Q1 2025 The Estée Lauder Companies Inc Earnings Call

The End

Good morning and welcome to the S.A. Latter Company's Q1 fiscal 2025 earnings release in conference call. All participants will be in a listen only mode. Should you need assistance? Let me say no, a conference specialist by pressing the star key followed by zero.

After today's presentation, we'll be in opportunity to ask questions. To ask a question you may press star and then one using a toucher and telephone. To withdraw your questions you may press star and two.

Exalted note today is being recorded at this time I'd like to turn the floor over to Randy Mancini Senior Vice President and Vester Relations. Man, please go ahead.

Hello, today's call are Fabrizio Freda, President and Chief Executive Officer and Tracey Travis, Executive Vice President and Chief Financial Officer.

Since many of our remarks today, contained forward-looking statements, let me refer you to our press release in our reports, files with the SEC, where you'll find factors that could cause actual results to different materialies from these forward-looking statements.

The facility for discussion over underlying business, the commentary on our financial results and expectations is before restructuring and other charges in adjustments disclosed in our press release.

Unless otherwise stated, all organic net sales growth also excludes the non-comperbling impacts of acquisitions, divestitures, brand closures, and the impacts of foreign currency translation.

You can find reconciliation between gap and non-gap measures in our press release and on the investor section of our website.

As a reminder, references to online sales include sales we make directly to our consumers to our brand.com site and through third party platforms.

It also includes estimated sales of our products or retailers website.

Throughout our discussion, our Profit Recovery and Growth Plan will be referred to as our PRGP. During 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, Rainy and hello to everyone.

For the first quarter, we anticipated a challenge in start.

To Fiscalia 2020 Fide

Our results today are a large legal system with the outlook for the quarter we offered in August Organic sales decreased 5% at the low end of the expected range, driven by double digit clients in Mayland, China, Global travel retail primarily on Intuasion and on Cone SIR.

is including these three areas, sails in the rest of our global business rose 1%, both on a reported and organic basis.

Wild retail sales growth accelerates sequentially from 2% to 3%.

An Amber of Marquette's continued to deliver organic says growth in our first quarter. Let by Japan where we gain prestige beauty share.

The developers market in EMEA and our emerging markets also grew organically while North America declined modestly as it compared to a big innovation known to calendar in the previous year.

While we are not satisfied with our organic system performance, we are encouraged by initial results from several pillars of our strategy reset the weird nouns in August, which I'll elaborate on in a few minutes.

Despite the lower level of total employee report, sales adjusted gross margin expanded by over 300 basis points

Initiative of the PRGP drove improvements as crazy with the skyd.

We strategy-regally increased a peace-tending as a percentage of sales in support of our robust innovation pipeline to realize over 100 basis points of adjusted operating margin expansion despite significant operating delivery.

We deliver a druster IPS or 14 cents better than 11 cents in the year ago period, and 4 cents above the high end of our outlook range.

Looking ahead, as the quarter evolved and through a tuber, it became increasingly apparent that we are facing greater macro headwinds for fiscal year 2025 than we expected in August.

First, the prestigious beauty industry reported retail sales in Maylan China, a further weeknit sequentially, from a 10% decline in our forecoaster to a million 10% of the increase.

Importantly, we gain share in Prestige Beauty in mainland China for the second consecutive quarter, driven by industry leading share gains in skincare and a return to share gains in makeup.

Consular sentiment in Maylan China weekend is further in our first quarter.

Why we believe the new economic stimulus measures present medium to long-term potential for stabilization and then ultimately growth. In Prestige Beauty, we anticipate the strong decline near-term for the industry.

Second, the prestigious beauty industry in Asia-Traday, say, continue to be significant until the pressure is conversal levels are still far lower than private dating.

Fred, the US prestige beauty industry retail sales, low with sequentially, from high single-digit growth in our forequarter to meet single-digit growth. As a levator levels of inflation-driven pricing, sales.

Wilde is still good growth. The man so robust at September passes no weight growth than July.

Incoratively, although the US prestige beauty industry's retail sales growth decelerators sequentially, our company retail sales growth accelerated. And we further reduce our prestige beauty share loss.

We believe we are well on our way to stabilize the shares in the US as we increase our exposure to high-growth channels and we have our side set on a return to prestige beauty share growth.

With this complex industrial escape, including the particularly difficult difficulty in forecasting the timing of market stabilization and recovering China and Asia travel retail, and in the context of the retirement of Tracey and myself.

We are solely issuing an outlook for the second quarter and we're drawing our CISCA here 2025 outlook.

Additionally, we are reducing our dividends to a more appropriate day operation, which we also create more financial flexibility for our incoming leadership team to re-accelerate our profitable growth trajectory.

[inaudible]

We intend to continue investing behind our strategy reset, especially in support of our rich innovation pipeline and expanded consumer rich.

Our strategy reset at this point in time is focused on continuing to rebalance our regional growth, evolving our exposure to China market volatility which has already come down by nearly 10% of points since fiscal year 2022.

At the strategy we reset core is the PRGP aimed at restoring sustainable long-term organic sales growth, impart through generated investment opportunities, as well as rebuilding profitability and increasing agility.

For CISCA, here in 2025 we have focus on executing the PRGP with excellence.

During the first quarter, the focus and dedication of our teams around the world, enable us to establish a strong foundation on delivery for the planet.

We are made good progress in operationalizing the PNGP evident in our gross margin expansion despite the pressure to mix.

from Skincare Decline, as well as beginning to right-size areas of our organization and address all the resistances to reflect the lower than expected sales growth in the last two fiscal years.

As you know, our strategy reset for Cisco Lea 2025 also has the following five priorities.

Green Night Skincare capitalized on the multiple growth drivers of high-end fragrance, move faster in leverage in winning channels.

Long Creative Innovation Inclusive, a new big opportunities and modernized precision marketing by leverage in data in AI. The latter of which we call our consumer-centric growth model.

Today, let me share our progress across QTA fragrance as well as leveraging women channels.

For skincare, we began to realize our ambitions to drive consumer demand in the ritual of nighttime skincare. As we brought exciting innovation to market, appealing to a diverse range of consumer segments.

Our fellow friends, as long as the leader in the science of skin recovery due to sleep, we did advanced Nairi Pia serum. It's new advanced Nairi Pia overnight treatment, drove a standy regime by both loyalist and new consumers.

This launch coupled with a brand new moisturizer in the super-infranchised, focus on improving science or collagen loss with overnight visible light reductions led to high single digital organic sales growth in the markets of E-mail.

La Mère

Farther contributed to our moment in nighttime skincare.

It's new Regulian 18-9 dream exceeded our expectation in Asia Pacific, driven by the proud resounding appealing China, where we saw excellent new consumer acquisition trend and the summer realized strong share gains in prestigious skincare.

Ford-Clinic, among its night time innovation, is the smart clinical repair AMPM retinoid bound stick.

It has been very well received in its initial markets, demonstrating an ability with nighttime skincare to trade consumer up and into the brand with an approachable price point and unique form.

Both Lisbaud and the franchise, New overnight recovery cream-plot mask, have compelling reading stories and strong-cleaner results, which will in the next scientists recently featured the prestigious and metallurgy conference in Amsterdam.

In the clinic focus on nighttime skincare builds upon the strategy it became deploying earlier this calendar year to double down on its authentic the the method of this brand heritage.

This strategy has been highly successful, evidenced by the clinic's sixth consecutive month of prestige beauty share gains in the US through September.

Turning to fragrance, our confidence in the category promised in growth opportunity remains strong. For the first quarter, our CISCA Lea 2025, excluding global travel retail, our luxury and astisional brands deliver mid-single digital organic sales growth, fueled by gains in every region.

Le Labo, Jomalon Landr, and Kilian Paris were sent out from Le Labo, significant double digigrot in China to Jomalon Landr in impressive results, expanding with the male consumer to Kilian Paris highly sought innovation.

and we are thrilled to have learned Balman Beauty during the first course, the beginning with the sophisticated collection of eight fragrances.

4.0 which abelments legacy sense reinvented for the modern era.

As we enter Freda's highly important holiday gift in season, we are complaining in the strength of our luxury and our seasonal portfolio with activations and innovations from Estalo the Enclinic to re-accelerate their growth.

As we aim to better capitalise on opportunities in the prestige tier of France.

Lemminau, Mood, to our pillar of leverage in winning Champions League.

From the Amazon Premium Beauty Store in the US to TikTok shop to shopping in Southeast Asia Many of our brands have expanded their reach to attract new consumers.

[inaudible]

is exciting work on Tino into the second quarter. When last week our flagship Estelou de Brande launched in the US Amazon Premium Beauty Store.

Before I close.

I want to highlight that we recently published our fiscal year 2024 social impact and sustainability report.

As detailed in the report, we achieve several sustainability goals.

Sam Pedro schedule including surpassing our water withdrawal targets, publishing our first corporate ingredient glossary and reaching our palm oil objectives before our 2025 deadline.

For the 60A in the row, we achieved carbonyl trality across our scope 1 and scope 2 greenhouse gas emissions and source 1 and a percent renewal of electricity globally for our direct operations.

Along with the report, we also publish in update.

To our climate transition plan, which describes our recent progress, and evolution towards our 2030 science-based targets across our climate action's work streams.

Let me now close by recognizing the evolution of the company leadership, following the retirement announcement of Tracey and myself.

As you know, tomorrow I'll kill Shriva Stava becomes the company's seafood. I'll kill as being a proven leader at the company for nearly decade, with demonstrated financial and we look forward to all he will accomplish.

On the out for the company, I stand our deepest gratitude to Tracey for her significant contributions.

and Bodys, the very best quality of the leader, and we are a far stronger organization today given her dedication to all of us.

We wish her every joy in her well-earned retirement.

Yesterday, market and excited milestone in our company, who will 75, 75 years of history.

as we announce the promotion of Stefan Delaferie to be our next president and CEO.

I'm thrilled to welcome him into this role as a general resource. And look forward to supporting a seamless transition for the next several months.

Stefan deep knowledge of our company and the industry, exceptional strengths as a leader, and unique ability to combine inspiration, authenticity, and strategic insights to drive profitable growth, we'll enable him to move us forward, with state and agility.

To our employees, thank you for your passion for our company, anything credible brands. I'm considered a youth and this company that I love will be in great hands.

and we now turn the call over to Tracy.

Thank you for being here and everyone. I'll begin by reviewing our financial results for the first quarter. Fabrizio is the outlook that we are prepared to share today.

Tracy: As Fabrizio mentioned, our first quarter organic net fails to climb 5% at the lower end of our expectation.

Our adjusted earnings for share was 14 cents, which exceeded our initial outlook for the quarter primarily due to the timing of certain expenses.

Starting with our region, organic net sales in our age of the specific region decreased to 11%, mainly driven by further softening and overall prestige beauty, do in large part to worsening consumer's sentiment in mainland China.

In addition, we experienced a net sales decline in Hong Kong SAR, where sales were pressured by lower spending from traveling consumers as well as reduced foot traffic at retail.

These are the clients who are partially offset by continued strength in Japan, where domestic and traveling consumers drove double digit growth in both fricking mortar and online channels.

Organic Nest sales in our Europe, the Middle East, and Africa region decreased 4% driven largely by beyond going challenges in our Asia-Travel retail business.

Our global travel retail net sales decreased double digits due to lower with punishment orders and age of travel retail.

This reflected the further retail market dissoloration and worsened consumer sentiment in China, resulting in lower conversion rates.

Comps the Queensland, while we managed to reduce our overall initial inventory levels in the trade, it was a slower pace than we initially expected.

[inaudible] the Lottis hashtag, Mike Dunn, right campaign as well as both existing products and new product launches including the Clinique Populate franchise.

Luxury Freda and Cis was also strong led by Laraine Boat. Retail and repair play site stroke overall double-digit growth from online channels.

Organic Net Sales in the Americas decreased 1%. In North America, our retail sales in the US accelerated sequentially. However, our soft retail sales from Macaveta, Tom Ford and two-faced, led to overall lower net sales, reflecting fewer replenishment orders for these brands.

A strong competitive environment in the continued moderation of growth and prestige, beauty in the U.S., also contributed to the net sales decline.

Our team remains focused on evolving our channel distribution mix towards fast growing channels with the consumer as evidenced by the launch of seven brands in the last eight months in Amazon's US premium beauty store, including our most recent launch of Estee Lauder, as Fabrizio mentioned.

This strategic pivot drove our double digit online growth in the US.

in Latin America. Continue to net sales growth in Brazil led by makeup, drove double digit increases in our free standing stores and specialty multi channels.

from a category standpoint organic net sales decline date percentage skin care and 6% in here care.

In skincare, the organic net sales decline was largely due to the pressures in Asia Pacific and our Asia travel retail business, which more than offset the growth we experienced. In the Americas and the markets of Amia, including from a say-later with a successful night activations in the West.

Tracy: and Shipments for the products launch in Amazon's US Premium Beauty Store.

Organic Net Sales and Makeup decreased to percent, driven by declines from Mac and Too Faced, primarily reflecting the brand's retail softness in North America.

These declines were partially offset by standout performance from clinic, which sought saw strong overall double-digit nest sales growth, driven by contributions from all regions.

The brand's existing products and new innovation in its clinic pop and almost lipstick product franchises, along with its launched in Amazon's US premium beauty store in fiscal 2024, primarily drove the brand's growth in the quarter.

Organic Net Sales and Fragrance decreased 1%. Mainly due to declines from Tom Ford, Plinek and a St. Later driven by pressures in both our Asia travel retail business and North America.

These decreases were partially offset by growth from the rest of our luxury fragrances, particularly in the age of the specific regions and the markets of the Mia, driven by hero products, new innovation and targeted expanded consumer reach.

Our gross margin expanded 310 basis points compared to last year largely due to a reduction in obsolete charges as we better aligned our inventory on hand with our shipment throughout last year.

We also better capitalized on our strategic pricing initiatives by reducing discounts related to excess production and promotions, while leveraging our pricing power ahead of inflation, through an enhanced more granular pricing methodology.

This was partially offset by the unfavorable change in mixed, particularly the decline in skin care, and the corresponding fixed cost of leverage.

Our gross margin for the quarter also improved 90 basis points sequentially versus our fourth quarter.

With this progress, we are pleased that he initiatives under the PRGP are beginning to address the specific pressures to gross margin that we experienced over the past two years, including the sales pressure we continue to experience in the quarter.

We obviously still have much more to do, and the company remains focused on controlling excess and off-solescence drawer integrated business planning process to better align our forecast accuracy and demand planning as well as addressing other cost opportunities in the supply chain.

Operating expenses increased to 190 basis points as a percent of sales during the quarter. Primarily driven by selling expense, delivery and advertising to support new product launches.

Tracy: This delivered offset the net benefits and expenses realized under the PRGP in the quarter.

As I mentioned in August, most of the PRGPs estimated that benefits this year are expected to be realized in improving our gross profit margin with approximately 20% of the benefits realized in reducing certain operating expenses.

We expect to achieve greater net benefits and operating expenses for the remainder of the year, from the plan as initiatives are further operationalized, and as benefits from a restructuring program progress.

Operating income increased 33% to $144 million in our operating margin expanded 120 basis points to 4.3% compared to 3.1% last year.

Our effective tax rate for the quarter was 38.8% compared to 17.9% last year.

The increases mainly due to the lower tax base in the prior year, which included the utilization of income tax credits and benefits from previously issued stock-based compensation.

The Moved at EPS was 14 cents compared to 11 cents last year due to the improving operating profit performance.

Our plans under our previously communicated PRGPR on track and advancing well.

Tracy: We also continue to explore additional savings initiatives to offset some of the impacts from the incremental sales pressure we are experiencing globally as well as mitigate the impact of reduced volume on certain initiatives within the PRGC.

As it relates to our restructuring program, today we have taken $221 million of charges primarily related to initiatives designed to optimize and right-size our value chain by reducing spans and layers.

Additionally, we intend to expand our shared services capabilities to streamline and standardize key processes that should enable us to better leverage our sales growth as it occurs.

During the quarter, we utilized $670 million in net cash flows from operating activities compared to $408 million last year.

The increase in net cash utilization is mainly due to lower net earnings compared to last year in higher taxes pay.

In addition.

from late August, throughout over this year, we entered into agreements with certain plaintiff's law firms to settle approximately 70% of pending talcum powder cases and established annual tax amounts with each participating law firm for potential future claims over the next five year starting on January 1, 2025.

As a result, we recorded a charge of $159 million related to these agreements. We entered into these agreements and response to the rising number of cases brought against the company as well as to proactively help to mitigate the future risk from the evolving litigation landscape related to telquer.

We invested $141 million in capital expenditures and we returned $240 million in cash to stockholders through dividends.

As you read in our press release this morning, we declare to quarterly dividend of 35 cents per share, a reduction from our previous quarterly dividend of 66 cents per share.

Tracy: As we reduce our dividend to a more appropriate payout ratio given our earnings outlook.

and now turning to our outlook.

As Fabrizio mentioned, we have taken the decision to withdraw the foyer outlook we provided in August, and are only providing an outlook for the near-terms second quarter today.

We have not made this decision lightly and believe it is the right action given the current environment, including the difficulty in forecasting the timing of market stabilization and recovery and shine on Canacea Travel Retail. And in the context of upcoming leadership changes.

Let me expand a bit on some of these incremental pressures on the business.

First.

As we discussed in August, our initial outlook anticipated pressures in both mainland China and Asia-Travel retail.

Expecting these changes to significantly impact our first quarter results, but moderates sequentially throughout the year, including a modest return to Net Sales Growth in the second quarter.

While our first quarter results are generally aligned with those expectations, the worsening consumer sentiment in these areas has been greater than anticipated and is also now expected to persist in the near term.

Tracy: Although we are cautiously optimistic about the potential medium to long-term opportunities presented by the new economic stimulus measures in China, we believe both the timing and the magnitude of their impact on our business and the regions are uncertain.

As a result, we now anticipate continued near-term, net sales declines in these areas of our business, and overall for the second quarter, adding pressure to our EPS.

Second, the continued normalization of prestige beauty growth and other markets post-pandemic. Along with near-term residual impact of the previous inflationary period on consumer sentiment, has created some uncertainty about the level at which market stabilization will occur. And is expected to further pressure for second quarter results.

As mentioned earlier, we remain focused on realizing that benefits from our PRGP initiatives.

Speaker Change: Yvonne the anticipated incremental sales pressure, we acknowledged the need to continuously evaluate the plan and more importantly take decisive actions and maximize its benefits, identifying new opportunities for growth and pursue additional savings initiatives.

Speaker Change: Using October 24, Spot Rate of 1.078 for the Euro, 1.293 for the pound, 7.126 for the Chinese one and 1380 for the Korean one. Heruncy translation is not expected to have a material impact. The reported sales and EPS for the second quarter.

We now expect organic net sales for our second quarter to decrease 68%.

Comparative the prior year period, largely due to the ongoing challenges in mainland China and in Asia travel retail. We have discussed, as well as persistent low conversion rates by travel and consumers in Hong Kong S.A.R.

In terms of Rosemarge, and we expect expansion in the second quarter compared to last year, although it is not expected to be at the same magnitude as the level of expansion we saw in the first quarter.

We call that last year's first quarter gross margin was the lowest of the fiscal year, as it was more affected by high up to less than charges.

and discounts then in the other three quarters and it did not reflect the benefits of the strategic actions we implemented later in the year to address these pressures and improve gross margin.

We now expect our second quarter effective tax rate to be approximately 43% compared to 37.7% last year.

The increase primarily reflects the unfavorable impact of previously issued stock-based compensation, which tends to have a disforcourt in effect in the second quarter due to the timing of equity award-vesting in our estimate of lower earnings compared to last year.

We now expect second quarter adjusted EPS of 20 to 35 cents for a decrease between 60 to 77% versus prior year.

Speaker Change: This has undoubtedly been a challenging period for our teams and all of us to manage through. However, as Fabrizio mentioned, we are encouraged by some bright spots that we are starting to see from proactive measures we have taken previously.

Speaker Change: There is clearly more to be done and we have confidence in our teams, including our new leadership team to continue to drive progress forward.

Speaker Change: As I close the earnings call, I want to express my sincere gratitude to our dedicated employees. Your steadfast commitment, hard work, incredible passion for our brands, and resilience have been vital to our success over these years, and certainly will be in the future.

Speaker Change: and reflecting on my past 12-plus years with the company I am immensely proud of the many things that we have accomplished together.

To our value investors, thank you for your continued support. Your patience and confidence in our long-term growth strategy and initial PRGP actions have been instrumental as we navigate through this intense period of volatility and the resulting impact it has had on our performance.

I am optimistic in the company and the ability to continue to take the appropriate decisive actions to manage through this prolonged period of volatility.

and supported by the PRGP and the strong resolve of our employees to progressively return to more consistent and sustainable sales growth and stronger profitable recovery.

Speaker Change: Thank you and that concludes our prepare remarks so we'll be happy to take your questions at this time.

Ladies and gentlemen we will not begin that question and answer session. To ask a question you may press star and then one using a touchstone telephone. If you are using a speaker phone we do ask that you please pick up your hands that before pressing the keys.

Speaker Change: So withdraw your questions you may press star and 2.

Once again that is star and then one. Did you all in the question queue?

Speaker Change: Our first question today comes from Darra, Miss Sennian from Morgan Stanley. Please go ahead with your questions.

Speaker Change: Take a morning.

So, where are you?

Darra Sennian: Good morning. So clearly the external circumstances of worsening the beauty category, particularly in China and Asia travel retail, as you mentioned.

Darra Sennian: I just want to get your perspective on the internal reaction to that.

You know, ages from a productivity standpoint, is there more you can do beyond the PRP program Tracey, you alluded to that in your prepared remarks.

but just with the significant pressure on the business and the dividend cut today.

Speaker Change: Can you give us a bit more detail on how much more aggressive you can get on call structure the potential areas you're looking at and then be just the other side of that is how much reinvestment might be needed going forward to drive a top line recovery.

So any thoughts there in light of the industry conditions at this point would be helpful. Thanks.

who are sure there are. So obviously given the situation and I discussed this a little bit in the prepared remarks, we are evaluating additional actions.

related to the PRGP and beyond.

Speaker Change: and I have been giving the continued pressure on the business. So we have identified some additional costs savings to offset.

Speaker Change: and some of the volume pressure that we saw in the first quarter. There are more plans under discussion as it relates to the PRGP. As it relates to investment, we did protect some investment in the first quarter. We actually did experience a bit of de-loverage in more of our consumer-facing areas, like marketing, advertising and promotion, as well as selling. We will do that again in the second quarter, so that is some of what isn't that in the guidance.

and obviously Stefan and the Keel will be communicating going forward what the plans are that are in process right now being worked on in terms of, you know, the new,

and Tom.

Speaker Change: Action that might be incorporated under the PRGP, as well as other growth areas as well. But we are very much focused as we have communicated previously under the PRGP to free up costs, obviously not only to improve our margins, but importantly to fuel additional growth for our grants. And you know, we're to come on that.

and I want just to add that on the investment on top of the amount of...

Fans, we need to invest.

Speaker Change: is the improvement of the quality of this investment around that return on these investments.

We are doing a special DPRVP, a lot of work and this means for example what we call the strategy of increasing our precision marketing and our consumer focus marketing which is basically

Speaker Change: The recognition of the improvements we need to do in the digital social media part.

and the way we go to market in every market through the world in this area. And there are some exciting progress happening as demonstrated by some results in the market shared some new innovation created while using this precision marketing techniques.

and then is the, also the winning, the acceleration of winning, fasting, growing channels.

is obviously a big part of that because when you are present in the growing, winning channels without what brands faster and with more services and clarity, like we are doing as I explain in my prepare marks in many many markets, these makes the return on the investment, they were doing better and more productive.

So, he's a combination of investing more at Tracey's claim and making $30 Countmore.

Our next question comes from seed powers from Deutsche Bank. Please go ahead with your question.

Thank you very much for your good morning.

Speaker Change: Um...

Speaker Change: It was so good. We could step back a little bit just a missed all the volatility, get some perspective on how you see your market shares standing across key markets, your expectations for.

Speaker Change: and how those marketers should trend into TQ and over the balance of the fiscal year. And to the extent possible, how you see different regions contributing to the negative 6th and negative 8 organic growth call for second quarter, that would be helpful. Thank you very much.

Speaker Change: Yeah, um...

Speaker Change: So in terms of the regions and Steve, you know, we normally don't give regional guidance just our overall guidance, but obviously with down six to down a we would expect as we said continued pressure from China and travel retail

We've also seen, and I think Fabrizio would touch on this point on the market share. We have seen slowing in other markets as well. So when you think about last year, first quarter, we had double digit growth in several markets in North America and APEC.

Speaker Change: and we've seen that progressively decelerate, still positive and I'm talking market now.

Speaker Change: but progressively decelerate throughout the four quarters. So part of the uncertainty is whether or not those markets will decelerate again in the second quarter.

But we are expecting that China and Trouble Retail will be down meaningfully in the second quarter as they were in the first quarter.

and the rest of the business, which for radio talked about what the results were in the first quarter, being a bit of a pick-up in the second quarter, but you know, resulting obviously in the 22 guidance that we gave.

Speaker Change: Yes, he's an image that I'm sure I'm sure he's a real man.

We can speak about the market shape plants in every single region of the world, but let me focus on what will make the difference. We try in our US Japan, so the big markets.

and that.

Speaker Change: So in China I think this quarter in the declining market we had the proof.

The way we focus on the strategy that we just discussed, meaning focusing on skincare in the case of China, the night skincare.

and Fabrizio Freda, for the first time in the world, we have a very strong innovation.

We can get Marqueshia growth in a very difficult market situation.

In China, the growth we got in skincare, which is more than one full-point of market share growth in skincare, is very, very strong. And this is driven by this innovation, for example, the La Mer, brand and its their own innovation. We grew also a market share in the cup.

Where the activity, for example, was less than his care, our activity was less than his care. We still, we grow, Martisha. This shows at least the clear strands of our brand-acquities, that when activated correctly, create Martisha growth. So, in China, we are optimistic on the opportunity in the future.

Speaker Change: Drapan was another great example where we focused particularly in the case of Drapan when our fragrance for for you with a new Lela Boastour.

and with a new jumalo stores in Tokyo that are flagship stores.

and the results has been an extraordinary 200 points on Marquesha Gates. In fragrance, becoming the number one fragrance company in Japan, you know, only one quarter. Again shows that the focus, when we put the focus on the activation of these strategies, you reset drivers, we get a thrown a result. So those are frankly green points, they show how the underlying brand equity is strong and when activated correctly, we get what we need to get to get. And finally, on America.

I want to say that is our...

Speaker Change: 3-tale trends in America was strong, was accelerating from 2% the quarter-four to 3%.

Dyscord, so improving and improving in the declining Marque Grotes, Tracey just explained, so the Marque Grotes went from...

9% to 5% so in a steel road, but the clan in Lerolo Grot, we were growing better and accelerated in retail, which means practically in America we are reducing the market-share gap growth. And as I said in my prepare remark, we look forward to stabilization and the tactics.

which are working here at a game.

Very visible in what is the reaction of our clinic brand, which is...

Speaker Change: obviously a classy brand brand which is there for many years is the Marquelliter

in the market. And it's growing now, Marquez Scherffle, five months in a row. Driven by the big repositioning and leveraging the trends in dermas, in care, particularly, but also leveraging the huge success in making copies as long as we explain in the prepared marks.

Speaker Change: and also has been read obviously by the Amazon distribution but I want to notice that at the same time the success of Lincoln Ulta has been very, very strong. Shoring that the Amazon is bringing new customers is not just speaking to this academy, the Adi Marquez-Share, Adi New customers and along all our new channels, like Amazon or historical strong partners like Ulta, who gets success on the same brands.

and this is up to also fragrances in many other activities we have in the market. So, we have focused on continue accelerating market share gain to market like China and Japan and focus on achieving the first stability decision and then a gain market share also in the US. And there are many other markets in the world, the emerging market or specific markets where when we look at the last two elements.

We did progress in the market share and we will continue to accelerate together with...

The answer to the previous question, which is the increase in investment and increase in precision of this investment. I hope you see the full picture of what we are trying to do, even in a moment where the bottom of the markets, but in China and travel details are dropping under us. We have keeping the focus on this recovery of the market in every single market.

Speaker Change: i

Our next question comes from Laura and Leigh Brumman from Park Please, please go ahead with your question.

Great, thanks for coming, everyone. I wanted to talk a bit about the dividend cut, both in terms of timing and kind of the message.

Speaker Change: So first is in terms of signing, you know, why not clean this up back in August? I know that China was in during the quarter, but I would argue it's not that you agree that David and should have come into question. And then the second thing is just on the message, you know, the...

Speaker Change: You know, she would be thinking here about it because of timeline and magnitude of earnings recovery when we think out over the next several years.

She would be thinking about cash and reinvestment needs because there's hardly a leverage problem, there's not a balance you problem, but this is a pretty big change. So timing and sort of the message and how we should be thinking through this beyond there's just being quote room for a new leadership. Thank you.

Now, thanks for the question. We do think our dividend is not an indication at all of what we think about our long-term growth opportunities.

You know, given the pressures not only in the first quarter, which to your point we expected, but in the second quarter, which is a different obviously than where we were in August.

As we looked at recognizing the level of uncertainty that we are experiencing for the balance of the year, which caused us to pull our guidance.

We thought it appropriate at this time as well to look at the dividends.

when you think about paying a 66-cent dividend with the earnings of 14 cents that we had in the quarter.

and obviously what we guided for the second quarter, it was appropriate for us to right-size the dividend at this time to make sure, obviously, we don't have a liquidity problem to your point, but recognizing the prolonged situation in terms of pressure in our markets.

Wright sizing the dividend, still a very good dividend yield for investors.

But right-sizing it was the appropriate thing to do to protect the cash that it will be needed obviously for additional actions that we may take under the PRGP as well as additional investments we may make to support growth.

Speaker Change: Really looking at it in totality in terms of total shareholder return and figuring out what's the best way for us to invest back in the business.

and the

Speaker Change: i

Our next question comes from Brian's Fellaine from Bank of America. Please go ahead with your question.

Thanks operator, good morning Tracy, good morning for the PrTO

I guess my question is more related to the management change and the qualities and skill sets that both you and Tracey were looking for in terms of replacements. And I asked that in the context of

You know, you both have been around this company as it was you know effectively turned around and brought it to a very you know amazing peak and

The landscape has changed a little bit for sure, maybe that understates it and so just

You know, I think people are trying to understand, you know, what comes next and not asking about the people specifically but just the qualities, the skill sets you were looking for and I guess how it informs, like what you think needs.

To be different, right? As the company kind of chartered through these next few years, relative to maybe what you all brought to the party over the last 10 plus years.

Yeah, is a first-of-all deep.

Let me say from so a world has to be different in the business. As you know, we have announced what we believe is the strategy we are saying. And we are working hard.

to rebalance the growth model of the company.

Speaker Change: and avoiding the future of all the resources.

Two areas of the global world that becoming two volatile and more uncertain.

and so.

is the rebalancing for the certainty of growth. Just to make an example of this because this acts in many ways, this concept of balance.

Grote, back that is posing to the company, to the growth trends of the world.

is referred to countries but is also referred to channels referred to consumer segments in a very broad way. And obviously in these moments is referred to the overall Asia travel retail and overall China market volatility, where we have the red balance 10 points.

in only two years already and this is a more balanced relaxing.

Speaker Change: and then these research channels where the proportion for example of global departments through his research, the other channels which in this moment are growing faster is changing in favor of the winning channels.

and etc. So all these work.

But we have a consumer, obviously, the penetration of young consumers to mention one.

So all these important strategy-revalancing elements is something that we believe we need to continue to do and we need leadership that as the characteristic.

The Kelly Loop

Speaker Change: at the business in this way and so began the standing.

Speaker Change: of the Global Marketing Examination and Understanding on the Global Consumence and Continuing the Work, we have started of focusing the company on the Consumence and on the big consumer changes that happen around the world.

Leadership that will focus on with that good understanding of the global business and being able to leverage global growth wherever growth happens.

and also we are a comprio brands.

and it's very important that our leadership team continue to be an outstanding brand builder.

and Benévo to build brand-acquities, but also innovation.

Speaker Change: and the quality of a brand of responding to different targets around the world and the ability of brands to adapt to the various market consumer segments around the world with the concept that we called in the past local relevance.

Speaker Change: and the other two of us are the most important.

For example, the actions that correspond to these intentions are building a China research center in Shanghai or building factories in Asia that will bring talents to our portfolio in the future.

So those are the parts of the strategy needs to be continued. And there is then a, the need of accelerating the strategy, and there is the need also as...

Torqued as part of the PRGP.

and to make the organization faster.

in reacting to trends, but also faster in making decisions across the globe and aligning on the changes that are needed to react. So, what we call the increase of speed and increase of agility, which are just towards behind those two words, there is a lot of specific changes.

that new leadership will intend to bring in the organization. He's already frankly working on it.

and me to be capable of doing this.

That's why I'm personally very happy that the board had the answer left in internal succession because internal succession in that area.

Speaker Change: of the ability to bring these organizations fast to important changes with the right speed and also the ability to understand what has to be changed in order to increase a ability, frankly, this ability is stronger in very tall and internal leaders than would be Estona.

Speaker Change: Brigham, that's my point of view. And then the understanding of how to better allocate our resources to the big change in trends of the world is also a characteristic that the new leadership needs to have.

and that is supported by the solid quality obviously of what the board chose.

For Fusual Leadership, but also by the knowledge of these people about the internal systems that we are. So, next, we believe we need brain builders.

But we need also people that will act with urgency, speed, courage to make the need of changes. I will support this courage, this change in my transition work.

with the team and we are looking forward to the new team to add a fast team, but in what has to change, but also for the new team to recognize the strength, the you mentioned in your question. There was the other strength not only the three-zeh-nibeilds.

In the last many years together in the Comparipadulso, the strengths that always be in this company, the values of this company, the long-term quality of the brands.

and the strength of the heritage of this company. This historic strength will be retained, but it will be some first change in reacting to the new realities.

and I personally believe that the new leadership team will be able to bring the kind of improvements and acceleration that obviously all of you are expecting from us in the next years.

Our next question comes from Repesh Creek from Oppenheimer. Please go ahead with your question.

Good morning and thanks for taking my question. So I just wanted to go to the cashl to save. So I just want to get a sense that if there's opportunities for the reduced Capbacks to better align with the weaker earnings part of the business currently. And then, you know, I just want to also get your thoughts on the health of inventory as you see it today.

So, and I'll start with CapEx. We have already reduced CapEx from what we had initially expected to invest this year. And that is certainly one of the areas that we're looking at as it relates to CapEx along with

Obviously, improvements in working capital, we made some big improvements last year as it relates to inventory. So our inventories are in pretty good shape, but obviously given the further sales declines, that is something that we are very much focused on in terms of making sure we are faster to react and respond to sales declines in our market. And keeping the out-solescent, you know, and discounting under tighter control. So we've gotten much more agility in our planning processes and the connection with certainly our supply chain to make sure that we're making the right.

Speaker Change: Taking the right decisions as it relates to production as well as the overall management of the network.

Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question.

Alright, thank you, Good Morning everyone. I am actually going to circle back to Asia, Travel Retail with a question.

You mentioned the lower replenishment order, so could you give us a sense of maybe very recalentatory levels are currently, you know, maybe versus a year ago and how much further destocking you expect, I guess, ultimately.

and how you expect selling, sell out trends to evolve throughout the balance of the year. Thank you.

We definitely have lower levels of inventory in the trade relative to last year and even last quarter. So we have made progress. You know, as I said in the prepared remarks, there relates to bringing down the inventory and trade in Asia-Travel retail.

Speaker Change: Because of the desoloration of the market, we didn't make as much progress as we had expected, so it is taking a little bit longer, but again, we're not giving guidance for the second half of the year, but we do expect even in Q2 to be able to make assuming no.

War significant change and what we've reflected in our Q2 guidance, some more progress in terms of inventory in the trade. Right now it's really a function of the market volatility.

You know, some of the trade that had built up or the inventory that had built up.

Speaker Change: During the pandemic years, we have managed that down and now it's a matter of the current market fluctuations that's impacting the levels of inventory that we have in the trade. But we're in a much healthier place than we were certainly a year ago given the the significant actions that we took particularly in the first half of the year to bring our inventory levels down.

and to give it the mentalization just to add what Tracy said is we actually have the lowest level in the last several years.

But the market is lower than it was in the previous year. So we should need to continue doing some work. But definitely there's been a extraordinary progress And I would like everyone to know that the team is very focused.

Speaker Change: in this progress and also our vision of course, the two reflect the need of continuous and non-anever let pass more than a few months when we decided to reflect the market trend also in the level of inventories.

Speaker Change: Ok, thanks.

and our next question comes from Olivia Call from Raymond James. Please go ahead with your question.

Olivia Call: Great, thank you.

I wanted to ask more about the Q2 outlook, more social profit than sales and whether you could talk about what's embedded for redue lab reading aspect.

versus maintaining investment versus perhaps more difficult in achieving savings as part of the PRGP. Effectively, just helping us bridge from South to EPS as it looks like a much bigger sequential dollar increase in a year's pass and pretty considerably on a year of your basis as well.

So essentially what's driving cost up so much in Q2 to help us assess what that pressure looks like in the second half of the year when you're not getting us a digital color. Thank you.

Okay, so I'll give it a shot, I'll leave you.

So I would start with Gross Margin, we expect that Gross Margin will continue to improve in the second order. You know, as I said in the prepare of Gross Margin not as much year over year as in the first quarter, but from first quarter to second quarter we will expect You know, we do expect even on declining sales a further improvement in Gross Margin.

you know, on a 6 to 8% decline in sales.

and that being in China and travel retail and travel retail in particular, that does put pressure on our expense face. We have talked in the past about...

Olivia Call: and Tracey Travis, both China and Tracey Travis, are both trying to travel retail being quite profitable, areas for us, given the productivity, for door and that region. And so...

Olivia Call: and Sebastian. So that is putting some additional pressure on our expense phase.

But we also are protecting some investments very selectively in areas of the business that are working And so, you know, it's a big quarter for us obviously with holiday

Olivia Call: We do have some...

New Innovative, advertising that we are doing behind some of our faster growth areas.

in order to make sure that we do set up the business to have the best holiday possible in light of the declining sales.

and 1111 as well as obviously going forward into the second half of the year. So advertising is one area that is continuing to deliver, selling as well, making sure that we have the right staff in our channels of brick and mortar distribution in order to execute the sales.

and then you know the other area that we've protected strategically this year and continue to do so obviously.

He had said previously and again, I'll reiterate it. He expected the first half of this year and really much of this year to see PRGP benefits in our smart language.

obviously seeing.

and more benefits starting in the second half of the year as it relates to some of the restructuring activities that we are taking under the program. And so the cadence of when to actually see some of those expenses reflected obviously being offset results with some of the sales declines in the first half of the year.

Olivia Call: would be in the second half of the year. But again, be mindful that the, you know, when you have

You know, mid-single-digit declines in your business. It does create a deal-ever-gun, the rest of the business that, you know, is the PRGP is helping, but it's still deal-ever-ging.

Speaker Change: and the only things I want to add again for perspective to what's really explained.

is the fact that it is a mixed factor because where the markets are declining, the majority of the change we are proposing is as we explain China market and travel it in Asia market.

These are two markets where we have big market shares and with big market share camps kale and with kale can for stability. So those are important profitable markets with us where the decline is happening.

and this is important the client of Marquez where we have scaled Marquez share and profitability.

Speaker Change: Hey, I'm ladies and gentlemen, with that we've reached the end of the a lot of time for today's question and answer session. And today's conference call, we do thank you for attending today's presentation. You may now disconnect your lines.

Olivia Call: i

I'm a little bit nervous.