Stephane de la Faverie
Chief Executive Officer, President and Director at Estée Lauder Companies
Thank you, Raini, and hello to everyone. And I are pleased to be with you today for our first earnings call as CFO and CEO of the estate other companies. We are incredibly honored to lead our iconic company, defined by our core values and portfolio of build-off brands. Having met with many employees, retailers, business partners, investors and other stakeholders since being named CEO three months ago, I am more convinced than ever that our fundamentals are strong. We have a strong foundation to leverage given our brand equities, high-quality products and exceptional talent. Our focus is clear, restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years as we aim to become the best consumer-centric prestige beauty company. Let me begin by reflecting on the drivers of our challenged performance over the last few years. Before turning to how we plan to realize our ambition for much-improved Results. Top due consumer sentiment in China greatly pressured the prestige beauty industry and our business. Given our strategically strong share in prestige beauty with the Chinese consumer, we were disproportionately impacted. At the same time, the increasing complexity of our organization, coupled with a narrow focus on too few markets and channels to drive growth prevented us from tapping into the prevailing strength of prestige beauty around the world. This was especially true in North-America. Simply said, we lost our agility. We did not capitalize on the higher-growth opportunities quickly enough in channels, markets, media and prestige price tiers nor fuel new consumer acquisition aggressively enough. We also did not deliver sufficient levels of on-trend innovation in our time-to-market often put us behind trend. This happened as prestige beauty become nimbler, driven by both and new entrants as we learn with our own indie ordinary, along with faster-moving consumers magnifying our issues. Compounding matters, lower sales in higher-margin areas of our business coincided with our overall expense base becoming too large as we invested in capabilities ahead of growth that didn't materialize. Our bold new strategic vision of Beauty reimagined is designed to address these factors to restore sustainable sales growth and deliver a solid double-digit adjusted operating margin over the next few years. We are reimagining our operating model to be leaner, faster and more agile through the biggest transformation in our history to best serve consumers globally. Beauty reimagined as five action plan priorities to achieve our mission. First, accelerate best-in-class consumer coverage. We are going to put the consumer at the heart of our business. To do so, we plan to rapidly expand our portfolio presence in consumer-preferred high-growth channels, markets, media and price tiers to fully participate in the growth opportunities of Prestige beauty. We have numerous area in which to capitalize, geographically in the US, the UK and emerging markets and by channel from travel retail in Western markets to online platforms, specialty multi-globally and pharmacies in Europe. By doing so, we expect to better diversify our growth drivers. Second, create transformative innovation. We aim to deliver fast-to-market on-trend innovation with an eye towards in-demand subcategories, benefits and occasions. For instance, there are several dynamic subcategories in skincare like body of makeup like multi-benefit LIP products and of fragrance like lifestyle for home for our brands to either enter or expand. We will innovate across price tiers from entry prestige to luxury, making sure to bring products to-market at attractive price points for new consumer acquisition. As we look to step-change our innovation, we are committed to tripling the percentage of our innovation that is launched in less than a year. Third, boost consumer-facing investments to accelerate new consumer acquisition. First and foremost, we plan to do this by increasing visible advertising spending, optimizing marketing programs and eliminating current A&P spending that is unproductive. Moreover, this also includes greater investment in selling to support our freestanding store acceleration for our luxury and artisanal fragrance brands to drive growth. Fourth, fuel sustainable growth through bold efficiencies with today's announcement of our now expanded PRGPs. We've made significant progress to date in the PRGP, having delivered over 60% of our fiscal 2025 objective in the first-half of the fiscal year. This has primarily been driven by addressing elevated excess and obsolescence, realizing strategic pricing through fewer discounts, lowering professional service expenses and restructuring our workforce. However, greater expense reduction is necessary. We have experienced further volume deleverage since the plant's inception, driven by moderated industry growth projection and geopolitical uncertainty as well as the company-specific issues as described. We must redesign our expense structure for an evolving mix of business to better align with prestige beauty growth drivers and given the significant changes in the travel retail industry. We're embarking on our biggest operational transformation in our company's history, enabled by now an expanded PRGP. We are redesigning how much and where we spend, further rationalizing our non-consumer-facing investments and significantly evolving our operating model to be more efficient. The new areas we have identified and adopting a more competitive approach to procurement, improving supply-chain network efficiencies and outsourcing of select services. The latter of which we plan to do with proven global partners. We are advancing well in the design of the outsourcing program with our potential partners. We are laser-focused on rightsizing expenses with the dual-mandate to meaningfully reinvest in consumer-facing initiatives to drive top-line growth and achieve a solid double-digit adjusted operating margin over the next few years. And as we return to delivering sustainable sales growth, we will be positioned once again to realize operating leverage to further improve profitability. We plan to give more detail on our growth algorithm once we have more fully operationalized the action plan priorities of Beauty reimaging. Fifth, reimagine the way we work. We are removing complexity and simplifying our organization. In doing so, we will provide for greater focus on execution excellence for the consumer. Moreover, we are unburdening our smaller brands so they can be more successful in a large organization, while driving greater benefits of scale for our larger brands. As we make these changes, we will empower faster decision-making in-part through a flatter and leaner organization. The foundation of our Beauty reimagined strategic vision is a new framework where we are clear on our strengths so that we can more optimally allocate resources. Our strengths are where we will lead and excel, brand desirability, consumer experience, innovation, quality and end-to-end execution. In support of our strengths and for certain other areas of our business, we are hardwiring AI through the organization. We are in an exciting moment-in-time for the company with AI as we've been working with the best-in-class technology partners. Their resources, technology and investments combined with our use cases and proprietary data are enabling us to deploy AI in a cost-effective manner to drive efficiencies with high-quality and differentiated output. As one example, we are leveraging AI to forecast our demand and plan for our material and production needs, which has resulted in our weighted-average forecast accuracy reaching new heights. This better synchronize our demand and supply and delivers significant improvement in inventories. Added proof that the initiatives that we are deploying to restore stronger operating Margin are sustainable. We are ready to dramatically scale the integration of AI into our workflows from product development to marketing, supply-chain, back-office and beyond to accelerate processes and improve decision-making. What's most exciting, we expect AI to free-up resources to unleash even greater creativity by our brand teams for the consumer. As part of the expanded PRGP, we also plan to work with other external partners to outsource areas of our business that are not core to where we want to lead and excel. Since I became CEO, we've moved quickly to jumpstart Beauty reimagine in my first 30 days. First, we announced this morning we reestablished a new consumer-centric executive team through a combination of elevated top talent internally and recruiting externally. The new flatter, leaner team structure and governance model are designed to significantly improve collaboration and speed of decision-making with clear accountability across brands, regions and function in support of our action plan priorities. Second, and as I said few minutes ago, we strategically expanded PRGP, including its restructuring program with the full support of our Board of Directors. This was a decision we did not take lightly and it will result in a reduction of several thousand additional positions. Third, we dramatically simplify certain work streams across brands, regions and functions to enable teams to focus more on external execution to drive sales growth. As we execute Beauty Reimagine, we are embracing a test and learn mentality. When we see an early win, we will endeavor to move with speed to. Conversely, we will seek to move quickly to exit what's not working. We are putting a new organizational structure in-place to empower colleagues to act as owners as we improve communication, accountability and collaboration to be more decisive and faster to action. Encouragingly, as demonstrated in the second-quarter, we have some momentum on which to build across the five action plan priorities of beauty reimagined. As we accelerate best-in-class consumer coverage, nine brands have now launched on the US Amazon premium beauty stores, including the successful launch of the ordinary in January. Last March, Clinic was our first brand to launch on Amazon storefront, at which time it also doubled down on its authentic dermatologist heritage with strong commercial execution across all channels. Given clinic's resounding success in the US demonstrated by eight consecutive months of prestige beauty share gain through December, it launched in Canada Amazon premium beauty stores during the second-quarter. Across markets, in Asia-Pacific, we continue to build our presence on TikTok Shop, Line and Shoppy with more brands launching in some markets on these high-growth platforms. And we are thrilled that the Ordinary is debuting in Mainland China this month with its proven disruptive launch strategy. We also realized excellent results as we extended the reach of our luxury and artisanal fragrance brand with their experiential in-store offerings led by Lo Labo and Frederic has each delivered strong double-digit organic sales growth. As we deliver our plans to create transformative innovation, clinic Estell order and Lamer strategic launches for the nighttime usage occasion demonstrate the gains we can deliver where we have the right to play and win. In Mainland China, Lamer grew in retail in contrast to the industry's decline in prestige skincare, driven by its new rejuvenated night cream. Clinic CX, the brand's new advanced post-procedure treatment franchise for China further epidomizes our aspirations. Clinic CX debuted in November at the Chinese Dermatologist Association with medical device to classification after less than 12 months development from concept to launch. We also announced the opening of a new biotech hub in Belgium in December and a collaboration with MIT in January to further accelerate the company's cutting-edge biotechnology innovations. Finally, we saw the fruits of our labor when we boosted consumer-facing investment to reach new audiences as seen by Joe Malone London's significant growth with men in the second-quarter. Before I close, I want to speak briefly about our 3rd-quarter outlook. While we are not satisfied with our 3rd-quarter outlook, it primarily reflects weak retail sales trend in our Asia travel retail business, which deteriorated in the second-quarter driven by Korea. While our retail sales trends in Hainan were still negative in the second-quarter, they improved sequentially fueled by our retail activations. For the 3rd-quarter, we expect overall soft retail trends to persist in Asia travel retail, significantly pressuring our organic net sales despite the improvement we made with our in-trade inventory levels in the first-half of fiscal 2025, which we intend to maintain across current levels. In order to reignite our retail sales growth, we are strategically increasing consumer-facing investments around the world in the 3rd-quarter. We expect the benefits of the PRGP to both fund these investments and modestly offset the meaningful operating deleverage from the sales decline. In closing, while we have much work to do, we are confident that Beauty Reimagine is the way to realize our ambition to restore sustainable sales growth and achieve a solid double-digit adjusted operating margin over the next few years. To our employees, thank you for your passion and contribution at this pivotal moment in our company's history. I am grateful for all the ideas that you've shared with me over the past months and I'm energized for what we can achieve together. This is our shared vision. I will now turn the call over to.
