact of previously issued share based compensation.
Diluted EPS is expected to range between $2.08 and $2.23 before restructuring and other charges.
The potential risks of further business disruptions in Israel and other parts of the Middle East and currency translation are expected to dilute earnings per share by <unk>, <unk> and seven cents respectively.
In constant currency, we expect EPS to fall between 34% to 38%.
Given the progress we have made in strategic initiatives. The first half of the year, we expect to return to organic net sales growth and stronger operating profitability in the second half.
In November we announced the profit recovery plan to support the progressive rebuilding of our profit margins in fiscal years 2025 and 2026.
Today with the announcement of a two year restructuring program, we have a further expanded this plan.
As Fabrizio mentioned, we are focused on strategically leveraging our strengths to accelerate our return to more sustainable profitable growth, while elevating our consumer activations and increasing our operating agility.
The restructuring program is designed to rightsize and streamlining select areas within our organization, which unfortunately necessitates us making the difficult decision of an expected net reduction in positions globally, a 3% to 5%.
The restructuring program is expected to begin in the third quarter and continue for the duration of the profit recovery plan.
We expect to take charges of between 500 $700 million and generate annual gross savings of $350 million to $500 million before taxes.
A portion of these savings is expected to be reinvested in consumer facing activities to drive long term sustainable profitable growth.
We now expect to drive incremental operating profit through all initiatives under the profit recovery plan of one one to $1 $4 billion inclusive of that benefits from the restructuring program announced today.
The plan is expected to yield almost all of the anticipated benefits by the end of fiscal year 2026 with slightly more than half of these benefits realized in contributing to operating profitability in fiscal 2025.
In closing, we express our sincere gratitude to our teams around the world as they worked tirelessly to execute against our priorities and drive our business forward.
We believe that with the work that is being done to position us to return to growth in the second half of the fiscal year and beyond and with the successful execution of our expanded profit recovery plan, we will be better positioned to return our company to long term sustainable growth and profitability.
That concludes our prepared remarks, we'll be happy to take your questions at this time.
The floor is now opened for questions.
If you have a question you simply press the star key followed by the digit one on your Touchtone phone.
To ensure everyone can ask a question we will limit each person to one question.
Time permitting we will return to you for additional questions just queue up again by pressing the Starkey and that did you want.
Our first question today comes from Dara <unk> with Morgan Stanley. Please go ahead.
Hey, good morning, guys.
So first just a couple of clarification questions under the restructuring and profit recovery program can you just give a little more detail on the structural changes in the program beyond the job cuts and in the past you've done a pretty good job of delivering upside to savings goals. So how do you think about other savings areas that could potentially emerge over.
Time and are you pushing beyond what's potentially announce.
And then if you'd be generous enough to entertain a question on China.
Clearly there are some structural changes that have emerged in China beauty consumer perception of the category itself.
[noise] willingness to be awesome Patriots et cetera changes and daigo selling promotional impacts mass brand performance.
Impacts to Este brand share so maybe Fabrizio just take a step back and broad thoughts on the opportunity in China from here, but also specifically how do you adjust to these changes what are your focus points from here in this new China reality that'd be helpful. Thanks.
Right.
But they're all I'll start with your question on the profit recovery plan you know what we shared in November was you know our primary focus of the plan.
Was is to rebuild our gross margin, which is where we've lost.
You all know quite a bit of a margin.
So some of the strategies that we spoke about at that time that we were putting in place is really to focus on a more profitable channel mix.
To get our inventories under control, which which should improve our obsolescence as well as some of the discounting that that has gone on over the last few years. You know we are being more granular in terms of some of the strategic pricing initiatives that we have and we also talked at that time about from an expense standpoint.
Implementing an incremental indirect procurement program to reduce some of our expense area. So that those were some of the initiatives that we spoke about that made up the 800 to a billion in terms of the profit recovery plan at that time, and then obviously, we've announced an additional element.
The program with the restructuring.
Uh huh.
Yeah on the so on the China on the China question.
First of all we had we had some soft consumer sentiment in the recent periods that the drive bys lowered the prestige sales growth.
First of all we remain very optimistic about the long term opportunity in China and are continuing to invest for growth.
The second point is you asked about it Brian helped and what's changed.
Our brands are really really really strong the retail sales growth has been much better than the net growth and have been sort of in a double digit growth of many of our brands, particularly in luxury like La Mer, Tom Ford Jo Malone, Bobbi Brown helium friederike mile.
And our visa will surely leboon continues to strike.
In term of market share importantly, we gained market share over the fiscal year in quarter. Two despite there was a small reduction from market share or is it too, but we gained market share in skincare category 80 points. We gave you in fragrances, we gained U S kit and there are several important.
Many of our brands, we had really top ranked senior 11 11.
The other element to support the strike the strengths of our equity is the freestanding store double digit growth both in total and the like those in mainland China.
And I should also mention the strengths you don't Kong, where we grow substantial market share.
As past, reflecting the success with the Chinese consumers, so where we go from here as I said, we are going to continue to invest in China.
And we believe we have a great team there and determination to continue building market share winning in the long term. The first step is building our distribution in winning online channels that this will continue particularly accelerating to win in the short term.
And continue to build market share and you see it is in brick and mortar where I would like to underline that in quarter. Two we grew substantial brick and mortar market ship in in China.
We will also continue to leverage our Katherine trend, where retail sales are clear the hedge on that.
And we will support very strong holiday plans, which as you know there is a high concentration of sales in China. During the various holiday plans in the course of the year.
We.
We also.
Believes that there is a particular strong opportunity in the luxury area among our luxury brands, which I used to say, they're doing very well and I'm, referring to Este Lauder renewed zig launch that we mentioned.
La Mer.
Tom Ford Le Labo, Bobbi, Brown and extraordinary aggressive plants.
Strong innovation plan in H two by the way will continue it will accelerate leveraging our new labs, the new laboratory in Shanghai, which is an important.
What do we do for us.
And is important you you asked what is changing in the various other aspects. So in the in the relationships with travel retail and in the managing of the euro reprising of promotional across to the Chinese consumer.
The framework, we have dramatically improved the model of the process between the China team and <unk> team in making decisions about promotional pricing channel penetration and this is working better and better for the future and then and also.
About the development of local brands for the moment they are mainly in mass, but we completely of knowledge there will be a continuous development of local brands and the strengths of our innovation and differentiation of our brands is going to be key and so we continue to invest in these systems and in these threats.
Investment in our wet lab local lab, they will develop a local local innovation is part of the answer to how to compete in this evolving environment. This will last we are shortening the supply chain with the factory in Asia Pacific and the ability to plan more accordingly to demand and to be.
More agile in responding to demand is the other big capability that will increase the flexibility the agility of our China team in a fully exporting it following demand. So net we we have a strong business in China, we have strong market share and we are continue we have the term.
Need to continue to invest for the long term in China.
Yeah.
The next question comes from Bryan Spillane with Bank of America. Please go ahead.
Thank you operator, good morning, Fabrizio and Tracy. So my question is just related to maybe how you're going to measure yourself as an organization over the next two years. So the 25 to 26 timeframe and I guess I asked that in the context of.
Stock clearly today, reflecting an inflection right a positive inflection but at the same time, there's a lot of mixed things right, China, you know slower than it was but again optimistic for the long term.
A lot of work to do underneath the hood right to.
You know.
Execute on the restructuring program and improved margins. So just.
I guess I'm, just curious how youre thinking about how linear this this improvement would be in and again just are you going to change the way youre going to maybe measure yourselves in the near term just given how much work you've got to do and how it may be different it was versus business as normal over the last couple of years. Thanks.
Yeah, absolutely and then your question will give me the opportunity to give an overview of what we are trying to do I hope you realize that the work we have done in the last several months that could mean eight today in what we define an inflection point is that it's first of all acknowledging the need of <unk>.
Some important changes to align to the future opportunity to address our key pressure points developed in this post COVID-19 environment. So I'd like to summarize first of all what we are doing that and I wouldn't make ourselves. The way. We look at it is that first of all we are addressing the need to change and we are addressing the key pressure points.
The first is the meaningful progress we have done on retail stocks in Asia that as we said as of April there should be aligned and this will determine your ability to aligning the future retail and net in this very important channel for us and for the industry in general that's a big pressure points that we had.
Dressing the second part there was driving margin was obviously didn't need all the gross margin at addressing our go to imagine addressing our cost structure and right size. Our organization. So the property called the plan and a lot of debt and AR and the execution of it which is strongly advance and yet dish.
Although the restructuring yet.
Addressing decisively.
Our ability to recall the profitability at accelerated pace.
And at the same time this property called the plan is designed to resource.
Our future growth floor plans more aggressively and to develop the right agility speed to market in the organization and we are going to measure this and to measure where cell phone that afford agility I mean agility to allocate resources in this more volatile toward more promptly and faster as the.
One for example, a supply chain that just mentioned in the previous question and the speed to market of innovation to better compete with local grants.
The other important part of profitability marriageable skincare, and obviously, we need to recall that our skin care growth to address the profitability as we discussed in several of those that I just want to clarify the skin care growth. During the course of two was very strong in the Americas in EMEA in APAC ex China in China with <unk>.
Didn't grow skincare during quarter, two but we grew market share scheme here as I said before in a very strong way. So we are addressing the skin care opportunity and they know vision of skincare that we announced at the one on Este Lauder La Mer fresh de la Mer future innovation Clinique repositioning actually not.
Leveraging its.
Heavy touch position the ordinary and Actavis.
Activision and future of yours globally. All of these are engines that should continue and.
To grow also in the long term our skincare now that the Angela vein the retail stock Cynthia would be.
So that's the first big pressure point that we address the second was the <expletive> the China growth in China, our focus in the long term I believe I address this in my previous answer the third one is accelerating our plan to stabilize market share in the U S and we are addressing.
First of all.
And that is very clearly our opportunity inactive derma and with the Clinique heavy touch position and with the ordinary extraordinary success. We will continue to address our distribution mix mix improvement needs toward the consumer segment in the channel segment, we had access.
We are raising our fragrance sales growth, which is very important in the region and also would like to remind that we have the top two brands in skincare any mcafee in our in the in the region and in skincare. We arrive on the growth of your Daddy now have we have four of the top five skincare brands in the market.
But in the ordinary gain 200 points for ship prestige market just important too.
So we are addressing a very decisively the future opportunities obviously in our North America.
So a second big point is we want to continue building on our strengths and we said that we have strength clearly in APAC ex China in this moment.
When they come back on corn, which is a very important improvement to our vessel they called T E.
In EMEA, we continued to have strong growth for example in skin care in markets like Germany, Italy, Spain, Turkey, our emerging market grew double digit and we believe we have strong opportunity in emerging markets, where we have very strong market share position in every one of the top ones for the future of acceleration our data to come.
Human business, our freestanding store grew double digits supporting also our brand strengths are in equity. So we will continue building on all of these strengths and our plans focus on this.
We remain confident in the future of the prestige beauty market. So there remains very attractive we remained focus as a pure play on these very high growth at least Indian onto market in.
In the consumer goods industry.
And finally, as I said, the property poverty plant and the restructuring would be at <unk>.
Key enabler of all these strategies in our future. So yes, we see it we are at an inflection point and that we are going to measure ourselves on all of these elements combined meaning we're going to measure out of upsells on with the pace of recovery of our profitability with the.
We going back to a growth sustainable growth model and investing in our brands for the future and that rehab dressing that need the changes in our organization to improve agility of resource allocation and speed to market.
The next question comes from Olivia Tong with Raymond James. Please go ahead.
Great. Thanks.
I wanted to talk a little bit about just first a follow up on your U S distribution comment in terms of stabilizing U S share them with clinique and the ordinary sort of towards.
Entry level price point, then on prestige well how does it how do you think about further diversification into Westchester fruition, especially as department stores continue to come down.
Yeah.
So now we are as you know we are working on this for some time and the way we address it is that we are going to continue to increase the focus on the high growth channels. We have done some extraordinary improvement in the specialty channel in our in the last period and that will continue.
To be our focus we are also obviously focusing our support to our department store partners.
And where.
Where we have high market share and we are managing it.
This business carefully and we are continuing to accelerate online with various opportunities that we have in this world and the consumer is shopping more and more omni channel and so.
We are going to continue to put focus on the opportunity of omni channel growth.
In the United States.
So that's what what we are doing and you will see the strategy to be implemented step by step in the next 12 months accordingly to these opportunities.
Yeah.
The next question comes from Oliver Chen with TD Cowen. Please go ahead.
Hi, Fabrizio and Tracy you mentioned agility, many times, but what are your thoughts on the priorities in terms of what Youll do there as well as our direct to consumer and digital and community engagement as you know is very important.
Terms of user generated content and making sure they embrace a lot of new formats.
A follow up as we model inventory in the back half.
Your inventories are in much better shape, but what gives you the conviction that the inventory levels related to Asia travel retail.
We'll be we'll be healthy in terms of the back half just some key aspects and being more confident there. Thanks a lot.
Thanks, Oliver So I'll I'll start with with the inventory levels. You know we made significant progress as we said.
In our prepared remarks on.
Inventory and bringing down the levels of inventory in the trade that that were high and in pockets of Asia travel retail. So we are pretty comfortable that we won't be able to bring those down to.
Levels that are healthier.
That are expected to drive regular replenishment levels, and therefore being a net sales accelerator that that we have embedded in our guidance for the second half of the year. In addition, what we spoke about is we've also at the same time of bringing down inventory levels in the trade raw inventory levels down in house.
And and that as you know part of the benefit that we saw in terms of the cash improvement in the quarter and we expect with the tools that we've invested in.
And and having healthier levels of inventory overall, largely driven by the pull down in production that we did in the first quarter that are that we spoke about that we are going to be in a much better shape as we support some of the upcoming innovation that we have as well as in the future in terms of bringing in.
Centaury level into a into better control obviously, the investment that we've done as Fabrizio mentioned in our Asia supply chain allows us to have shorter lead times in the region and Ah and be able to better manage any volatility that may occur in the future.
Now that we have a plan and an R&D center in <unk> in the region. So all of those things help us in terms of creating that our inventory agility, having being able to produce faster to market demand then than we have been in the past.
Then in your your question on our agility. There are two measures of agility that we look at is very important one is our agility in responding to volatility faster reallocating resources. So the action in this area is being the sharpening of our supply chain in Asia for example, and that the.
Video ASP at all even the way we agree we had reposition elaborate agenda historical Harry the positioning of Clinique and doubling down on it inactive there Mac that we were leveraging the ordinary strengths India in there. So in other words, how we are responding to the consumer trend of active.
Now very decisively so those that element of agility, we want to improve our ability to do these things faster and more promptly in the future yeah that aspect to the agility is the way we go to market. So reaction to for example, the new platforms. We are learning how to operate with Tic Toc.
<unk> much more we are focusing on earned media value much more our organization, including the resource allocation, but also the training and the development of the understanding of the various models. We have do with D. C known markets for the world at the same time, we are modernizing our promotional models.
And making them more relevant to the current consumer trends.
And importantly, as an umbrella concept we have.
Becoming more and more.
He moved to react to trends. So there are two kind of trends we have working our organizational development. The first is the long term trends the fundamental changes in consumer preferences, where frankly, we have been always pretty strong and we are we are further refining this liability and then there are the short term trends.
The trends that could change in a week in a month or what's going to be popular online in this circumstance the country and it served the moment, where we have developed better a better model to react to short term trends with our brands with our execution with our resource allocation and by the way the world can organization of the profit recovery plan is.
Also tailor it to improve our ability in both these areas many data agility in resource allocation and the agility in reacting to trends and to the new model some marketing around the world.
The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.
Hi, Good morning, Fabrizio and Tracy as you think about pricing and with the new launches that you have coming how do you think about pricing both for existing hero new products and how it's changing and then as you continue to enhance our specialty multi distribution, how do you see and engaging with the department.
<unk> stores, and how what that relevant how that relevant changes. Thank you.
So we have a pretty sophisticated dana pricing pricing model for for new product launches and I think we had spoken about even under the profit recovery plan and making sure that our new product launches actually are accretive to our overall margin. So we have.
Cut some of our new product launches and in that.
That were planned for fiscal 'twenty five.
In order to do that and really looked at our innovation pipeline to make sure that that what we're launching is in fact accretive.
But the sophistication that goes into our new product pricing model in terms of looking at you know what the competitive benchmarks are relative to that particular launch.
You know also from a market standpoint, making sure again that are that the new product is positioned appropriately.
We look at if it's replacing an existing franchise.
A measure of the product and pricing differential related to added content added benefits added packaging et cetera. So there are a number of things that factor into it I think that you know as a as we mentioned we've got some very exciting new product launches in the second half of this year Mac is.
Re launching two of their largest franchises studio fix and and the Mac lipsticks.
We've got Este Lauder renew truth with certificate. He that are you know that is quite exciting really playing on the longevity. Our focus that are that is accelerating in the market. So fabrizio just talked about trends, we've got quite a bit of trend based.
But you know highly efficacious from a quality standpoint products launching in the second half of the year all of which have been are priced appropriately for the benefits that are that they are up contributing.
Yeah and on the on the different retail the retail channels. We obviously support every one of the retail channel. So specialty multi department store, everyone. But every retail channels is going to be supported more and more in a theater way, meaning that tailoring to their model to their strategy to their specific consumer.
Profiles and this would be very different country by country, there are countries, where certain channels to grow faster than others and maybe the opposite happened in other countries. So is it is not about nil.
References are changing strategies about tailoring the strategy to each channel supporting every one of our partners at the end of the results of these is that the mix of our business in every country of the world will be focused on growth. It will be focused on leveraging the channels that the consumers in that.
Specific moment, we choose where the different target consumer we choose in every channel. So is it is about tailoring to all the opportunities wherever they are.
The next question comes from Steve Powers with Deutsche Bank. Please go ahead.
Hey, Thank you and good morning.
So back to the profit recovery plan.
Your outlook today.
At the midpoint implies roughly a billion and a half or so of operating profit in fiscal 'twenty three.
And you framed the recovery program.
The incremental profit from here, which you know assuming the benefits are off of fiscal 'twenty four based on implies two and a half to $3 billion or so of operating profit in fiscal 'twenty six and I think that's.
Before considering presumed underlying growth in the business over the next couple of years. So congrats correct could you confirm that okay great.
I guess the question is the question is how do you protect.
That objective yourself today, how do you protect against those incremental profits being.
Essentially.
Countered by incremental investments that emerge over that time, so you're selling a expectation for investors today that profit comes at us.
Pretty firm and confirm objective, but I'm just how do you guard against other costs creeping into the model over the next couple of years.
Yeah.
So no. It's a great question. Steven look you know we are certainly realistic that with regulatory changes with what happens with inflation. You know there are a lot of things that that are that we in the base business before the profit recovery plan need to be able to manage and one.
The things that.
That we are working through with our organization is how do you make those choices in terms of what to invest and and different asset.
In terms of the base business. So those are areas that we are keenly focused on as we look at just what the base progression, which you're very familiar with what our normal progression is you know outside of obviously this unusual period.
Of post pandemic disruption that are that we've experienced so we certainly have in the past been able to do that.
And and believe that we can do it in in the future as well and we've also stood up a very disciplined and strong project management office in order to be able to track all of the savings that we are committing to and Ah and also obviously with the base business I'm, making sure.
Sure that we're meeting our normal base expectations as it relates to a regular growth and margin expansion.
And just would like to add one one point is that as you said it well.
One one to $1 4 billion have been defined at extra profitability, which means that the reinvestment part in.
Building, our brands and accelerating growth comes from more savings than what we define as extra profit so to be clear there will be more savings some of them will be reinvested in consumer facing growth acceleration and the one who went to work put forth is Iowa.
Target for extra profitability and that's why we have been very clear on that and the investment in growth that will be done with the extra investment in growth for the future that we want to develop them.
Capabilities for our four consumer facing that we are not planning to invest in many new capabilities, but rather we want to leverage the capabilities. We have built in the last period in a very efficient way. So that's the way to think I believe about the profit recovery plan.
Okay.
Our last question today comes from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, Good morning, and two things I'd wanted to touch on the first was just I think during the prepared remarks, you'd commented that retail sales ex China and travel retail are up mid singles, but organic also funding I think was down three so.
Do you smoke and you know very explicitly about the inventory dynamics in Asia travel retail, but I was just curious about inventory dynamics outside of those markets and why that disconnect was that large so that was question one.
And then question two is just on the.
Go forward plan around unstructured market.
Across Asia.
Of course, we all know there's been regulatory change in China and Hainan.
But you know Ive spoken many times catastrophe talk about how that market tends to shift and move with with the travelers.
Currency and all sorts of things.
Things that can do that can impact.
It's taking place so was curious on your thoughts about that unstructured market going forward. You know what you are or aren't going to do in terms of regulating the degree of participation.
It isn't going to have a lot to do with how we should be thinking about and modeling the absolute size of the travel retail business in dollar terms.
As we look out over the next several years. Thanks.
Thanks, Lauren so I'll start with the with the retail and inorganic.
When we have especially in the second quarter. Obviously, you know when we have big events like 11 11.
And you have holiday.
And in the case for for US when those events don't go as well as expected obviously retailers pulled back on and we pulled back on some of the shipments that we that we have.
To those retailers in order to bring things back in line. So you will see from a quarter to quarter standpoint, there may be some some disconnects are related to that.
But you know it averages out over the course of a year. So we don't have any issues in any other markets like what we have been experiencing in Asia travel retail for you all to be concerned about.
And on this thread unstructured market, our focus is on travelers and travelers conversions and this is getting better and better around the world just to be clear apart from the China situation that we have discussed many times in the rest of the award that he is an extraordinary progress in this area.
Digit in some cases triple digit in every market of the world. So this will happen more and more also in China also in Korea and also in the past, which has been the slowest to recover in that direction. So first part of the answer is the term the focus and continue growing in travelers and continuous improving that trial.
This conversion as you have seen from the doctor or the market. The travelers has been improving very very nicely, but the conversion of the travelers for the moment has been below expectations.
Yes structure market.
SaaS is growing is reducing and I want to say is reusing old sulfur regulations for the intention of the government. So the retailers are so there is a trend to reduce the amount and obviously this is also what we are doing and so the way you should expect is that your structure.
Mark will be reduced.
In my opinion will reduce all sorts of market, we'd be reducing for us and we'd beat it using <unk>.
In a gradual way as the travelers improve and increase overtime.
That concludes today's question answer session.
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Yeah.
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