Estee Lauder sees 8% organic sales decline in FY25; plans low single-digit growth in FY26 with improved margins and strategic initiatives.

OPERATOR - (00:02:51)

Good day everyone and welcome to the Estee Lauder Company's fiscal 2025, fourth quarter and full year conference call. Today's webcast is being recorded for opening remarks and introductions. I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Rainey Mancini - Senior Vice President of Investor Relations - (00:03:12)

Hello. On today's webcast are Stephane de la Favre, President and Chief Executive Officer and Akhil Shrivastava, 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 these 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, references to net sales refer to organic net sales which excludes the non comparable impacts of acquisitions, divestitures, brand 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, references to online sales include sales we make directly to our consumers through our brand.com sites and through third party platforms. It also includes estimated sales of our products through retailers websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP. During the Q and A session that we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for this webcast. And now I'll turn the webcast over to Stephane.

Stephane de la Favre - President and Chief Executive Officer - (00:04:34)

Thank you Rainey and hello to everyone. Before we discuss our results for fiscal 25 and 26ambition, let me begin with a moment of remembrance of our beloved Chairman Emeritus, Leonard A. Lauder, who passed in June. On behalf of myself, Akhil, the executive team, Board of Directors and the Lauder family, we extend our heartfelt gratitude for the sympathy shared. We were profoundly moved by the outpouring of compassion from employees, consumers, peers, retailers, suppliers, media analysts and investors. Your condolences celebrated a life beautifully lived and a legacy deeply felt. Recognizing how Leonard uniquely shaped and revolutionized the not just our company, but also the beauty industry. Leonard was a mentor to me as he was to so many of us. He was a strong advocate for beauty reimagined when he entrusted us to lead. We are more committed than ever to regaining prestige, beauty leadership in his honor and upholding the company's values it champions. Turning to our fiscal 25 full year performance. Our results were in line with the revised outlook we provided in May and the expectation Akhil and I set in our first earning call in February. Nearly 2/3 of our 8% organic sales decline came from Travel Retail as it decreased 28% driven by strategic decision and and prolonged weak conversion. Importantly, we ended fiscal 25 much better position than fiscal 24 with healthier trade inventory, especially in Travel Retail Asia. For currently forecasted demand, Travel retail represented approximately 15% of reported sales, down 4 percentage point from fiscal 24 and and 14 percentage points below its fiscal 21 peak reached during the pandemic, making it more similar to the Channel Global Prestige Beauty Share and reducing our exposure to its volatility. Gross margin expanded 230 basis points to 74% driven by PRGP benefits and better by 50 basis points than the outlook given in May. Despite significant volume deleverage operating margin of 8% contracted 220 basis points driven by sales declines and increased consumer facing investment. Diluted EPS decreased 42%. Since I became CEO we have acted with urgency to operationalize our strategic vision of beauty reimagine, making strong initial Progress across all five action plan priorities from January through June. In the second half of fiscal 25 we gained prestige beauty share in China, Japan and the US demonstrating not only our ability to return quickly to share gain by building on our brand's high desirability but also early wins from new consumer coverage and uptake of enticing innovation globally. Le Labaud and La Mer gained prestige beauty share in the second half, confirming their strong desirability and the Ordinary accelerated to high single digit retail sales growth in the fourth quarter. La Mer, Tom Ford and Estée Lauder fueled our second half share gain in China while Le Labo, Estée Lauder and La Mer powered Japan. In the US The Ordinary, Clinique and Estée Lauder drove share gain while Estée Lauder New Double were considered ranked number one product launch in prestige makeup by Syrcana from January through June in our first action plan Priority Accelerate Best in Class Consumer Coverage we achieved many accomplishments in the second half of fiscal 25, particularly for our online business following the Ordinary's launch in the US Amazon Premium Beauty Store in the third quarter, Originss and Aveda launched in the fourth quarter while Estée Lauder and Aveda opened in the Amazon Premium Beauty store in Canada. We now have 11 brand storefronts in the US and three in Canada and in Southeast Asia. We built scales on Shopee and TikTok Shop across the third and fourth quarters. This action complemented second half growth from our existing presence in fast growing online retailers like Timor and and owing. As a result, online organic sales growth accelerated from low single digit in the first half to mid single digit in the second half. Online reached 31% of reported sales for fiscal 25 up 3 percentage points from fiscal 24 to an all time record and we expect online mix to climb higher still. We continued our expansion in pharmacy in Europe and began mentoring the pharma channel in Latin America with Clinique responding to rising demand for derm brands, moving to our second action priorities create transformative innovation and innovate across prestige price tiers to reach a wider audience. Throughout the second half of fiscal 25 we introduced a robust slate of breakthrough on trend and commercial innovation aimed at new consumer acquisition. As you can see on the slide, we are realigning our innovation portfolio to deliver gross margin accretive product quicker and better capture faster growing industry trend in skincare with within Night longevity and derms as well as across makeup and the still in demand luxury France segment as well as hair care. Let me share a few highlights from the fourth quarter. Beginning with skincare, La Mer built upon the iconic success of its treatment lotion with the balancing treatment lotion which along with the brand's third quarter launch of Night Recovery concentrate fueled La Mer second consecutive quarter of double digit organic sales growth in mainland China, Clinique and the Ordinary showcase their unique derm and scientific brand equities at entry prestige pricing. For Clinique, the brand launched a supercharged SPF version of its renowned dermatologist recommended DDML for the Ordinary. Its new UV filter SPF 45 serum offered consumer sun care protection in its signature serum format. In makeup, Clinique build upon its blockbuster Almost lipstick franchise with a third shade Nude Honey. Since 2021, Clinique has driven strong sales growth of Almost lipstick with volumes over 30 times greater than four years ago, demonstrating our ability to leverage social media virality to further fuel demand and attract younger consumers. Mac's born famous commercial innovation paired with the new Lip Glass Air contributed to strong share gain in the US Prestige makeup, lip color and lip gloss subcategory. In the second half, Aveda introduced Miraculous Oil which is significantly outperforming initial sales expectation for our third action plan Priority Boost Consumer facing Investment to accelerate new consumer acquisition, we increase consumer facing investment at a greater rate of growth in the second half versus the first half to reignite retail growth in mainland China. This contributed to high single digit retail sales growth and share gain in each of the third and fourth quarters solidifying share gains for the fiscal year with every category improving share in the fourth quarter, 10 brands grew at retail to fuel share gains in every category and every channel. The incremental investment coupled with innovation drove outstanding performance for 618 for La Mer Lauder and Jo Malone London across online platform and powered the ordinary success launch in China with Sephora and we invested in our freestanding store as we strategically drive a more productive fleet for the full year. We opened nearly 40 doors for our France brand to much success and closed unproductive doors primarily for Mac, Aveda and origin for over 10 net new stores globally. Le Labo continued its spectacular expansion with new stores including the Beijing and Seoul Experience center for while Jo Malone London enhanced our navigation and experience to meet evolving consumer needs. Next, let me share an update on our portfolio review. We recently engaged external advisors as we consider evolving the portfolio to best align with the strategic vision of beauty reimagine and focus on our highest return on opportunities over the medium to long term. We will share updates in due course. Let me now turn to our fiscal 26 outlook with three fiscal year of sales decline and operating margin erosion behind us. We enter fiscal 26 with signs of momentum and the start of our turnaround, a return to top line growth in fiscal 26 and the pursuit of of a solid double digit operating margin in the years ahead. For fiscal 26 we expect to deliver low single digit organic sales growth, maintain our now stronger gross margin despite the headwind of incremental ties and expand our operating margin by 165 basis points at the midpoint. Akhil will describe the drivers in detail, but let me share a few overarching themes for sales we intend to significantly reduce discounts. We made good progress in this front in fiscal 25 and believe there is much more that we can achieve. Our sales growth also embezz benefit from accelerating best in class consumer coverage recognizing we still have a lot of work to do in markets with a high penetration of of department stores. Finally, we are putting greater emphasis on accelerating in high growth emerging markets given our still untapped potential as emerging market only represent 10% of reported sales for operating margin, the organization has embraced PRGP and its momentum is very encouraging. We achieved much more from PRGP than we expected in fiscal 25 which which gives us confidence that we can deliver meaningful cost saving in fiscal 26 and fund incremental consumer facing investments to fuel our 26 outlook. We are focused on executing with excellence beauty reimagined Already in the first quarter we are further accelerating best in class consumer coverage. The Ordinary launch on tmall in China with a breakthrough service, the first AI powered flagship stores co developed with tmall and we are excited to be expanding on Amazon Premium beauty store success beyond the US and Canada starting with the Ordinary in Amazon UK which launched in July as well as Clinique in Amazon Mexico this month. In travel retail we are greatly expanding our presence in the Americas through the all new distribution we with Duty Free Americas. This builds on progress in EMEA to expand the presence of our luxury France brands in airports. Moving to our second action plan Priority Create Transformative Innovation we have identified our external hire for the new leader of R and D and expect to make this announcement in the coming weeks. For fiscal 26 we are targeting innovation to be back representing over 25% of sales. With this pipeline we are well on our way towards tripling the percentage of innovation launched in less than a year from 10% to 30%. In fiscal 26 we are set to have 16% of our innovation that is launched within a year. Here are few fiscal 26 innovations already in the hands of consumers in skincare reflecting our imperative to innovate we are from the entry prestige through luxury tiers the ordinary Laund Sulphur 10% powder to cream concentrate a breakthrough formula. Further up the prestige tier, a still older advanced night repair franchise introduced a new eye cream while Renutrive launched a watery lotion powered by longevity Science in makeup we are rebuilding on our gain in In Lip with Mac Lips Glazer Glossy liner and Bobbi Brown's Cashmere Luxe Matte lipstick. And following Tom Ford's recent success with Cushion foundation, the brand launched Architecture Radiance Hydrating foundation in France, the category poised to lead prestige beauty industry globally. In fiscal 26 Jomal owned London's Raspberry Ripple. This year's seasonal Limited edition Colloid is outperforming last year's Limited edition Runaway success Tom Ford extended the halo of its OUD collection with Oud Voyageur and expanded to its popular Black Orchid franchise with Black Orchid Reserve. We are also proud to mark the exciting relaunch of the Aramis brand with Intrition, a new France fronted by global ambassador and NBA hall of Famer Dwyane Wade. For our third action plan Priority Boost Consumer facing investment, we are deploying a new media model that puts greater focus on demand generation through broader media tactics. We made significant shift in the mix of media budget to enhance consumer acquisition and improve ROI accountability. Our investment in AI have begun to show meaningful impact transforming how we engage with consumers and operate internally. From personalized marketing and media optimization to agile go to market execution, AI has driven a 31% increase in ROI from our North America media campaigns enabling faster decision making and stronger retirement real time market responsiveness for our fourth action plan Priority Fuel Sustainable Growth through bold Efficiencies. Among our newer initiatives when we expanded The PRGP in February 25 is outsourcing. Our analysis revealed a significant gap versus industry benchmark and we are rapidly advancing these initiatives for our final action plan Priority Reimagine the way we work as of July 1, brands own global strategy, innovation and long range planning while region have full responsibility for the P and L allowing for greater local agility and consumer focus. We introduced new ways of working playbook aligned to this structure to drive brand region collaboration and and we are very encouraged by the elevated engagement so far. In closing, we are energized as we are transforming our company through Beauty Reimagine to our employees. Thank you for bringing Beauty Reimagine to life in six short months through your tremendous passion and commitment. Together with all of you, I am excited for what we will accomplish. I will now turn the call over to Akhil.

Akhil Shrivastava - Executive Vice President and Chief Financial Officer - (00:22:32)

Thank you Stefan hello everyone and thank you for joining us today. Before discussing the outlook, I'll briefly recap our fourth quarter results and highlight progress in key areas of the business. For more information on a full year and fourth quarter performance, please refer to a press release issued this morning. Overall, we delivered fourth quarter and second half results at the top end of our implied guidance range. Starting with Top Line Organic net sales declined 13% in the fourth quarter, reflecting declines across all product categories except fragrance as well as across every geographic region, primarily driven by global travel retail as we expected. Encouragingly, we are seeing positive results with share gains in some key markets, notably in mainland China and Japan. In the US we made significant progress in narrowing our share losses during the fiscal year and gained share in the second half. Now looking at margins, our gross margin for the fourth quarter was relatively flat even as we faced the steepest sales volume decline of the year. For the full year, we delivered 230 basis points of gross margin expansion despite our sales deleverage landing at 74%. This meaningful expansion was driven by the relentless execution of our PRGP. Turning to operating margin for the fourth quarter we delivered 4% compared to 9% last year. This was driven by a 580 basis points increase in consumer facing investments as percentage of sales on the full year Consumer facing investments increased 400 basis points as we invested in our brands as part of Beauty reimagined to fuel growth and long term value creation. These investments were enabled through our PRGP which fueled our continued progress in reducing non consumer facing costs in the fourth quarter, ending the year with a 6% reduction in the fourth quarter. We also recorded $425 million of impairment charges relating to Dr. Jart and two phased. This reflects challenges in mainland China and Korea for Dr. Jart and continued underperformance in key geographies and channels. From two phased our effective tax rate for the full year was 38.8% compared to 31% last year. This reflects a higher effective tax rate on our foreign operations due to our geographical mix of earnings and the unfavorable impact associated with previously issued stock based compensation. Our diluted EPS was $0.09 in the fourth quarter as compared to $0.64 last year. Looking now at a PRGP restructuring program, as of June 30th we recorded $610 million of total cumulative charges primarily in employee related costs. Moving to our cash generation for the year, we generated $1.3 billion in net cash flow from operating activities compared to $2.4 billion last year. This decrease is primarily due to lower earnings adjusted for non cash items and an unfavorable change in operating assets and liability. This also reflects that last year we made a very significant year on year reduction in our inventory which drove very strong CFFO in the base period. Additionally, the reductions reflect a significant increase in restructuring payments. We invested $602 million in capital expenditure down 34% compared to last year which reflected prior year payments relating to the manufacturing facility in Japan. This level of CAPEX reflects a strong focus on optimizing capital expenditures and prioritizing consumer facing investments. Free cash flow generation remains a strategic priority and we are focused on driving improvements in working capital, capex and operational efficiency to strengthen free cash flow going forward. Now turning to outlook, our priority is to execute our beauty reimagined action plans with excellence. The strategy is designed to drive long term value creation and restore growth, improve margins and drive cash. We are focused on driving sustainable sales growth in fiscal 26 and beyond as well as achieving a solid double digit adjusted operating margin over the next few years. Beginning with fiscal 26, we are providing only an annual outlook. This approach gives us more agility and flexibility to navigate ongoing volatility while better aligning with a long term value creation and strategic priorities. Also, as you may have seen in a press release issued this morning and consistent with prior years, we continue to develop our strategy and allocate resources by product category. Beginning with the first quarter, we will be reporting our fiscal 26 and comparable fiscal 25 results by reorganized geographic regions that align with our recent leadership changes. We plan to share more detailed financial information based on our new regional structures in the coming weeks. Now let me update you on our assumptions regarding evolving trade policies and enacted tariffs. As I mentioned in May, our task force has been moving with urgency, closely monitoring developments and evaluating various scenarios to mitigate some of the tariff impacts. Since then, our teams have acted swiftly to implement mitigation actions, including leveraging available trade programs and further optimizing our regional manufacturing footprint to bring production closer to the consumer, including through a facility in Japan. These efforts, along with the agility we have built into our supply chain, are helping to offset more than half of the expected impacts and better position us to adapt quickly to address the evolving trade policies. Based on what we know today and net of our planned mitigation strategies, we expect tariff related headwinds to impact profitability by approximately $100 million. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions. Turning now to our industry expectations for fiscal 26, we assume modest global prestige beauty growth in the range of 2 to 3%, which is an improvement versus fiscal 25. While there are early signs of stabilization in mainland China, travel retail conversion continues to be weak and challenges persist in the west, including subdued consumer sentiment in the US And Western Europe. In terms of retail sales, our expectations assume retail sales growth in line with or ahead of prestige beauty in key markets. We also remain focused on improving our performance and narrowing the gap between retail and net sales growth globally in fiscal 26. We aim to achieve this through tighter monitoring of inventory in trade and a significant reduction in discounts. That said, progress may take longer in some markets and is unlikely to be linear, particularly in North America. We ended fiscal 25 with an approximate 5 percentage points gap between retail and net sales growth for the full year. While we expect the gap to narrow throughout the year, a greater disconnect is anticipated in the first quarter. Moving to top line for the full year, we expect organic net sales to be flat to up 3%. Our outlook assumes mid single digit net sales growth in mainland China as well as meaningful improvement in our global travel retail business. It also assumes more broad based improvements across the rest of the business compared to last year. Let me now share a few details. We expect full year organic net sales in a global travel retail business to return to growth at the midpoint of our outlook. This reflects the improvement in shipment compared to last year in Asia travel retail, particularly in the first half as we anniversary the impacts of action taken to improve retailer inventory levels along with the strategic decision to reduce our exposure to reseller activity. However, this improvement is expected to be offset to some extent by persistent challenges in the broader retail environment including weak conversion. As a result, we expect a wider range of net sales growth in global travel retail in the second half, reflecting ongoing uncertainty in the rest of the business. We expect to deliver low single digit organic net sales growth for the full year, reflecting improvement in year on year growth rates across most markets relative to fiscal 25. In terms of the first quarter, we expect organic net sales to be down low single digits to slightly positive. This reflects high single digit growth in a global travel retail business while maintaining a strategic initiative to keep the mix of business in line with industry norms. In addition, we anticipate a return to solid growth in mainland China and a more moderate decline in the remainder of the business. Turning now to our PRGP in fiscal 26, we are continuing to execute with rigor, discipline and clear purpose to optimize key elements across our cost structure to improve margins and profitability as well as create fuel for growth. We are pleased with the meaningful progress we have made in fiscal 25 and remain focused on advancing our PRGP initiatives in fiscal 26. Through our PRGP, we expect continued benefits in fiscal 26 to gross margin and to operating expenses, specifically non consumer facing expenses as we enhance overall productivity and right size our cost base. Now looking at our restructuring program, we remain on track and continue to advance key initiatives inclusive of approvals through August and relative to the high end of the total expected ranges we previously communicated. We have approved initiatives accounting for over 60% of expected gross benefits and nearly 50% of both anticipated charges and net reduction in positions. With that backdrop, let me walk you through our other full year assumptions. We assume an operating margin between 9.4% and 9.9% reflecting greater expansion in the second half of the year as we expect benefits from a PRGP to build sequentially each quarter. In fiscal 26, we expect margin progression despite year on year headwinds from incremental tariffs and normalized bonus levels. Our estimated geographical mix of earnings is expected to drive an effective tax rate of approximately 36%. This assumes a higher rate of approximately 40% in the first quarter with improvement over the course of the year as we expect to build profitability. In addition, we are monitoring certain provisions in global tax legislation that may expire in fiscal 26, which, if not extended, could increase their effective tax rate. Diluted EPS is expected to range between $1.90 and $2.10, assuming a weighted average share count of approximately 365 million shares. This reflects year on year growth of 26% to 39%. Turning now to cash generation, in fiscal year 26, we expect to generate net cash flows from operating activities between to $1.1 billion. While this reflects a slight decline from last year driven by the anticipated peak in restructuring payments, we are confident in our ability to mitigate some of the pressures through a strong focus on managing working capital. We expect capital expenditures for the full year to be approximately 4% of sales, reflecting a more efficient and normalized level of expenditures, along with a focus and determination to optimize capex overall and and target the investments on consumer facing areas to fuel growth. In closing, we remain confident in BTD imagined, grounded by a consumer centric mindset that prioritizes growth driving investments, cost discipline and operational efficiency. While we are not providing an Outlook beyond fiscal 26, we are determined to deliver strong cost leverage through sales growth in fiscal 27 and bring to bear with urgency PRGP benefits from optimizing of our end to end operating model to drive cost savings, including through ongoing outsourcing initiatives, tax planning consistent with the strategic changes we are making in a mix of business and a more competitive approach to procurement to our employees. Thank you for your dedication and excellence through this period of meaningful transformation. Your resilience and commitment drive our progress. Together we are turning strategy into execution and execution into long term value creation. That concludes the prepared remarks. I'll now turn it over to the operator to begin the Q and A session.

OPERATOR - (00:36:00)

The floor is now open for questions. If you have a question, you simply press the star key followed by the digit 1 on your touchtone telephone. To ensure everyone can ask their questions, 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 star key and the digit one. Our first question today comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara Mohsenian - Equity Analyst - (00:36:33)

Hey, good morning.

Stephane de la Favre - President and Chief Executive Officer - (00:36:35)

Morning, Dara.

Dara Mohsenian - Equity Analyst - (00:36:38)

So clearly a lot of hard work occurring under beauty reimagine significant plans in place in the five key action areas you mentioned. I wanted to touch specifically on simplifying the organizational structure just and the restructuring there. How much progress have you made so far? What changes are left to be implemented in fiscal 26. And I'd just love to get your sense for how the organization's handling the change culturally, both on the organizational front, but also just in a broader context. There's obviously a lot of change occurring for a company with a proud heritage and tradition. So are you satisfied with how quickly the organization's moving so far and how do you think this change is being seeded culturally? Thanks.

Stephane de la Favre - President and Chief Executive Officer - (00:37:26)

Yeah, thank you Dara for your question. I think it's obviously at the heart of all the changes that that we are implementing and obviously delivering on the vision of beauty and margin, like you said, on the five key action priorities. I think from an organization standpoint, you've heard me say in the prepared remark that we are going to announce in the next coming weeks the head of R and D which will actually complete the new leadership team in place. And we've done that in a very short six months since we've announced the new organization. Also, if you remember, we've announced the collapse of the seven region into four. So today and Akhil mentioned in his prepared remark also like, you know, the new geographical structure on which we are going to report on, which is obviously the Americas, uk, Asia and travel retail and China as a standalone region. So all of that is already in place and very, very pleased with the progress that we are making at this point. The team really committed on the changes that we are doing. We have had relentless communication throughout the organization. Personally, I've had multiple town hall through the organization. Many of my executive team leaders also did the same thing internally but also externally. We spend a lot of time communicating with you guys but also with our suppliers, our retailers, all the changes that we are making around the world. I've said it multiple times, this is the biggest organizational transformation that we have done in our history and we are changing compensation to just make sure that everybody is rewarding on the total and the execution of beauty reimagine. And we are really laser focused on the time that we have left to deliver the prgp. We obviously you've heard both Akhil and I being very pleased on the progress that we are making on the PRGP which obviously we exceeded our expectation in fiscal 25 and we have more to go get in fiscal 26 and continues to benefit in 27. From an organization standpoint. We have the complete new organization in place from a leadership standpoint. But I think it's not only at the level of my leadership team, it's throughout the organization. Last time, in the last earning calls we said that we were Moving the responsibility of the P and L from the brand to the region. And I reiterated that also, like, you know, Today as of July 1st, all of that is in place. And I think the engagement that we're seeing throughout the organization between the brand, between the region, between the function, throughout the organization is extremely encouraging and very positive. And we are seeing the collaboration and the speed of execution already that is paying some strong dividends. I think many of the progress that we've highlighted of the last six months since we've announced beauty reimagine are coming through. All these changes that we are making from the share gain that we have in China, that we have in the US that we have in Japan, the acceleration that we're seeing in the emerging market, even though not yet satisfying to all of us, I think many of the changes are the result of the new organization that we are putting in place. So I would say in conclusion, frankly, very happy with the progress that we are making, the speed at which we are making. I think, Dara, you mentioned obviously the culture is evolving and is changing, but we are really pushing on ambition and accountability throughout every, I would say pillars of brands and regions and function of the organization. And I think this is only the beginning of the momentum that we are just going to go see going forward.

OPERATOR - (00:41:29)

The next question is from Steve Powers with Deutsche Bank. Please go ahead.

Steve Powers - Equity Analyst - (00:41:35)

Great. And good morning everybody. This is a question perhaps one more for Akhil. Although Stephan, I'd obviously welcome your perspective as well. I was hoping you could just maybe better decompose the gap between retail sales and shipments that you see entering fiscal 26. I'm curious as to how much of that is still the byproduct of elevated trade inventory in pockets versus the discounting you mentioned versus perhaps channel mix dynamics or otherwise. And then I guess as you look forward, just how you anticipate that gap looking if it still exists as you exit the year versus the beginning. Thank you.

Akhil Shrivastava - Executive Vice President and Chief Financial Officer - (00:42:16)

Thank you, Steve. So I would say if you look at the big picture from where we closed fiscal 24 to where we closed fiscal 25, and you look at our largest markets, travel retail, China and us, in every single market, we have reduced inventory and we have brought it in a meaningful way to where we need it to be. So that's the first step, I think in travel retail. From where we see retail now, I think we are very much there. China, we have always kept lean inventory and we are in a good place there. In North America, while we have reduced inventory, we still, because of the retail environment we are just watchful of how we want to manage that going forward. We expect this gap to narrow. So in terms of your big takeaway, our net should start to track retail much closely than it has in the past. So you should feel good about it. And of course we'll give you quarterly guidance which is why on quarter one in North America we gave you already the perspective that we see some challenges. However, overall your takeaway should be that we are shipping to retail. As Stefan and I had said very much, build retail, ship to retail. You could have a variance on the quarter, but we will never let it pass that we will adjust it right in the next quarter and of course we will be very transparent in communicating that. Now in some of the markets like North America where we are as part of btd, imagine changing a coverage and going to pure play. Retailers moving more to specialty, multi, et cetera. There comes a channel mix which creates that dynamic. There comes certain costs which go above the line versus below the line which create that gap between retail to net. But these are profitable channels and overall very creating channel. So overall I would say we have made dramatic progress. We are watching this very carefully and going forward we expect the gaps to be significantly narrow versus where we have been.

Stephane de la Favre - President and Chief Executive Officer - (00:44:16)

Yeah, and I think just one thing to add to what Akhil was saying. I think you're seeing even in the algorithm for the year what we said. We have a modest growth for travel retail, mid single digit growth in China. For the rest of the business we are in low single digits. But we are seeing gradual improvement from our net sales throughout the year because of what Akhil said, we are aligning retail and net throughout the year, quarter over quarter. So still a bit of a gap in Q1 as Akhil mentioned, but frankly you're going to see that and the exit of 26, we will be in a much better position frankly in all the geographies. But again the big work was done in fiscal 25 on reducing dramatically the inventory in travel retail. And we existed fiscal 25 in the right place. So now it's fine tuning to make sure that the total net sales and the retails are aligned going forward.

OPERATOR - (00:45:14)

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

Stephane de la Favre - President and Chief Executive Officer - (00:45:22)

Morning Lauren.

OPERATOR - (00:45:24)

Ms. Lieberman, perhaps your line is muted on your end. It's open on ours.

Lauren Lieberman - Equity Analyst - (00:45:29)

Sorry. Good catch. Okay, I'm here. So. Good morning again. Good morning Stefan. Just wanted to hone in a bit on North America and Stephan, your Akhil's comment that markets with significant departments or exposure would Sort of remain more challenged. And so you've made great progress to North America presence on Amazon, et cetera, market share gains in various periods. But how are you thinking about the balance of channels in North America and frankly, how long it takes for the region to get to consistent sales growth given still that weight of department stores? And I guess to go more pointedly, would you consider sort of more dramatic action, the way that you've taken in travel retail to effectively at this point proactively reduce exposure to the channel? Thanks.

Stephane de la Favre - President and Chief Executive Officer - (00:46:21)

Thank you, Laura. And I'll start. I'm sure Akhil will just like, you know, add flavor to it. Now, when you look at North America, let me take a little bit of a step back because the market is very strong and we've seen it in fiscal 25 really gradually improving sequentially quarter over quarter and even the beginning of fiscal 26. What we see in the months of July is strong and we're strong. In our prepared remark, we said that we've been gaining market share for the first, the last six months of the last fiscal year. And that's the first time in many, many years I've said it. Last quarter, said it again. This is a massive transformation to what you're pointing, Lauren. A lot is coming from obviously the first pillars of beauty reimagine, which is to increase the consumer coverage we've made. And we made it very intentionally and strategically. Today we have 11 brand on Amazon. And the interesting thing with Amazon, obviously we are very pleased with our progress with Amazon and Clinique was like the first brand to launch. Aveda and Origin were the last one to launch. And we're seeing even as we are lapsing, the anniversary of Clinique launch clinic continues to be very, very strong, which tells us that we've been able to just attract new consumers but also re engage with lapsed consumers. Over the past 12 months. Amazon not only is adding new consumers for us, but is also acting a little bit as a megaphone to our total business because Amazon is not only a commerce platform, but is also the majority of the beauty search that is happening in the market. So we have been seeing a lot of positive momentum in, in retailers like Ulta where we are very, very strong. Obviously our online business, our own online business, online.com is also strong. We have a lot of work that still needs to be done on the more traditional channels like the department stores. And obviously as a percentage of our total business, they continue to reduce. And we are working very closely with our historical partners to make sure that we focus on the top stores that to make sure that we also recruiting the right consumers. There's still a lot of traffic and a lot of demand in these stores. So we're seeing a good momentum and I have to say the early result that we are getting in July are extremely encouraging. Where July again we are in market share gain and we are not only market share gain on brands like the Ordinary, but we are also across Lauder Clinic and Mac which gives us a lot of confidence that we we are on the right track to make the changes. And you will see the mix of new retailers like Amazon or specialty Multi increasing in the total going forward. And that's the intent that we have.

Akhil Shrivastava - Executive Vice President and Chief Financial Officer - (00:49:16)

I would add a few things to what Stephane said. Hello Lauren. So I think overall we are very pleased with where the channel mix is evolving in North America. Stephan said we now have a much more balanced view of what each channels bring. I mean department stores are probably less than 1/3 of a business. Not probably they are 1/3 less than 1/3 of a business. We have built Amazon business which is significantly a larger part of our mix of business. We have a large DTC business between brand.com, between freestanding stores. So we now have a much more diversified business than probably most people realize. And what we intend to do is to really serve the consumers and each channel as part of very consumer centric approach. There's a different consumer there, we are serving them according to that and over time we will continue to build. We do have opportunity to grow further in specialty multi and we are looking at every opportunity to go as Stephane said, wherever the consumer is, we are going there of course in a value creating way.

OPERATOR - (00:50:23)

The next question is from Ashley Wallace with Bank of America. Please go ahead.

Ashley Wallace - Equity Analyst - (00:50:29)

Good morning. So one of the data points that you gave at Q3 was organic revenue growth ex travel retail which was minus 3 at the time. Are you able to share with us what Q4X travel retail organic revenue growth was? And whilst I recognize the markets, not many are. I think reporting from global beauty peers does show.