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Good day, and welcome to The Estée Lauder Companies Second Quarter Fiscal 2025 Earnings Release and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Rainey Mancini. Please go ahead.

Thank you, Stéphane, and hello, everyone. It's an honor to be with you today in my new role as CFO of The Estée Lauder Companies. I'm energized to partner with Stéphane as we boldly drive the execution of Beauty Reimagined, our transformative strategic vision. While we have made progress with initiatives under our PRGP, we recognize there's still much to accomplish. As we collaborate with our global teams to simplify processes and execute with speed and agility, we are confident we can achieve a leaner cost structure through significantly expanding our PRGP. We believe this evolution positions us to invest more in consumer-centric activities that drive recruitment and fuel sustainable, profitable growth and cash generation for the long term. I'll discuss this in more detail shortly. But first, let me recap our second quarter results, covering overall performance, organic net sales by region and product category, margin, cash flows, restructuring charges and other items. Organic net sales declined 6%, at the high end of the outlook range we gave in October. Adjusted EPS was $0.62 in the quarter, exceeding our outlook. This reflects better-than-expected gross margin expansion given a higher-than-expected category mix in Skin Care. It also reflects disciplined expense management while we continue to invest in consumer-facing activities to support growth in key areas of the business. Starting with our regions. In Asia Pacific, net sales decreased 11%, primarily driven by double-digit declines in Mainland China, Korea and Hong Kong SAR, mainly due to subdued consumer sentiment. The decline in Korea also reflects our November 2024 exit of Dr.Jart from the travel retail channel as well as the impacts of recent political and social unrest. These declines were partially offset by double-digit organic net sales growth in Japan where both domestic and traveling consumers continue to fuel growth across nearly all channels of distribution. Organic net sales in EMEA fell 6%. This reflects continued retail softness in our Asia travel retail business, which resulted in lower replenishment orders. Organic net sales were flat in the Americas. This was mainly due to the 1% decline in North America where we still have relatively high exposure in slower growth channels. This was partially offset by double-digit online sales growth, which included early shipments for The Ordinary's launch in Amazon's U.S. Premium Beauty store in January. Moving on to product categories. Organic net sales decreased 12% in Skin Care and 8% in Hair Care. The challenges in Asia Pacific and our Asia travel retail business have the greatest effect on our Skin Care category. This more than offset the sales growth we saw in the Americas led by double-digit growth from The Ordinary. In Makeup, organic net sales decreased 1%. The collective decline from TOM FORD, M·A·C and Smashbox more than offset the high single-digit growth from Clinique's launch last March in Amazon's U.S. Premium Beauty store. Fragrance organic net sales increased 2%. Le Labo continued to excel with strong double-digit sales growth across all geographic regions, driven by hero products and innovation. Now turning to our margins. For the quarter, our gross margin expanded 310 basis points compared to last year. This reflects net benefits from our PRGP that drove the reduction in excess and obsolescence, lower discounts, benefits from our strategic pricing actions and operational efficiencies. Operating expenses increased 500 basis points as a percent of sales during the quarter. This reflects a 210 basis points increase in advertising, promotion and innovation expenses. This includes our investments to fuel performance during holiday and key shopping moments and drive consumer engagement for new product launches. We also saw an increase of 130 basis points from higher selling expense. This reflects higher costs to support key activations, including during holiday and our distribution expansion. And our sales deleverage offset the net benefits realized under the PRGP. I'll expand on this later. Operating income decreased 20% to $462 million, and our operating margin contracted 200 basis points to 11.5% compared to 13.5% last year. Our effective tax rate for the quarter was 42.6% compared to 37.7% last year. The increase is primarily due to the unfavorable impact of previously issued stock-based compensation and a change in a global mix of earnings. Diluted EPS was $0.62 compared to $0.88 last year. As of December 31, we have recorded $403 million of charges under our PRGP restructuring program. These charges primarily relate to initiatives aimed at transforming various functions, brands and regions. During the quarter, we recorded $861 million of impairment charges related to TOM FORD and Too Faced. This reflects challenges in Asia Pacific and our Asia travel retail business for TOM FORD and continued underperformance from Too Faced. The increase in the weighted average cost of capital also contributed to the impairment charges for both brands. Moving now to our cash generation, CapEx investments and dividend payments. For the six months, we generated $387 million in net cash flows from operating activities compared to $937 million last year. Lower net cash flows from operations this year as compared to last year is due to the decrease in earnings adjusted for noncash items and an unfavorable change in operating assets and liabilities. This includes the fact that last year, we made a very significant year-on-year reduction in our inventory. We invested $273 million in capital expenditures compared to $527 million last year. The reduction in capital expenditures was primarily driven by the prior year payments relating to the manufacturing facility in Japan. It also reflects the improvements we have made to optimize expenditures as we are determined to improve our free cash flow. Turning to dividends. We returned $366 million in cash to stockholders. Looking ahead, to harness the full growth potential of our strategic vision as we transform how we operate and invest in our business, we must boldly pivot with a consumer-centric mindset focused on cost discipline, optimizing our resources for growth and fueling consumer-facing investments to further ignite our brands. Now I'm going to elaborate on our PRGP that is a critical enabler of this strategic vision. We have made significant progress in executing our plan thus far. While we remain on track to deliver the previously communicated $1.1 billion to $1.4 billion in net benefits, the current headwinds we are facing are now expected to partially offset these benefits. To date, the net benefits we have realized thus far have been more than offset by our operating deleverage. Our profitability has been pressured by our sales volume declines, mix, ongoing inflation and a cost base that was scaled in anticipation of growth that did not materialize. We have also continued to invest in consumer-facing activities and distribution expansion to fuel sustainable growth. To address these challenges and accelerate our return to sustainable sales growth and profitability, we have made the decision to further expand the PRGP, including its restructuring program. Anchored by the five key action plans Stéphane discussed, the expanded PRGP is essential to our operational transformation, fueling investments for growth, not ahead of it. We are focused on improving operational efficiencies, optimizing our cost structure to be leaner and enhancing leverage across the business, especially during periods of volatility and low sales growth. This transformation enables us to reallocate resources, allowing us to better prioritize and increase consumer-facing investments. By doing so, we are better positioned to address changes in our mix of business, whether driven by internal or external factors. Related, we have made the difficult decision to expand our restructuring program. With all initiatives under the program, we now expect a net reduction of 5,800 to 7,000 positions globally, including approvals to date. Approvals for specific initiatives under this restructuring program in total are still expected to be completed by the end of fiscal 2026. In the now expanded restructuring program, we expect to take total charges of $1.2 billion to $1.6 billion and generate annual gross savings of $800 million to $1 billion before taxes. A portion of these savings is expected to be reinvested in consumer-centric activities and additional investments to fuel growth. The actions under the PRGP, including its restructuring program, are expected to be substantially executed in fiscal '25 and '26 and completed in fiscal '27. We expect nearly all of the full run rate benefits to be realized during fiscal '27. Overall, we aim to accelerate our return to sustainable sales growth and deliver a solid double-digit adjusted operating margin over the next few years. We are moving with a sense of urgency to execute the action plans of Beauty Reimagined to start delivering annual sales and margin improvement quickly. As Stéphane said, we plan to share more details once the Beauty Reimagined action plans are operationalized. Let me now discuss our outlook. We expect our business to continue to be challenged by subdued consumer sentiment in China and Korea, pressuring Asia travel retail. In light of this, along with evolving global geopolitical uncertainty, we anticipate continued volatility and low visibility in the near term. As a result, we are only providing an outlook for the third quarter. We expect a strong double-digit sales decline in our global travel retail business in the second half of the fiscal year. This reflects shipments based on our expectation of persistent industry retail softness and incremental pressure from the change in selling policies at several Korean retailers. Additionally, recall that we resumed replenishment orders in the third quarter last year, making for a difficult comparison. However, we are encouraged that for the second quarter, our retail trends, while still negative, improved sequentially in both Mainland China and globally, excluding travel retail. We anticipate our retail sales trends, excluding travel retail, to significantly improve in the third quarter as we increase consumer-facing investments. Given that context, let me walk you through our specific outlook for the third quarter. We expect organic net sales for our third quarter to decrease 10% to 8% compared to last year. As I previously mentioned, this is primarily driven by a strong double-digit decline in our global travel retail business. In the rest of the business, we expect the net sales decline to moderate. Currency translation is expected to negatively impact reported net sales by two percentage points. For the third quarter, we anticipate moderate gross margin expansion, reflecting a tailwind from the in-period charge last year, which was triggered by the previous pull-down of production. We also expect continued benefits from the PRGP as an offset to our expected sales volume deleverage and continued consumer-facing investments. We expect our third quarter effective tax rate to be approximately 36% compared to 30.5% last year. The increase primarily reflects the estimated change in our geographical mix of earnings. We expect third quarter adjusted EPS of $0.20 to $0.30, primarily driven by the expected strong sales decline in global travel retail. Currency translation is expected to dilute EPS by $0.04. In closing, we acknowledge that we have a lot of hard work ahead, but we are empowered by a Beauty Reimagined vision. With its mandate to pivot boldly with a consumer-centric mindset, speed and agility, we are confident and better positioned to accelerate our return to sustainable sales growth and long-term profitability. On behalf of Stéphane and our new leadership team, I want to extend a heartfelt gratitude to our talented employees around the world. Together with you, we are driving the critical transformation to unlock the full potential of our beloved company. That concludes our prepared remarks. I'll now turn it over to the operator, to begin the Q&A session.

Thank you. [Operator Instructions] And the first question will come from Bryan Spillane with Bank of America. Please go ahead.

The next question will come from Lauren Lieberman with Barclays. Please go ahead.

I would add a few things, Lauren, that we are making a clear distinction here between consumer-facing and fixed costs. So as Stéphane said, on consumer facing, a lot more discretion, there's a lot more variability and a lot faster learning, to quickly pivot our plans. In the past, we made some investments, which are big bets in fixed costs and capabilities, then you are stuck with them. And that's the big distinction, we are making in pouring all our investments, to drive business and constantly pivot. And that's what we'll keep driving regularly month-by-month, quarter-by-quarter, and constantly pivot.

The next question will come from Dana Telsey with Telsey Group. Please go ahead.

Hi. Good morning, everyone.

Your next question will come from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara, I would add one thing. I mean, of course, as Stéphane talked about, I mean, really what he's asking us all to do as leaders, to support in this is really build a culture of three things that I take away very importantly, from what he's telling us. One, each one of us are owners and leaders, and really empowered and accountable. Secondly, the consumer is at the heart of everything we do, whatever be your function. Whatever be your work, wherever you are in the company. And then thirdly, a clear focus on value creation. And long-term value creation while navigating some of the challenges, and these things are, as a leadership team, we all are owning it along with our employees around the world.

Great. Thanks.

Your next question will come from Oliver Chen with TD Cowen. Please go ahead.

Thank you, Stéphane. Hello, Oliver. So Stéphane touched upon our sales growth. I mean, of course, as we look, we are driving the three critical things for long-term value, sales growth, margin and cash flow. And from a margin perspective, you saw that our margins are in the single-digit right now. We have demonstrated a clear way to improve gross margin over the last few years. And there is still a lot more work to do here, and we are confident based on the work we have already done, and what we see ahead that with the whole zero-waste mindset and the supply chain efficiency, we can make significant progress here. So that would be a critical building block as we go towards solid double-digit margin in the next few years. Within OpEx, we are - you saw that we have increased. We have doubled the restructuring program. So that's a significant increase on the employee cost, opportunities that would be there. Secondly, as Stéphane called out, we are step-changing our work on procurement, which means every single line item of our expense, is an opportunity to improve. So that's the second big pillar. And the third big pillar is shared service, where we have done work in the past few years. But we have an opportunity to step-change, with some of the leading partners around the world. So with all of those building blocks, we remain confident that we can move towards a solid double-digit margin in the next few years. And of course, we will share with you more details on the upcoming forums.

Yes. The only thing I would add is - that we clear priorities to delever in the short-term, our balance sheet. And then, of course, we are brand builders and we are constantly looking at opportunities. But in the near-term, as Stéphane outlined, our priority would be to deleverage the balance sheet.

Our next question will come from Olivia Tong with Raymond James. Please go ahead.