Good day, everyone, and welcome to The Estee Lauder Companies Fiscal 2020 First Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Rainey Mancini.

Good morning. On 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 contain forward-looking statements, let me refer you to our press release and other reports filed with the SEC, where you will 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. All net sales growth numbers are in constant currency. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. During the Q&A session, we will ask that you please limit 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, Rainey, and good morning, everyone. We have started off our new fiscal year with terrific results. Our successful strategy driven by multiple engines of growth helped us to deliver an extraordinary performance, especially in light of the volatile macro environment. Net sales grew 12% in constant currency, making it our tenth consecutive quarter of double-digit growth. As a result, we gained share and strengthened our leading position in global prestige beauty. We leveraged our strong sales increase with a disciplined focus on cost, and adjusted diluted earnings per share rose 20%. Our performance on both the top and bottom lines was fueled by successful innovations, increased advertising, and effective marketing across brands, categories, geographies, and channels. With deeper consumer insights informed by improved data analytics, we expanded our growth engines, activated additional ones, and invested in the best opportunities worldwide, which fueled these strong results. We remain mindful of global volatility risk; however, with the strong start and our confidence in continuing to execute effectively, we are raising our net sales and EPS estimates for the year in constant currency. During the quarter, the external environment was challenging, and we faced different issues in every region. Disruptions in Hong Kong affected commerce in that area. Continued uncertainty about Brexit impacted consumer spending in the UK, and demand for makeup in North America softened. However, by having numerous growth engines across all facets of our business, we were able to deliver and exceed our sales and earnings expectations. Most of the over-achievement came from continued strengths in China and Travel Retail. We also had better-than-expected improvements across Europe and our other emerging markets. Additionally, contributing to our continued growth is our company positioned in the sweet spot of consumer goods. Our brands generate superior consumer loyalty, evident in our strong repurchase rates. While our high-quality products justify premium pricing, they are an affordable luxury, which we believe makes them more resilient to economic volatility than other luxury products. During the quarter, each of our four largest brands grew globally, reflecting strong consumer demand for established brands and their proven desirable products and compelling innovations. Estee Lauder and La Mer each advanced more than 20%. A key strategy is our focus on hero franchises, which are the high repeat products in each brand. With greater innovation and resources around these hero product lines, our brands successfully attracted new consumers and reinforced their loyalty with existing ones. Our Estee Lauder brand is a great example of this winning strategy. The brand introduced a new product in its largest franchise, Advanced Night Repair. Sales of the concentrate exceeded our expectations, and it helped lift the entire franchise by double digits globally. In Asia, buzz around Estee Lauder's new Intense Reset Concentrate broadened the brand reach, about 70% of consumers who bought it were new to the brand, underscoring our strategic priority to attract new users with exciting innovations. Estee Lauder was one of several of our brands that benefited from rapid growth in the skincare category worldwide. We are well-positioned to meet the growing demand for all types of skincare products. It is our largest category and grew sharply, accounting for nearly half of our global sales in the quarter. We continue to invest in skincare; La Mer gained share in luxury skincare in Asia Pacific, and Clinique delivered stronger global growth in several years driven by well-received skincare innovations. One of Clinique's newest products, the Smart Clinical multidimensional moisturizer line, resonated strongly with ageless consumers, particularly in North America and the UK. In other developments, our Tom Ford Beauty brand launched a luxury skincare collection to complement its successful fragrance and makeup offerings. Our makeup sales grew globally, driven by a sharp uptick in Asia Pacific and Travel Retail, as well as gains in the European region. The deceleration in prestige color cosmetics has been driven by Anglo markets, but growth is still healthy in other geographies. Global companies like ours are well-positioned to grow in the category. Using enhanced data analytics and consumer insights that signal new and fast-growing areas of demand, we invest in the promising subcategories as they emerge. For example, we knew the interest in foundations with skincare benefits was trending. With that insight, we developed new products around our hero foundations that offer hydrating and smoothing benefits. Our foundation business climbed 20% globally. We innovated with great success in other subcategories where we found granular opportunities. For example, MAC introduced Love Me lipstick, a breakthrough weightless and moisturizing formula that offers lasting color. The product helped increase the brand's lip business, which climbed double digits. Overall, our innovation was robust, with new products accounting for 30% of our makeup category this quarter. Turning to our geographies, our growth in China accelerated from the previous quarter, fueled by multiple engines. We had double-digit growth across all categories, all channels, and nearly all brands. Our online business in China was strong; our sales on Tmall doubled with growth across brands. We also successfully partnered with Tmall on special events, such as Jo Malone London Super Brand Day. Additionally, GLAMGLOW launched on the platform in September. Investing in emerging markets remains a strategic priority because we anticipate continued growing demand for prestige beauty from the expanding middle class. Excluding China, as a group, this market rose double digits, and we recruited several new consumers. Standouts included Russia, Mexico, Brazil, and Southeast Asia, and we saw improvements in retail in the Middle East. Our business in Hong Kong was challenged; our sales declined 20% in the quarter, and we have not seen signs of improvement to date. However, since the last downturn in the market, we have repositioned our business and increased sales with local consumers becoming less dependent on tourists, which was the most affected area. Our sales decline in Hong Kong was offset by an acceleration in the rest of Asia, reflecting strong consumer demand for our prestige brands and desirable products. In Europe, the Middle East, and Africa, every market grew, which added another growth driver and broadened our multiple engines. We were encouraged by strengths in the large Western European markets, which advanced as well as many emerging markets in the region, thanks in part to a strong reception of our brand's innovation across categories. The North America market remained challenged by declining makeup sales, mainly in color cosmetics, as well as weak traffic in brick-and-mortar department stores, where we are the largest player. Although, our business generally reflected these trends, there were several bright spots. Our skincare business rose; several brands had higher sales, and we had growth in key subcategories, such as eye treatments and mascara. Typically, skincare makeup growth fluctuates depending on trends and innovation and can accelerate at different rates at different times. However, on average, over the last five years, both categories rose nearly 10% compounded annually in the US. We believe recent declines in color cosmetics in the US are due to several factors. Trends change, and a more natural appearance is now involved, which requires fewer products that went contouring and other looks were popular. Also, the number of new product launches in makeup declined 20% in the last year, including from the brands. In addition, Gen Z consumers are discovering the benefits of skincare, spurred by more social media activity in that category. Our brands continue to innovate strongly in both makeup and skincare. Clinique recently launched a new lipstick collection, which matches the consumer foundation shape with 28 new lipstick colors based on the brand's shade match science. This continues Clinique's customization of beauty products that began with its successful Clinique at the skincare launch. Looking at our business by channel, Travel Retail and online globally again drove our performance. Travel Retail's upward trajectory continued with strong double-digit sales growth, reflecting diversified growth engines across brands worldwide. Our products continue to resonate globally, and like-door growth was robust. Among our top eight brands in the channel, all but one grew double digits at retail. Digital campaigns and pre-ordering aimed at travelers before they start their trip helped boost sales. We expanded distribution for our newer artisanal fragrance brands and there is still much distribution expansion remaining for many brands in our portfolio that are only available in a small percentage of airports. Our online business also climbed strong double digits. All types of online distribution grew substantially, led by third-party sites and retailer sites. Traffic was higher and mobile commerce accounted for more than half of our e-commerce sales. We increased our advertising investment faster than our sales growth and continued to focus our spending on digital advertising, which accounted for 75% of the total. Our digital spending is mainly on advertising, social media communications, and search engines. Our brands are using many digital tools and experimenting with emerging social media platforms to connect with consumers. For example, MAC launched a tool that lets consumers test over 100 lipstick shades on their own face by accessing the camera of their own phone and to simply research and purchasing. La Mer and Bobbi Brown launched voice search on their brand dot com sites in North America. We are proud of our results this quarter and confident we have the right plans in place for the rest of the year. Our brands have created many exciting products and promotions for the holiday period, in-store and online for Cyber Monday and 11/11 in Asia, and we believe consumers will be attracted by our compelling offerings. Looking ahead, we expect to further expand and magnify our multiple engines of growth across categories, brands, channels, and geographies to better manage global volatility. We will continue to leverage our superb skincare growth and expect to gain even greater market share in that category. We have the best diversified pure-play in global prestige beauty with talented global teams and profound local expertise, which makes us well-positioned to pursue the fastest-growing areas around the world for any kind of consumer. At the same time, we will continue to transform our business as we anticipate what lies ahead and strengthen our entrepreneurial and competitive spirits. Now, I will turn the call over to Tracey.

Thank you, Fabrizio, and good morning everyone. As a reminder, my commentary today is adjusted for the items that Rainey mentioned at the beginning of the call, and net sales growth numbers are in constant currency. And now for the quarter results. Net sales for the first quarter rose 12% driven by strong growth in our international regions and in our skincare category. Asia, Travel Retail, and online continued to deliver strong growth, and our European and Latin America market sales growth accelerated, while sales in North America remain challenged. From a geographic standpoint, our Asia Pacific region net sales rose 26%, with more than half of the markets contributing double-digit increases. Sales in Greater China rose strong double-digits. Our sales in Mainland China continued to deliver broad-based growth across cities, brands, categories, and channels as we gained share; and as anticipated, our sales in Hong Kong fell 20%. Among developed markets in APAC, both Japan and Korea delivered double-digit sales growth this quarter. Our sales in Japan, which grew a solid 7% last fiscal year, accelerated even further within the quarter in anticipation of an October 1st VAT increase in the country. In Korea, sales in specialty-multi and online distribution were robust, and we gained share in department stores. Southeast Asia grew double-digits, led by Thailand, Indonesia, and Vietnam. Net sales in our Europe, the Middle East, and Africa region rose 19%, with every market contributing to growth. Our Global Travel Retail business rose strong double-digits, led by quarters across Asia. Strong like-door growth drove the majority of the increase in Travel Retail, and was supplemented by the rapid development of online pre-ordering. Our emerging markets in the region grew high-single digits, led by a double-digit increase in Russia and the Middle East. Western markets grew mid-single digits, led by Switzerland and Greece. Our sales in the UK grew modestly this quarter despite continued challenges in brick-and-mortar retail. Some retailers bought extra stock this quarter ahead of the anticipated hard Brexit, and our online business in the UK continued to grow double-digits. Net sales in the Americas declined 6%. Brick-and-mortar retail remained difficult, especially in department stores. As you know, the makeup category in North America has been declining, and we are the leading prestige company in the category. We continue to invest where we saw the best opportunities for growth. Skincare showed good growth driven by Estee Lauder, Clinique, and La Mer, in their hero franchises. Within makeup, we saw solid growth with some key subcategories such as mascara. While our fragrance business was particularly soft this quarter, it is expected to pick up in the holiday quarter. Looking at the region by channel, North America sales rose in both brand and retailer online, as well as in freestanding retail stores. Our sales in the specialty-multi channel also grew at retail. Our Estee Lauder brand and most luxury brands grew in North America this quarter. In addition, sales in Latin America grew double digits in all major markets. From a category standpoint, skincare led growth this quarter. Net sales accelerated to 25%, with strong contributions from Estee Lauder, La Mer, and Clinique. Innovations such as Estee Lauder Advanced Night Repair Intense, Reset Concentrate, La Mer the Regenerating Serum, and Clinique's Smart-Clinical multi-dimensional line contributed incremental sales and supported hero franchises. The historical strength of Origins and natural skincare helped drive the brand's double-digit gains. Net sales in makeup grew 4%, with strong double-digit growth in Asia and Travel Retail led by strong innovations and support behind foundation and lip products from Estee Lauder, MAC, La Mer, and Tom Ford Beauty. Sales of fragrances declined 1% as sales in luxury and artisanal brands were offset by declines in designer fragrances. Clinique and Estee Lauder, which had a tough comparison to the prior year launch of Beautiful Belle, had some tough comparisons this quarter. Innovations this quarter included Poppy & Barley from Jo Malone, METALLIQUE from Tom Ford, and new City Exclusives from Le Labo. Fragrance sales grew in all international regions but were soft in the Americas region as I mentioned earlier. Our hair care sales declined 4% driven by a tough comparison to the prior year launch of Cherry Almond shampoo and conditioner from Aveda, as well as lower sales from Bumble and bumble in North America. Our gross margin declined 10 basis points compared to the first quarter last year. Higher obsolescence and sourcing costs were mostly offset by pricing and favorable skincare category mix. Operating expenses as a percent of sales improved 120 basis points. Continued leverage of our cost base due to greater efficiencies in our selling model and store operating costs more than covered higher advertising investments to build awareness in critical growth markets and support our innovations globally. Operating income rose 17%, and operating margin increased by 110 basis points. Diluted EPS of $1.67 increased 19% compared to the prior year and grew 20% in constant currency. EPS was higher than expected due to the stronger sales growth, greater operating leverage, and a slightly favorable tax rate. During the quarter, we utilized $170 million in net cash flows from operating activities, which was below the prior year, due primarily to timing differences in accounts payable, and we invested $125 million in capital expenditures. We used $313 million to repurchase 1.6 million shares of our stock and paid $156 million in dividends. We also announced this morning a 12% increase in our quarterly dividend to $0.48 per share. Now, let's turn to our outlook for next quarter and for the full year. We are pleased, obviously, with the strong start to our fiscal year, but we recognize that a variety of macro risks such as ongoing trade tensions, Brexit, and continued challenges in Hong Kong's retail environment could impact our fiscal 2020 results. Nonetheless, we believe our multiple engines of growth strategy will continue to deliver strong global results. For the year, we are raising our sales growth expectation by one point to 8% to 9% in constant currency. This still assumes a moderation of growth in China and Travel Retail in the back half of the year. Despite the market conditions in place today, we expect our North America business to gradually improve, fueled by innovations in skincare and foundations, better fragrance performance during the holiday, and strong growth online. Currency translation is expected to negatively affect reported sales growth by 1 percentage point, reflecting weighted average rates of $1.09 for the euro, $1.23 for the pound, and $7.12 for the won for the fiscal year. EPS is expected to range between $5.85 and $5.93 before restructuring and other charges. This includes approximately $0.05 of dilution from currency translation. As you are most likely aware, currency rates have moved about 3% to 4% since our last guidance, which was based on rates as of June 30th, the spot rate. The won, euro, and pound have all weakened relative to the US dollar and created a currency swing of approximately $0.10 on our annual expectations for EPS. So the currency impact previously was a plus $0.05 that we were expecting for the year and we are now expecting a minus $0.05 EPS impact based on the September 30th spot rates. For the second quarter, net sales are expected to increase approximately 8% to 9% in constant currency. Currency translation is expected to negatively impact growth by 1 percentage point. Therefore, we expect reported net sales to grow between 7% and 8%. EPS is forecasted between $1.83 and $1.86 before restructuring charges. This includes about $0.02 dilution from currency. With a strong start to the fiscal year, we are optimistic about our ability to execute our plans to deliver another year of top-line growth, margin expansion, and double-digit EPS improvement. That concludes our prepared remarks. We'll be happy to take your questions at this time.

The floor is now open for questions. Our first question today comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks so much. I wanted to ask a little bit about the US and distribution footprint because the commentary we all know of course that the specialty-multi channel has slowed a bit. And Tracey, your comment I think was pretty specific that you still saw growth in the channel at retail. So I guess one, can you talk about any inventory destocking that might be going on in that channel? And two, what might be happening there in terms of foot traffic and takeaway because that might tell a slightly better story in terms of the health of the channel versus, I think what we're all worried about in terms of maybe like a structural slowdown of the channel? Thanks.

Let me begin by addressing this question. The main point is that the makeup market has softened, with some companies and retailers being more affected than others. This has led to fluctuations, and in that quarter, we managed around this new reality. The crucial idea is that we can anticipate and respond to trends effectively, which is why we mitigated the impact of the fluctuation in makeup by focusing more on our skincare business and enhancing our distribution strategy for long-term success. We are directing our distribution towards high-traffic, high-performing channels and retailers gradually over time. Our strategy remains intact. In North America, we have significantly enhanced our team, capabilities, and our ability to manage the market at a granular level, allowing us to quickly anticipate and react to these trends. We have gained better consumer insights, increased local relevance, and improved our online operations, which have proven to be robust. We are dedicated to enhancing North America trends throughout this fiscal year, and even more so in the long term. This quarter primarily reflected a weaker-than-expected performance in the color makeup segment.

Okay, that's great. Thank you. In that regard, Fabrizio, you're pointing out some of the changes that you've already started to make in the US and that you had actually talked about, and I think some of the things that Chris Good highlighted at your Analyst Day in the spring were really interesting, so it was a type of segmentation. So when do we start to see or do you think we start to see that impact performance? Is that kind of why you're speaking to the forecasted improvement from here? It's less about the makeup category and getting healthier and more about some of Estee Lauder specific proactive hyper-segmentation coming into play? Is that fair?

Yes, that's fair. It is going to be more proactive segmentation. Also, it's going to be innovation focused on this proactive segmentation. That's why in my prepared remarks I explained that our innovation, for example, the Clinique innovation on makeup is more customized exactly to the opportunity we identified. I also explained that frankly, when you don't look at the last quarter or the last six months but the last five years, the categories, makeup, skincare, or even the subcategories like color cosmetics versus the foundation or moisturizer versus anti-aging had different situations and different trends. On average, over the years, these categories have all been growing pretty well. In this moment, there is a softness in color makeup for specific consumer-driven reasons. I personally believe this will come back. It has always come back up and down over time.

I would also add more in that. We did have an unusual anniversarying of a very strong launch period last quarter from a fragrance standpoint last year with Estee Lauder Beautiful Belle and some of our other designer fragrances, and we are comfortable and quite encouraged by our holiday programs for the second quarter.

Yes. I also want to clarify because maybe this is not completely coming out from the fragrance number that our high-end fragrances, such as Jo Malone and Tom Ford, continue to grow very strongly in North America, globally and in North America. So the fragrance number is 100% influenced by the base period of the launch of Estee Lauder in the past and scent designer fragrance performance, but our high-end fragrances continue to be strong performances, continue to become a bigger percentage of our business, and we are at the moment of tilting the proportion.

The next question is from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey, good morning. So I wanted to flush out a bit more the lower global prestige beauty category revenue growth guidance you gave in your release versus last quarter. Can you give us a sense of which geographies and product categories are driving that lower growth expectation? Is it just mainly US makeup or are there other areas, and then obviously you raised your own internal sales forecasts? So just help us understand the context of greater confidence in Esto as a market share trend within that lower prestige category growth?

Yes. First of all, I want to emphasize that our market estimate remains very strong, with growth expectations of 5% to 6%, which is at the higher end of historical averages. We continue to believe that the prestige beauty segment will be among the fastest-growing markets in consumer goods and will maintain this position above historical averages. This is an excellent time for overall growth. We have adjusted our outlook due to the recent softening in color makeup, particularly in the Anglo markets like North America, the UK, and Australia. Additionally, this adjustment reflects our assumption of a slowdown in growth in China and Travel Retail, even though we have not yet observed this trend. We want to be consistent with our future forecasts. Despite this, we still see the consumer market as very strong, and we anticipate this robustness to continue.

And obviously taking up the year certainly reflects the performance that we saw in the first quarter.

The next question is from Olivia Tong with Bank of America. Please go ahead.

Great, thanks. Just sort of following up a little bit on that. Can you talk about your expectation for market share gains, particularly given that a key competitor's luxury division at least this quarter outpaced your growth? Now, clearly, Asia continues to be fantastic. Is there more coming there to drive even greater improvement, more in terms of the US rebound? You talked a little bit about that in the prepared remarks, even more doors, even better innovation? And maybe if you could just sort of, if possible, on the category growth, just sort of talk through the prestige growth where your expectation is going in makeup?

So I'll start and then Fabrizio will continue. So, Olivia, we're seeing strong growth in Asia. We're seeing very strong growth, as we've called out previously in Travel Retail. We're seeing also an acceleration in EMEA as well. Some of the things that give us confidence in terms of gaining market share, it's less about North America at the moment, although we clearly expect to see, as I said in my prepared remarks, modest improvements in North America throughout the course of the year. But from a share standpoint, we really expect to gain share outside of North America in our international markets as well as good growth in online as well.

Yes. In addition to what Tracey explained, the strength of this quarter and the last two years indicates that we are clearly outpacing the market and gaining market share. We do not plan to change our approach; we are consistently growing our market share. Our strategy for increasing market share is not to invest heavily in stable markets for a zero-sum battle. Instead, we focus on identifying growth opportunities through our Compass, allowing us to build market share at the onset of growth trends. For instance, we are currently gaining significant market share in China and in all emerging markets globally. We are also expanding our market share in Western Europe and making gains in several categories in the UK due to the market softness. We seek to increase market share by anticipating future growth in key areas. Our market share is also influenced by the mix of our high-share markets, which will grow over time, enhancing our global market share. This approach is long-term focused, ensuring efficiency and excellent returns on our investments in market share growth, which I monitor daily. Another major factor driving market share growth is innovation. We have seen robust results from our innovations and have dramatically improved our process. Currently, about 70% of our innovations go from concept to market within 12 months, and many, particularly in makeup, within six months. This was not achievable in the past and has bolstered our capacity to grow market share through innovation worldwide. Lastly, our Leading Beauty Forward initiatives have provided us with greater flexibility to invest in advertising, which is another key tool for enhancing our global market share.

The next question is from Ali Dibadj with Bernstein. Please go ahead.

Thanks. Fabrizio, that's a very good segue to my question actually, and recognizing very much the share gains that you've developed and growing the beauty category even as it slows the gap in fact, as to your point continues to expand as you continue to outgrow even further the category. I guess my question is what levers do you have at your disposal if the top line of the category slows even more? What levers do you have at your disposal to keep growing top line, keep growing margins if it really gets tougher from here? Would you just continue to invest more in advertising and innovation like you just described? Would you acquire more? Would you lever the balance sheet more and buy back stock more? Are there new expansions in geographies that you take advantage of? Could you cut costs a lot further? I guess I'm trying to get a better sense of what's the contingency plan if the world gets much tougher from here?

The contingency plan is the diversification of our business in the sense that we believe that the total beauty business globally will continue to grow healthy, as I just explained in the previous question. We can argue, if this is 5% to 6% or 6% to 7%, but those are the recent numbers. This is sustainable in the long term, as we have explained in our Analyst Day. So that being the base, however, as we have demonstrated, there could be in a given market, a given category, which is softer in this moment is color makeup in the United States as an example. What we do is continue to try to improve this category and use the softness also to build some market share. Most importantly, we are going to diversify our investment, our innovation, our marketing activation, and consumer repeat purchase activities where there is growth. Today we have the agility to move investment from maybe temporarily soft markets or categories to very, very high-growth markets and categories. This agility has improved thanks to the increase of variable costs and the reduction of fixed costs that Leading Beauty Forward provides and our flexibility to invest in advertising when needed. So, basically, the overall strategic answer to your question is that the flexibility we have is part of our multiple engine or growth strategy and the ability to continuously invest in where there is growth, where the return of our investment will be the highest, not only financially but also in terms of growth in market share. Then going more specifically to the flexibility, I think this quarter, you can read it in many different ways, but for us it’s a terrific demonstration of our multiple engines of growth. We are delivering a 12% growth globally, and despite the color makeup having one of the softer trends in Anglo markets in the last years, Hong Kong has been difficult and the North America business in total had a softer market than expected. Why? Because we have accelerated market share and deployed innovation in skincare in a terrific way across the globe in every single market. This quarter, 94% of our brands grew; basically, all our portfolios are growing because Asia has further accelerated. China has further accelerated. Travel Retail has been super strong. Online continues to grow at the same strong level that's been growing for some years. In every single online channel, one data point which is interesting is our direct-to-consumer part of online, meaning where we have direct-to-consumer which includes our brand dot com and Tmall, has been growing at 40% plus. We continue achieving more direct contact with the consumers via that. We've been able, despite this area of softness, to focus on the area of strengths, adding total to meet our growth forecast. I think this is the key sign that we are trying to explain is that the secret is not never having something in the world that doesn't work. With such a big category, something will go wrong somewhere, but now we have the flexibility to move in order to always try our best to deliver the total and progress the total in terms of growth, EPS, and market share.

The next question is from Rob Ottenstein with Evercore. Please go ahead.

Thank you very much. I'd like to focus more on China and ask a few questions. First, when you mentioned that China had accelerated, was that in terms of your business and market share, or was it the overall market? Second, over the past 12 months, have you observed any changes in the Chinese market or made any adjustments that could give us a better understanding of the situation on the ground? Finally, based on our analysis of media reports from China, it seems that pre-sales for 11/11 are achieving record numbers. Is that accurate, and is that trend continuing? Thank you.

Let's start with the core of your question. The China market continued to grow, particularly in beauty, which is above 20%. The market is very solid. We grew significantly more than that and gained considerable market share. In the recent quarter, we acquired almost 2 full points of market share, indicating our strong position. What is driving this? First, we are committed to China for the long term, supported by a local organization that understands the market's nuances. We are investing across all growth areas. Right now in China, growth is not only occurring in Tier 1 and Tier 2 cities, which has been consistent for some time, but also in Tier 3 and Tier 4 cities, which are experiencing rapid acceleration as reflected in the growth of Tmall. Let me clarify the situation. Historically, there was no national advertising in China. We could only invest in areas where we had distribution; for instance, if there were stores in Shanghai, we could promote in that locality. With social media becoming widespread, advertising has a national reach. This allows us to create demand on a national scale, even if our physical distribution is limited. Our brand is present in 121 cities, yet social media influences demand in over 600 cities. Many cities have millions of residents with a burgeoning middle class that currently lacks physical distribution access. The main contributors to their consumption are Travel Retail, Tmall, and our online brand sites. Eventually, distribution will grow, and physical presence will expand into these cities. For now, online is the primary means of meeting demand. This long-term growth is driven by the middle-class demographic and the Chinese population's passion for beauty, which extends to the broader Asian community. This trend suggests that our position is robust, and the long-term market outlook remains very promising.

The next question is from Wendy Nicholson with Citi. Please go ahead.

Hi, I have two questions if that's alright. First, regarding the balance sheet, your cash balance keeps increasing, and I assume you're planning to support the stock by buying back more soon. It seems there is a reluctance towards acquisitions at the moment. Can you share your thoughts on being more aggressive with the repurchase strategy? What is your approach regarding the growing cash balance? Secondly, could you provide some insight on the gross margin? It has been under pressure for several years, which surprises me because I thought skincare was your highest gross margin business. Given the substantial growth, I would have expected the gross margin to start increasing again. A bit of clarification on that would be appreciated. Thanks.

Let me address your second question, Wendy. There are numerous factors that influence gross margin. Skincare positively contributes to gross margin, and some sales channels also benefit it. As we've indicated, our growth is primarily driven by Asian markets, and you know our presence there. We are facing higher supply chain costs due to the strong double-digit growth we’ve experienced, especially in the eastern regions, which has led to increased inventory and transit expenses. We've also included some elevated tariffs in our gross margin calculations. We're observing some favorable shifts in category and geographic mix, but these are balanced out by increased freight costs, obsolescence, and other tariff-related supply chain expenses. Regarding the balance sheet, our general approach to free cash flow is to return it to shareholders if we’re not pursuing any acquisitions. We consistently seek strategic acquisition opportunities that can drive incremental sales and profit growth. We also have minority investments that we can potentially acquire. Thus, we view acquisitions as a vital drive for strategic growth, focusing on those that align well with our portfolio. If there aren’t suitable acquisitions at the appropriate price representing new opportunities, we typically return 100% of the free cash flow to shareholders through dividends and share repurchase actions. Additionally, we have increased our capital expenditures this year to reinvest in the business to support long-term growth. Although our cash balance is slightly higher, we're allocating our capital to areas that yield the highest returns for both our strategies and our shareholders.

The next question is from Mark with Stifel. Please go ahead.

Thanks and good morning, everybody. A couple of clarifications, please. So the VAT benefit in Japan, how much was the benefit? Was it material in the quarter? And is there any expectations that that comes out of the December quarter? And then your category growth expectation, I was under the impression that you had anticipated a moderation at some point in time in China when you gave it originally. So your comment in addition to North America weakness was, I guess, somewhat surprising, or maybe I misinterpreted it. So maybe if you could talk about kind of the confluence of those expecting China to already decelerate and yet taking your global growth rate down. And kind of related to the last one, how do you think about North America over the balance of the year? You had talked about it, anticipated to stabilize; is that still the expectation, and what does stabilize kind of mean?

Okay, let me start. I'll start with your question on Japan. So as I'm sure you're aware, the Japan market had a VAT increase starting on October 1st. We do see some acceleration of purchases into the month prior to the increase, which is expected. It typically normalizes out during the course of the year. So the reason I commented on the fact that we're coming off a 7% growth last year from Japan is that we certainly expect Japan for the year will normalize out to the levels of very strong growth that we've seen, and we're very pleased with the pickup that we've seen in Japan over the last couple of years, really a testament to the great team that we have in Japan and what they've been doing in the market. As it relates to North America, we did say, and I did say in my prepared remarks, we expect gradual improvement. We discussed the fact that we have seen further deceleration in North America. Fabrizio talked about the color makeup challenges that we, along with others, have spoken about in the market. Depending on your definition of stabilization, we certainly expect to see improvement from the results that we saw in the first quarter. Again, we had some unusual anniversarying items in the first quarter as well, but we expect to see gradual improvement from the first quarter results throughout the balance of the year.

And I think the other part you referred to regarding China. We said our market point of view is that 5% to 6% growth is a super strong growth that will continue at the high end as explained of the historical range, but we have reflected the softening of the makeup North America market in our global estimate. We also continue to assume that there could be a softening of the China market in the future, but as I said, we have not seen it yet. I just commented that actually we see an acceleration in this moment, but we believe this is a prudent assumption in the current global economic situation.

The next question is from Fulvio with Berenberg. Please go ahead.

Yes. Good morning, and thank you for taking my questions. Just on that last comment you made, Fabrizio, about the potential for a slowdown in China. I mean, given the comments that you've also made during this call about the contingencies, the diversification of your business, the ability to quickly react and adapt and go after new pockets of growth. How should we then read that in reference to the guidance that you've given? Because I guess if you think about what you've delivered, what you expect to deliver in the second quarter, your full year guidance implies just over 5% organic growth in the second half. I'm just sort of trying to understand why you couldn't use all the tools that you've got available now to offset potentially some of that China slowdown if and when it comes in the second half to still generate a high level of growth?

So, I think this is Tracey, and then Fabrizio will respond. In the second half, I believe your numbers are slightly weak. If you calculate, it's more in the 6% to 7% range regarding our expectations for the second half of the year, considering the moderation we discussed concerning China and Travel Retail. Given the global backdrop and environment, this is unrelated to our business. It reflects our perspective on potential developments in global markets, considering the occurrence of macroeconomic slowdowns. Although we haven't observed this trend in China or seen it impact our overall Asia business, which is strong, it is a possibility. As we plan our business and resources for the second half of the year, if the slowdown doesn't materialize, we will continue to achieve results similar to those we saw in the first quarter. However, we believe it is prudent to anticipate what many economists are projecting regarding a slowdown in the second half of the year.

Yes. In fact, to go to your point, I've explained all our great strengths, strategic strengths, flexibility, agility, and the ability to leverage all channels. That's why we believe that even if there was a slowdown, we will continue to build market share and we'll continue to be ahead of the market. That's the strengths we've built. If there will be no slowdown, we will over-deliver, and that's what happened this quarter. It happened, frankly, even in case there was one element that actually was worse than our expectation. There was the makeup color market in the US. Even in the presence of one element that was actually a surprise, we still over-delivered because all the other elements, first of all, the strategic execution that I commented on, and second, the overall trend of the market in Asia is now slow down and our strategy execution is excellent, so we have over-delivered. As you see also, currencies have impacted in a way that were different than our guidance just a few months ago. So there are many variables that we are trying to take into account, but the strengths of our model and the ability to navigate good times and bad times, growing market share, doing better than market that I believe is by now really proven.

We do have time for one final question, that question will come from Linda Bolton with D. A. Davidson. Please go ahead.

So I was wondering if you could comment on this concept of your hero products, which drive your core franchises so successfully. I think in the past, you had commented that some of the indie brands in North America may not be so good at that. Have you detected any increased capability on their part to develop these hero products, which could be further threatening to your market share? Can you just comment on that? And also the idea that your costs to attract attention on first trial are rising over time; can you comment on that trend and whether there's been any change there?

Yes, interesting question. As I explained also in my prepared remarks, what we define hero products in our portfolio is actually products with high repeat rates and a decent purchase frequency, meaning products that have not only the power to make the consumer loyal, but also they have to bring the consumer to the repurchase return that creates traffic in stores for our partners and for ourselves. These products are very precious in the portfolio, and to build products like that, marketing is not enough. You need superior quality and great performance because I know many people, including myself, who are tempted to try new stuff one time to try new things, but I don't know any person that buys these things the second time if this product didn't perform in line with expectations, and that's what we mean. We invest in high-quality R&D, high-quality manufacturing, safety, clinical tests, and products that really work and not only they work in terms of performance and they have the kind of texture and usage experience that make the consumer delighted about what design and that investment is at the end the essence of our premium pricing strategy. This investment creates repeat purchase. This is still a very big differentiator between on average our portfolio and the portfolio of indie brands. If you look at the numbers, the difference in repeat is still significant because also the difference of repeat is driven by quality, innovation, and by the ability to delight the consumer over the long term. We believe this is a strength that is not being mitigated. In your question, you speak about a new threat. Frankly, on that topic, I don't see new threats. I actually see new strengths, and it is from new strengths for our brands, not for the indie brands. To prove that is that this is the first quarter in some time where each one of our big brands is growing globally, and the total of them is growing faster than any combination of our indie brands; so it is an extraordinary, if you want proof of the point, that repeat purchase is the biggest driver of prestige beauty.

That concludes today's question and answer session. If you were unable to join for the entire call, the playback will be available at 1:00 PM Eastern Time today through November 14th. To hear a recording of the call, please dial 855-859-2056, passcode 799-6338. That concludes today's Estee Lauder conference call. I would like to thank you all for your participation and wish you all a good day.