Estée Lauder Companies Aktie

Good morning, everybody. Welcome. I am very excited to welcome the Estée Lauder Companies back to the stage here in Paris, and I'm equally excited to welcome back both President and CEO, Stephane de la Faverie; as well as Executive Vice President and Chief Value Chain Officer; Roberto Canevari. .

Behind me, for those in the room, you will see Estée Lauder's disclosure slide. Please take heed. And for those of you who are listening in online, you will find the same disclosures on Estée Lauder's Investor Relations website.

And with that, Stephane, Roberto, we'll kick it off.

Looking forward to it.

Okay.

Thanks for having us.

Good. So a year ago, when we were on this stage, we spoke a bit about portfolio optimization. And in that context, the conversation was mostly about organic optimization over time. And just to, I think, address maybe probably elephant in the room, you've obviously, since that time, looked at a very large acquisition of a portfolio of brands, and you've continued to be active in minority and majority investments and other assets, as well as hiring advisers to overall do a portfolio review.

So I guess, as we kind of reset and think about the business from here and your strategy from here, how do we think about the role of M&A going forward? Do you have the right portfolio of brands to achieve what your aspirations are? Or do you need something more transformational from an M&A perspective to achieve the value creation targets that you set?

Thank you for addressing the elephant in the room on the first question, which I'm sure everybody is waiting for. So let me start by the end of your question. Do we have the right portfolio of brands to compete in the prestige beauty market today? And the answer is absolutely yes. I think we have a fantastic portfolio of brands today. We have many markets around the world where we're gaining market share. China, like even in the U.S., we are in the right trajectory in the emerging markets, online, around the world.

So I believe from our portfolio, and we divide our portfolio of brands in 3 groups, you have what we call the large brands that are $1 billion or close to $1 billion and more. Anything that is between $500 million in net sales and $1 billion, and the smaller brands. And I have to say, our large brands, our midsized brands are very, very good, and we have some really up-and-coming smaller brands that are growing fast. Think about a brand like KILIAN that now is the fastest-growing brand in the company. We have Le Labo as a midsized brand that is the second fastest-growing brand in the company, and La Mer within some of our largest brands that is gaining market share in pretty much every market around the world, let alone brands like The Ordinary, which are like performing extremely well.

So I would say I'm very proud of like the portfolio of brands. And when we were on stage last year, I think there was still a lot of question mark of are our brands impaired or not because obviously, we had like 3 years of deleverage, there was a question mark. And I think this year, when you look at us being able to just go back into growth and in many geographies and channels and market share growth, I think it is for me the proof that our portfolio of brands is very strong.

But I've also been very public that we will be part of the M&A discussion. We've always been part of the M&A conversation. You think about it of the 25 brands plus that we have in the portfolio, 4 were created in the company. The rest have been small or large-scale innovation, the 2 largest ones being Tom Ford and DECIEM that have been done over the past like 5 years. So we will be part of it. Sometimes, we have to revisit the portfolio, and we are looking at it. I've been clear that we've hired advisers to look at some of our brands. Sometimes brands don't fit anymore the consumer needs, and this is what we are in the process of relooking at.

Now to address the elephant in the room and Puig, obviously, that has been on many people's mind. When you look at what we discussed yesterday about Beauty Reimagined, Beauty Reimagined at its core, obviously, has the 5 pillars that I think everybody knows very well. But it was about the rebalancing of the growth from a geography, from a category standpoint, and from a channel standpoint. And it is true, when you look at the portfolio of our company in prestige beauty, we are the leader in skin care around the world with very strong position in Asia Pacific and many other markets around the world. We are the leader in makeup, especially with brands like MAC.

But obviously, in fragrances, this is the smallest of the 3 large ones. Obviously, hair care, we are playing a much smaller role in the prestige market, even though we see a great potential. We're extremely proud of the portfolio of luxury brand artisanal niche, however people are calling them, that we have from Le Labo, Tom Ford, Jo Malone, KILIAN, and so on and so forth. But it is true that when you go from East to West, the more west you go, the higher the penetration of prestige fragrance is, especially in Europe and in Latin America. Europe, you are roughly 40%, 50% of the business that is in prestige fragrances. And in Latin America, it can be in excess of 50%, 60%. And we have less of a presence on this one, so if an opportunity one day comes and we can look at it.

But I want to be very clear. It has to be accretive from a growth standpoint, has to be accretive from a profitability standpoint. Over time, it has to create shareholder value. And if we cannot reach the growth and the profitability at the right price point, then it is not an option. And this is why, obviously, this deal didn't go through, because it was not at the right price. And this is, as the President or the CEO of the Estée Lauder Companies, nothing that I will ever do to the Companies or like to our shareholders to just do something that doesn't make sense financially. Strategically, it may make sense, because the complementarity of the portfolio are very interesting, but it has to make sense financially.

And I just want to address like one of the thing also as part of a large-size acquisition, merger, whatever, even though it's maybe not at the heart of what we are seeking within Beauty Reimagined, something that is merging transformational, we will continue to look at opportunities. But one of the things that people have questioned, is it the right time? And that's what I just also wanted to address, because as part of the PRGP, our profit recovery and growth plan, we're in the midst of a major transformation from an operational standpoint, cultural and leadership standpoint.

I want to be very clear. This transformation in 29 days is over in terms of approval of the PRGP. So by the end of June 30 or the end of our fiscal year, we are done. I would have been approving with the leadership team, 100% of the business case, which we've expanded, but the execution of this transformation will be largely completed by the end of this calendar year, that it is the back office, that is the transfer of our media planning with like WPP or the integration with Shopify from a direct-to-consumer. This will be largely done by the end of 2026, which allows us to obviously take more transformational deal if we decide to in the future. But again, it has to be at the right price, and it has to make sense within the existing portfolio of The Estée Lauder Companies.

Great. Okay. Thank you. So as you say, the PRGP kind of winding down and being fully embedded in execution. It's 18 months, thereabouts, since Beauty Reimagined was rolled out. I guess how do you parse or how do you respond to, I guess, concerns or criticism that, okay, Estée Lauder has started to put some points on the board, but it's low-hanging fruit. How do we parse out between what's low-hanging fruit versus what's more structural momentum that you can build on as you go into the future?

I think it's a really good question, to start with the market. So what is seen as low-hanging fruit is hard work from the team, and I'm extremely proud of the work that the team has put like over the years, the last 2 years really to just do this transformation. And it's not something that is insignificant. It is the biggest operational transformation that we've ever done. And we are doing it in a market that is below historical growth algorithm. We believe that especially calendar '25, I think prestige beauty grew 2% to 3%. In this context, I've been very clear at the last earnings calls that this year, we are going to deliver the top end of our guidance of 3%. So today, I confirm again, we will be in position to deliver the 3% growth for the year, which will translate into slightly higher retail sales growth. There's still a bit of a disconnect between retail to net for us. And in many markets like in China, in emerging markets, online, we believe that we are gaining strong market share. And we can elaborate on that in more detail if you want to. So I think we have a lot of great momentum.

This momentum is allowing us also to confirm today the preliminary view that we've given during the earnings calls of 3% to 5% net sales growth for next year, which will translate to roughly 4% to 6% in retail. Again, because of the switch of the channels that we are going from more traditional channel to specialty-multi platform like Amazon, some of the accounting rules from gross to net is slightly different, which we have a higher retail sales. With 4% to 6% at the mid to the higher point, we will gain market share globally. And that's the one thing that I would like everybody to remember is, within the year after the PRGP, Estée Lauder Companies will be back into market share gain at the mid to the higher point of the preliminary view that we're getting.

And we are doing it also by continuing to expand profitability. We've given also a range of 12.5% to 13% like OI for next fiscal year. And that's the beginning and the continuation of us being able to just like recover to future mid-teens in terms of profitability for The Estée Lauder Companies. So the thing I would say on the 5 pillars of Beauty Reimagined, everything is moving in the right direction. From the consumer coverage, we've really like deployed our brands where consumers are. We have 12 brands in 10 markets now today like with Amazon. We have like many brands in TikTok Shop around the world. We've expanded on vip.com in China. We expanded on Shopee in Southeast Asia. So many, many like great opportunities.

From an innovation standpoint, we are accelerating. If you remember, I've put a stance of saying that at least 25% of our sales will come from innovation and that we will triple the number of innovation coming to market in less than a year. We are making a lot of progress. This year, we are going to deliver roughly 24%, 25% of our sales from innovation. So it's a net acceleration compared to where we used to be. And in terms of bringing innovation to market in less than a year, we are in the high double digit for high teens at this point, which obviously is very encouraging, and we're moving fast and the category that is benefiting from the most is makeup.

The third one is we are accelerating our consumer-facing. I was very clear at the beginning of the journey of Beauty Reimagined. It was not only we could have taken the benefit of the PRGP, dropped everything to the bottom line, everybody would have been happy with like a net increase of the EPS at a moment in time. But it was very clear for us, we needed to reignite the retail demand and think about like the U.S. After a decade of market share erosion for The Estée Lauder Companies, now we are gaining market share in volume in all 4 categories. And for me, that's a very good sign that we are now going into stabilization to acceleration because we are recruiting a lot of consumers.

The fourth pillar of PRGP, we've expanded it in the last call. Now the benefits are going to be between $1 billion and $1.1 billion of benefit for the company. So it's not insignificant, but think about more the benefit and the agility that we are creating into the company, the speed. And at this moment in time, after 3 years of deleverage being back into positive, confirming the top end of the guidance this year, and already putting a top guidance for next year in the midst of the current environment with high level of volatility should hopefully give a lot of confidence that we have the momentum to go back into market share gain.

And the last one, certainly, the one that I'm the most proud of is the cultural transformation of the company. We've changed the ways of working. We're much more agile. We have one team. We've changed also the incentive program of the leadership team that is really rewarding on the success of the One ELC, so the one company. And we're seeing today, we've already -- 7,000 positions that we've already eliminated and you know we're going to go anywhere between 9,000 to 10,000 that we're seeing a lot more agility and speed and collaboration within the company with clear sense of who does what between the brands, the regions, the affiliate and, obviously, with the very strong support of the function like obviously, Roberto is doing.

Yes. And Roberto, underpinning all of that has been a number of changes on the supply chain. You spoke about, last year as well, supporting Beauty Reimagined and PRGP. I guess, as -- last year, we were talking about tariffs. I guess, there's still tariff uncertainty. We now have other uncertainties related to conflict. I guess, when you step back and think about the supply chain journey and how you're handling current volatility, what more is there to do from here? And how would navigating the current environment look differently a couple of years ago versus what you're able to do today?

Yes. Well, a number of things. Maybe let me start with what we are doing, and then I'll explain how and give some elements. What we're doing is we're definitely driving what we call our dynamic value chain or supply chain. Dynamic value chain has 3 ingredients, it's speed, so time to market, has agility, and resilience given what is happening around us. Those 3 elements are the principle of dynamic value chain.

Why we're doing it? Agility is needed now. We want to enable the growth wherever it comes from, however it comes from, and what is happening around us requires quite a lot of agility. But at the same time, we want to continue the journey of gross margin expansion. That has been very successful so far, and we want to continue to do it while we give this speed and agility. So that's what we're trying to do. The how is insisting a lot on our strategy that we started a while ago on regionalizing our network, both the manufacturing network, what we have, but also the sourcing network with our supplier partners.

I'm very proud of the network that we have built today, and I think it's one of the most diversified of the industry. We have strong presence in the 3 major continents that we operate. The idea is basically, if I simplify, it's source where we make and make where we sell. Now some data points to explain what I'm saying. 60% plus of our finished good production is done in the region we sell. 70% and growing -- 70% of the raw and packaging material is sourced in the region where we make. So that's where we are today and the journey continues. Of course, we want to make it as efficient as possible, but that's the journey. That's where we are today.

And on top of that, we qualify for the same product. We can qualify always multiple sources of manufacturing, so that we can give optionality to our network. And if something is happening, we can play with the diversified network. That's really what is happening. Again, more specific example. I think last year, we were mentioning about our factory in Japan, the Sakura factory in Japan. In less than 12 months, including the reason that we were saying before tariffs, we moved from 10 million units produced to 80-plus million units produced in less than 12 months.

Moving the network around to mitigate tariffs. So now this year, we can say what we have done. Last year, we were saying that's what we plan to do. That's what we have done. We have China today as sourcing from North America, which is less than 10%. All of that has allowed us to mitigate 60% plus of our tariff exposure. So that is what we are doing from a manufacturing and sourcing standpoint. But there is more. What is happening today, fulfillment is another challenge. So what we're doing, part of the same transformation and fulfillment, we've been doing 3 things essentially: simplifying the network, so reducing stock points, simplifying the network, variabilizing the cost as much as we can to follow, I mean, the volatility that we have, but also investing in key strategic places to be closer to consumers, so that we can anticipate stock where it's needed for resilience.

We have done one in Dubai and it is helping quite a lot today to supply in that area. We have one in Hainan for travel retail, I think it's the first beauty, I think, distribution center in Hainan, and it's a key presence for us. We have simplified our network and invested in a state-of-the-art in Shanghai. That's from a fulfillment or stock point standpoint.

And then we work a lot, and again, especially relevant in this period, on alternative freight lanes. Example, there might be disruption in global supply chains as we have seen, and unfortunately, in the past. What we're doing is multiple sources, multiple lanes. So we're using Asia to Europe sea freight, air freight, but they could be challenged. So we're using now also a train from China to Germany. And this train has a pretty good lead time, and it's definitely competitive, much more competitive from a cost standpoint than air freight. So basically, we're giving us a lot of optionality to play with the network.

Best example, and I have here the product, not by chance, but I have the everyday product. This is our Double Wear, Estée Lauder Double Wear, so one of the main products we have, which we launched recently. We have applied all -- and this is a big one. This is several hundred millions of gross sales, 900 SKUs, 70 shades, 45 million units. So that's a big one. It's 98% regionalized from a manufacturing and finished product standpoint, almost 100%. It's 100% regionalized from a packaging standpoint, and the lead time is 20% faster. So that is kind of trying to give proof point of a theory that I was saying at the beginning, but this is really happening as we speak. And we continue.

And you see this is why this agility that we've built in the supply chain allows us in this moment in time of high volatility and disruption even with the Middle East to just be able to yet still confirm our guidance because obviously, we are mitigating the impact. And in this moment in time, the impact from the Middle East has been minimal for us because of how we've been using the agility and the speed of our value chain. And that redundancy, regionalization, that was comparatively elevated from what it was even a year ago.

Yes. Okay. Maybe you can tag team on this one. So you've spoken in the past about the need to reenergize recruitment, right? And you talked about in the U.S. about volume growth, but not necessarily market share growth from a value perspective. How do you balance accessibility -- increasing accessibility into prestige and into your portfolio without blurring the lines between prestige and mass or diluting brand equity?

Yes, that's a very good question because we remain a pure play in prestige beauty, prestige and luxury. So we're very careful and the attention we put on brand desirability first. So accessibility in this moment in time doesn't mean that you are diluting your brand equity. And this is also the reason why we are combining consumer coverage with great new innovation and consumer-facing investment. And I think once you start missing one of the elements, you're missing actually the magic equation about how do you maintain and you continue to build the equity.

So when you think about the reach of consumers, yes, we're continuing to invest in top-end luxury distribution like top-end department stores or freestanding stores. But at the same time, we go all the way to platforms like Amazon that allows us to just like get reach. But there's a clear understanding of where the experience is and where the replenishment is. And so today, we have a very good understanding and control of the ecosystem of where discovery starts and where retention continues. And that is very important. Remember, we are not in a business of only acquisition. We are actually, first and foremost, in a business of retention, because this is where the profitability will start like building.

Now you can do it also by having the right innovation. And innovation, I was very clear when we say we want to accelerate innovation. Now it's not necessarily in quantities. Now it depends. On makeup, you need more innovation, you may be less in skin care and fragrances. But it's also playing the size, the impact, the breakthrough, but also at the same time, sizing and price points. I've been very clear that on innovation today, we're bringing more innovation at the entry of prestige, especially on makeup or brands like The Ordinary and Clinique that are allowing us to just reignite the recruitment wheel. But at every single time, we are doing it at accretion of gross margin. There is no innovation that we are allowing to launch in the portfolio that are not gross margin accretive to the total. So we're doing that.

And then by increasing consumer-facing investment -- remember, last quarter, we increased consumer-facing by 5%, every quarter before it was anywhere between 3% and 4%. That allows us to put more investment into consumer-facing, driving equity, driving reach. So think about the media today, which is equity first, then desirability for reach, and making sure that we're putting our brand into culture. Just to illustrate one good example with MAC. MAC, we've expanded MAC into Sephora, both into the U.S. and into the Middle East, that gives us access to the largest part of the makeup business in this region. We went after more innovation like Powder Kiss, for instance, which has been a global success in the lipstick area. At the lower price point, we have reignited the retail.

And then third, we've put back the brand into culture. We've hired ambassadors like Doja Cat, like Kris Jenner, et cetera. And now as a result, in the U.S. for the months of the last quarter, the first quarter of the calendar year, the MAC brand grew 250 basis points of market share in lip gloss and grew like close to triple digits in lip in total. So that's actually the model that we are applying on every single of our brand. When you combine equity, desirability and culture is how you maintain the strong desirability of the brand overall.

The target to 30% new products by innovation, is that more innovation? Or is that more effective bigger innovation? Is it both? And I guess, what are the bottlenecks or what needs to happen from here to hit that target?

Maybe we'll tag team on these 2 things because I think there is like what we do on a product standpoint and what we're doing from a value chain standpoint to get there. I think it's a combination depending on the categories. Like I said, I think makeup is more innovation. Skin care and fragrances is bigger and most disruptive innovation. I think we look at innovation in about 3 buckets, the breakthrough innovation. So these ones have to be like what we do, for instance, in longevity with Estée Lauder or Crème de la Mer that brought like regenerating night cream, both like face and eye. These are smaller in quantities, but big in size, really like we want to place any of this innovation in the top 3 of the subcategory we are launching every single time.

Then there is what we call on-trend innovation. In makeup, you have to be fast. Lip oil is trending. Okay, you need to just like bring a lip oil in the market in 6 to 12 months, or you're missing potentially the wave. Or even, if not you are missing it, the cost of entry becomes so high because there's too many players. So the combination of being fast at the entry of where subcategories trending is absolutely the key. And that's why I'm putting the accent of bringing products faster to market, never compromising on quality or high performance, but you have to be faster.

And the last one is what Roberto was saying with like Double Wear, which is what we call like commercial innovation. So it's a product that people love. It's #1 foundation in many markets around the world, but you can just bring it through different eyes to the consumer with new ingredients, new technology inside, but it's still the Double Wear you love, but it is what we call Kaizen. It's like what we know is good. We can make it even better going forward. So that's what it is. And then there's many things that we are doing to be able to just bring product to market faster using AI that allows us to never compromise in quality or performance and the things that you can say.

I'll give some example of that. And one is back to the 30%, what we're doing to enabling speed. There are a number of things. We are well underway. We have doubled actually -- when we started, we have doubled the launches that we do under 12 months. So we are in the high teens, as Stephane was saying, but also below 18 months, it's more than 50%. So it's there. It's coming. I have no doubt we will get there.

And we have done it, and we are doing it in 2 ways. One, a lot of systemic changes in our value chain processes. There are many. Again, I'd like to give an example, a quick one, the way we harmonize testing and validation to expect quality with our third-party manufacturers, especially makeup third-party manufacturing is an important component of our value chain network, by eliminating some activities, by simplifying and synchronizing some activities, bypassing some actions while reducing by several weeks that fast. So this is all speed that we gain in the launch.

More relevant, I think, for what we are doing today and for the future that we are building to achieve and beat the 30% is the work that we're doing with technology, with digital technology and AI being a big component of that. One risk that we wanted to avoid was to have a lot of AI initiatives, but in a way, not connected, a lot of pilots one after the other, which is then difficult to scale. What we wanted to do since the beginning is to say whatever we do has to have an end-to-end view first that has to be full value chain view. And second, we are able to scale it. So we have created internally what we call our digital atelier, which is basically a competence center where we identify and define how to scale the best digital solution, AI solution. We invest in training what we call our workers for the future. And of course, we look at our data structure to make sure that we are out there.

Again, examples, design to manufacture. So we go upstream. We are developing an intelligent technical packaging design using AI that is -- what we're trying to do is to link a marketing brief to a packaging that is either already existing or similar packaging that are aligned with the brief, but with the small modifications, they are immediately industrialized, meaning we don't need to -- once we did the -- it's much faster the way we develop the packaging first. But second, equally important, the packaging is industrialized, meaning when it goes to a factory line, it can be produced. We don't need to do the pilot run and do the testing, et cetera, et cetera. This is months, months, of 2 to 4 months, we believe, of savings in the development and the industrialization. This will be savings because it's not about double tooling as an example. So there will be speed, agility and efficiency at the same time. We are ready to deploy it. We're finishing it. So that's why we believe we have plenty of solutions to double down on that.

Another example that I'd like to mention, because it's now a presence in our value chain. In the manufacturing environment, we have an AI solution, which we call ELLA. It is our new colleague, we call her. It stands for Estée Lauder Line Assistant. It's essentially an AI solution augmenting the capabilities of our people to identify immediately the best setup of the line for a launch or for a change in the line for a performance requirement. Something that used to last, I mean, quite a lot with different line operators is now instantaneously provided by ELLA. So again, it's speed, it's agility and it's efficiency because, of course, this is allowing more time to produce and more time to set up.

The third example, there are many, but I'll stop with the third one, but that's the one that I really like, because it has helped us to manage the network. Everything that I was saying before, also thanks to our digital solution that we call our digital twin of our value chain network. So basically, we have mapped the network digitally. And with all the different technology and the different sites, all the different lanes, full network, so that when we want to play with scenarios, now what is happening, we play with different scenarios, we can quickly identify which is the bottleneck, where do we have a risk, where we don't have enough agility or resilience, and then we can zoom in and find solutions there. So those are all the technologies that we have, we are building and will allow us, I think, to definitely go where Stephane wants to be, maybe a bit more.

It's very interesting how AI for the time being is seeing -- we're seeing a lot of benefit in the value chain and in R&D. about like the ability to just be much more resilient, much faster and agile on how to bring and to scale our innovation. And I think it's only the beginning. We'll see a lot more benefits from what AI can just bring even on consumer-facing optimization going forward.

We could spend another 40 minutes on AI, but we have about 7 left, and I want to make sure we hit 2 key markets that perpetually come up in conversations.

U.S. and China.

You got it. And so I guess, perspective on the state of the market, the consumer, the health vibrancy of each of those geographies. I think from a U.S. perspective, the focus is, okay, there's momentum, there's volume growth. But when do we get to value share growth? And when do we get the gap between organic sales and consumption to close? And then in China, there's a million questions, but I think the one that I've fielded most often recently is just how does Estée Lauder navigate with all the different local indie brands that are coming up? Is the portfolio as potent today as it has been historically?

Yes. And I think these are -- jokes aside, these are the 2 markets to talk about, not that I want to diminish the importance of all of us. But if these 2 markets continue to be in the mid-teens from a growth -- mid-single digit, sorry, from a growth standpoint, I think we are in a really good position like globally as a category. And then our ability to gain market share is really what is just going to make us like overall gain market share in the total.

So looking at the U.S., I would say, first of all, coming from the decade of market share deleverage that we have had, I'm very proud of what the team has done in a very short period of time. And I think especially online, I think the momentum is very strong with what we've done with Amazon, what we've done with TikTok Shop now, or frankly, even our brand.com. And I think the early sign of the transformation and the move from our internal platform to Shopify with Tom Ford has really shown like increased KPIs in terms of satisfaction, close retention of the consumers on brand.com. And you remember that all direct-to-consumer in the U.S. is not captured in any of the Circana panel. And frankly, we're doing pretty well in direct-to-consumer, especially linked to brands like Le Labo, where the majority of the sales are in direct-to-consumer, therefore, not captured in Circana. So on that front, I think the momentum that we are in U.S., for me, the first stage was put back the brand in volume growth and gain market share.

Now from a value standpoint, we are already gaining market share on brands like The Ordinary. The Ordinary is actually like flying not only in the U.S., but frankly, everywhere around the world. I was with the team last night just doing a quick review and the brand is in high double-digit growth in pretty much every market around the world. We're seeing good momentum with our perfume brands also like with Tom Ford, like Jo Malone, like Le Labo especially really gaining strongly. But you're right, for us, we need to go from volume market share growth to value market share growth consistently. And we are still dealing with the rebalancing of the distribution. So in our case, it is purely a distribution rebalancing.

We've made some really clear moves lately. I think it was made a headline, Bobbi Brown, we decided to exit Bobbi Brown from the department stores in the North America market to really focus on the high-growth channel. There's nothing wrong with the brand. On the contrary, the brand is doing very well, but it's doing well and it's well positioned to just work in specialty-multi and online. That's what we decided to do.

At the same time, the expansion of the PRGP that we've announced at the last earnings calls, 70% of the expansion of the number of positions eliminated are field positions of beauty advisers because we are accelerating the cut of the tail of both freestanding stores that are no longer working for us, because the traffic is not there, or frankly, the tail of department stores. So the faster we continue to just shift from, I would say, roughly mid-30% of our business in department store to mid-20% of our department store in the U.S., I think then we will be poised for a very strong market share acceleration, thanks to the momentum that we're having both on specialty-multi and online.

One of the big move we made is MAC entering Sephora in the U.S. After 41 years, title basically in the U.S.A., it took them 41 years to just go to Sephora. Yes, but MAC was not built for that. MAC was built as a direct-to-consumer brand. But when the consumer started to shift to go to online and specialty-multi, it was time for us to do it. And frankly, the result of the partnership that we have had with Sephora, frankly, with Ulta and many of our specialty-multi retailers have been absolutely fantastic. So the faster we shift the distribution, the faster we will just get back into market share gain.

Now going east completely to the other big block of beauty, I'm very confident of what we are seeing in China. I just want to make it very clear. I don't believe that China will just resume to consistent double-digit market growth as a market, because China is a mature market. Obviously, you've said it, from a pre-COVID to a past-COVID, there's been a complete transformation of the role of the local brands. But it's not that we don't know that. We've seen that in Japan. We've seen it in Korea. We see it now in China. We just purchased a brand in India with Forest Essentials that is the #1 brand in India, and we're seeing the rise of the indie brand. We've seen the rise of the Korean brand. So it's something that we deal, and we deal by making sure that our brands are the most locally relevant in the market where we operate.

Don't forget one thing, we've been now 32 years in China. So we know how to operate in China. Of the last 8 quarters, we have had 7 quarters of market share gain. And what I'm the most excited about is, especially since the deployment of Beauty Reimagined, is the growth is much more balanced. In the past, a lot of the growth in China was dependent on Lauder and La Mer that are continuing to do very well, but we are seeing a net acceleration of Tom Ford, Le Labo. Le Labo now has the #1 productivity per door of any beauty brand in China. Jo Malone, that is doing very strong. And last year, we launched The Ordinary, very successfully that allows us to complete the entry of prestige with many of the local brands.

So do I worry about the local brands? No. Do I look at the local brands? Do I learn from the local brands? Yes. Because they have one thing is the speed. And having the R&D center based in China now today allows us, after 2 years of really setting up the operation nicely, to have a net acceleration of the number of innovations that we are developing in China for China. 30% of the global innovation for the Estée Lauder Companies will come from Shanghai. And the large majority are targeting the Chinese consumers. So I'm really confident.

Today, just early in the morning, I was like talking to the China team to just get an update on 6/18. I think you always organized like the conference like right in the middle of some of the biggest shopping festival like around the world. And I'm happy to report that actually the momentum is strong for the time being. It's too early to tell, obviously, because there's still another like 17 days before the conclusion of the festival, but very excited about the balance of the growth and the momentum that we are getting, which hopefully puts us again into market share gain into this quarter.

We are at time, but I want to end on the final pillar of Beauty Reimagined and culture. And I mean, we've talked about a lot of the change. There's been a change in the leadership team. There's been a dramatic flattening of the organization, dramatic changes in the ways that Estée Lauder Company works. What do you think has been the most difficult hurdles for the employee base to overcome amidst all that? And what are the keys to success from a cultural perspective as you go forward?

I think it's a beautiful question and one that is very close to my heart, because all this operational transformation only sticks if you evolve the culture. And I think we've put a lot of like effort into maintaining what are the core value of the company, but evolving the culture. We've deployed what we call our beauty commitment. We are in beauty, so beauty commitment. And this stands for very simple B of beauty is bold. We need to be a bolder organization. We need to go after the new ideas. E is to be more entrepreneurial as an organization. I think our founder was the ultimate like girl boss, and we want to be more entrepreneurial, which means that there's a lot more empowerment of the organization to go after new ideas.

A, is agile. I think we've demonstrated in supply chain, our ability to go into new channel. Remember that in the U.S., everybody was questioning why are we not going to a new platform like Amazon. We were like part of the last trend. Now obviously, this is behind, and we are doing great movement. In Europe and in the U.K., we are the first one doing it. So we are learning. U is unified. We are unified as one team with clear clearly creating this one culture and this one organization, even by changing the incentive model. All the leadership team, as I said, is going from thousands of different like mechanisms of rewards to just one. We need to deliver the company. As a leadership team, when at the beginning of the year, we tell you what is the guidance, top line and bottom line, our job is to meet it or to exceed it. And I really want the leadership team to just be behind it.

T is transformational. I believe that when the PRGP is over, the big transformation is done, but it's going to be constant evolution. We are in a world that, frankly, AI allows you to just like create efficiency like every day. And then Y, it's a little bit of wink, is yes. Yes to new ideas, yes to just like go to new brands, new markets, new channels as long as everything we do preserves what we have, the 2 most important things in our company, the best brands and the best team in the industry. And maybe, Roberto, you can say how you're applying that to your organization.

We don't have a lot of time. Maybe I'll just say one thing. On top of the incentive, what is working a lot and it's certainly working in value chain to kill silos and apart from the operating model and a number of things is what Stephane brought with Beauty Reimagined, the idea of the consumer voice. So it's a consumer-centric organization. At the end of the day, in the meetings, there are no silos. We say what is adding value to the consumer. It's adding value, we go for that. It's not adding value, who cares that it's a functional area. But that to me is the strongest push to say that's the very end. And all the rest gets organized and gets streamlined for that. So I think it's a strong message and everybody is now talking about consumer value.

Awesome. With that, we will wrap it. But thank you both for your time, and thank you all for joining.

Good afternoon, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. I'm very pleased to welcome Estée Lauder to Morgan Stanley's Luxury Conference.

Just before we get started, I do have to note a quick disclosure. Please see the Morgan Stanley research website at www.morganstanley.com for important research disclosures and reach out to your Morgan Stanley representative with any questions.

So joining us today from Estée Lauder are CEO, Stephane de la Faverie; and Nadine Graf, who is president of EMEA, U.K. and Ireland and Emerging Markets. Thanks so much for being here, guys. We appreciate it.

Our pleasure. Thank you for having us.

So Stéphane, I thought we could start out. It's been 1.5 years almost under your leadership and Beauty Reimagined. A lot of work has been put in place and internal improvement. Can you give us an update on what you think is working well so far in the 5 pillars that you've laid out as being key to your strategy, where you've made the most strides and maybe also some of the areas where you're looking for more traction or to drive even more progress.

That makes sense. No, thank you, first of all, for having us. Glad to be here. Today, first time I do this conference. So when you think about it, almost like 1.5 years, like you said, but who's counting the days. Every month feels like a year on what we've done in 1.5 years. But -- so Beauty Reimagined, as you know, when in February of 2025, when we launched it was anchored on 5 pillars. The first one being the consumer coverage because the realization is when I took this position with the leadership team is that we needed to put our brands in the channel of growth.

And we may not always had the right position, meaning in the U.S., in Europe or in Asia in channels, and we've expanded. Today, I'm very proud to say like even on Amazon today, we have like 12 brands in 10 different countries. We've expanded also on TikTok Shop. We've done in Asia Shopee. We've also revisited our freestanding store network by accelerating the deployment of freestanding stores in the fragrances area, but optimizing also on the makeup and hair where we may not have had the best productivity. So I think from -- we've made some great progress here, and I think we will continue to do so.

I think one of the things that I'm the most proud of is the work that we've done with Nadine and her colleagues in North America, expanding our brands in Amazon, but also recently on Sephora, where we've launched MAC in Sephora in the U.S. and in the Middle East. And in both cases, we have had some really good success that allows us to put this brand in the hands of like the younger consumer that we were targeting.

The second area of Beauty Reimagined has been innovation. I'm sure we can talk about it more in detail, but innovation has been really good for us because in the post-COVID world, we're seeing a need for more innovation. And I made some really bold statements when we launched Beauty Reimagined where we would increase the penetration of the business generated by innovation around 25%, but also triple the number of innovations coming to market in less than a year. And today, we are already in the mid-high teens in that. So we're making a lot of good progress on innovation.

And then the third one, which, obviously, when you have the right distribution and the right innovation is also about how much can you invest behind it. And we've increased our consumer-facing investment. Even in the last quarter, we were up 5% ex FX, which really allows us to reignite the wheel of recruitment and retention behind our brands in various markets around the world.

And then finally, this is just on the consumer-facing. And finally, the last 2 pillars, which is one, the PRGP, how do we create bold efficiency. You saw that this year what we've guided for the year, we are going to make an improvement of like close at the higher end of the range, like 300 basis points improvement. And if you take what we've guided for now next year, we will be about 500 basis points of improvement. So enormous amount of transformation, which is linked, finally, to the final pillar, which is how to work together to create more agility. And we brought a lot of new partners like Accenture, WPP, Shopify that allows us to revisit our operating model to be a much more agile organization.

So we are at the beginning of the journey. I think there's still a lot of work to do for us, but the confidence and the momentum that we are seeing with now 3 quarters in a row of positive growth, and we've guided to the top of the range in terms of growth this year, it's giving us confidence that at least the strategy is working and that we can continue to accelerate. And as we are finishing the deployment of the PRGP, we can really focus on growth going forward.

Great. And Nadine, maybe on the same front, you can talk about the progress in the strategic pillars in your areas of responsibility and also just perspective on culturally how deep-rooted these changes have been in your regions or any perspective on the broader company?

Yes. No, absolutely, with pleasure. And I think one thing I can say is that Beauty Reimagined has fundamentally changed the way we are operating already across each and every market. This is not a theory of a transformation. This is really very, very operational. And I think the way to look at it, as Stéphane explained is, the first 3 pillars are consumer-facing, and this is where we have doubled down the most with regards to accelerating consumer capture being where the consumer is, but really expanding the universe of the prestige consumer. It's not about the channel. It's about the positioning. But then also on how we go to market, I think, in terms of agility, in terms of speed, in terms of consumer centricity, proximity that we have never had before, but also the agility on how we're doing investments. And that has changed fundamentally in the way how we go to market.

You have alluded to it. We have made some very pivotal shifts, I would say, in terms of where we play across our brands. We have launched 8 brands on Amazon in the U.K. and in the European markets just over the last 8 months, believe it or not, but the decision has been taken less than a year from now and it's already out there executing, and it's growing fastly from an online perspective. So we can already see that in the number. It's 10x faster than what actually it is on brick-and-mortar literally across the region.

But then you also have got on how we invest the agility, on how we are able to shift from a P&L responsibility standpoint across the different geographies. It's very important, especially with the volatility that we have because where there is demand, you need to double down; where there are some challenges, you will want to put it out.

And when we look also on the geographic cluster, you said it earlier, but we came with UKEM as a new region where U.K. and Europe are under one roof just from a heritage and scale standpoint, where we've got a lot of similarities on the challenges that we need to address versus bringing all the emerging markets across the globe together, very powerful, not looking at one individually, but altogether as a powerful future growth driver. And the proof is in the pudding. It's already there. In Q3, you saw that we're growing double digit already and really leveraging the full portfolio and how we're going to market. This is very encouraging and also something that we will see in the future as part of our growth strategy.

Great. That's helpful. Stéphane, you touched on innovation contribution and the ramp-up you're seeing there. Obviously, that's a key linchpin of the Beauty Reimagined strategy. Can you just discuss how your innovation process has changed internally, so how you're generating this greater output? And then as we think about that output over the next couple of years, you mentioned the progress you made already. What are you expecting as you look out to fiscal '27 and beyond in terms of a ramp-up in innovation contribution to sales?

No, I think it's a good question, and it's fundamental. I think I'm very proud of many of the innovation that we've launched to market from La Mer Rejuvenating Night Cream and the eye product or the new lipstick that we've launched on MAC alongside all the different perfume that we've launched across our brand. I think fundamentally, what has changed is that we look at innovation in 3 different buckets. There's trend innovation, there's breakthrough innovation and commercial innovation.

The trend innovation, we've said we want to just bring products faster to market. So we've reengineered our process sometimes powered by AI, sometimes by simplifying the way we are working and been very vocal on rebalancing internal and external innovation. So we've been able to tap into innovation externally, also both in makeup and in skin care. Externally, we've worked with the likes of Intercos and Cosmax and others like in the past, but we've doubled down the work with them and it allows us to just bring products faster to market, simplifying the way that we operate with them, also because of the way that we are delayering and simplifying our processes internally. And like I said earlier, we're very proud that we've been able to bring a lot of makeup product to market in 6 months or less. And this is -- makeup has always been for us the category that we knew on trend was needed to just go faster because the consumer wants to see the new lip gloss.

And one of the things that I said when we launched Beauty Reimagined is for -- to reignite demand behind our makeup brand, we needed to go after lip. And what I'm very proud of in the U.S. in the last quarter is we grew market share, both in volume and in value with MAC and Clinique and Lauder depending on the subcategories. And that, for me, was an indication that we are reactivating the wheel of recruitment because lipstick is often the category that you enter in for recruitment.

So then you have like breakthrough. Breakthrough takes a little bit more time. Think about skin care. Skin care, sometimes it can take 2 to 3 years to development. We are now bringing product to market in 18 months. For instance, we have like a new oil serum under the Estée Lauder brand that we've launched with the R&D center in China, we've been able to just do in 14, 15 months. That was never conceivable in the past, and we've -- because of reviewing completely our process.

And the last thing that innovation is not only about new product. It's also how do you make sure that you put in the hands of the consumer the product they love, but you always find new ways to talk about it. And Double Wear, for instance, which is the #1 foundation in the world with Estée Lauder. Now we've relaunched it, obviously, but at the same time, we found new ways to talk about it. And we've talked about like the added benefit to the formula, which is not only a complexion and full coverage, but there's also like more breathable and so on and so forth. So I think it has been revamping the processes, also bringing new talent in the organization, our new Head of R&D, René Lammers, that comes from PepsiCo and Unilever, in the past has allowed us to just also simplify our processes, rebalance internal and external.

And the last thing, I would say, from an innovation that has been very clear is what are the right prices. At the moment, where there's so much tension in consumer confidence around the world, we've been able to just reengineer our innovation also to be at the right prices. And in lip, the success that we are seeing in the U.S. or we're seeing in Europe and in many markets, like even Tom Ford in Asia because we've been able to put the product at the right price point. But I've been very clear with my team that every innovation we launch has to be accretive to gross margin going forward or the category we launch in. So it's not that we are lowering or optimizing the price at the wrong cost of goods, we are doing it by optimizing gross margin and putting the right price. And that's really allowing us to just reignite the wheel of recruitment.

Okay. And as you think about the multiyear innovation pipeline from here, should we see continued progress? Is it sort of linear progress as we look out over the next couple of years? Give us a little bit of detail on the multiyear innovation.

Yes. No, no. We will -- now I think when you look at it, when you have -- when we said about 25% of our innovation of our business comes from innovation is about the right number. Now it's about not necessarily more innovation, it's bigger, bolder, more breakthrough innovation. So you're going to see a lot more in the areas of longevity, for instance, which is like a big trend that everybody is talking about. We have a lot of research on that front, multiyear research, but many of these products are coming under the Estée Lauder brand and even La Mer.

On The Ordinary, you see constantly like new ingredients. We have like a new [ IPDRM ] product, which is also on the longevity at a price point of $10 that is coming to market. So you're going to continue to see us doing breakthrough on ingredients, on technology across the 4 categories. And even on fragrances, you saw the last quarter, we published like double-digit growth on fragrances because what our perfume each one like Tom Ford, Jo Malone, Le Labo, KILIAN are all doing extremely well, but we also have like striving new innovation. On Tom Ford, we have had Figue Érotique, multiple new fragrances. We have had also on Le Labo, multiple city exclusives that we are launching around the world. So you're going to see us continuing with this cycle of innovation because I think there's a clear demand across all the regions for new all the time. And that allows us to just bring constantly new consumers.

The last data point I would give you is with La Mer, we've launched the new Rejuvenating Eye Cream across Asia, including China. We've brought 20% new consumers to the brand on a brand that was already gaining market share in pretty much every market.

Great. So a lot of hard work and progress under the strategic pillars. I think...

Yes. We still have a lot of work to do, but we're on the right momentum.

Yes. The question is where do we get in terms of sort of sustainable organic sales growth going forward longer term. So maybe we can shift to some of the regions and talk about progress so far and long-term expectations. China has been a big success story over the last year. You've returned to consistent share gains, but it's also an incredibly competitive market. So just as you think out from here, a, do you think you're back to sustainable share gains in China? What's really driven the improvement? How sustainable is that? And what's structurally changed in the geography for Estée? And then second, I'd just love your perspective on category growth here in China from here. There's obviously been an incredible amount of volatility in recent years, but your perspective on category growth going forward would be helpful also.

Yes. No, I feel really confident about China. I've been in China, I think, 3 times this year, like this year already, I'm going back in August. I think, first of all, our team on the ground is doing a fantastic work. And I think in China, it's been about 5 quarters in a row that we have market share gain. If you look at the 8 last quarters, I think out of the 8, 7 we've gained market share, which basically shows the continuous desirability of our brand.

Let's not forget that the Estée Lauder company has been in China for 31 years now. So we know the market a very long time. We have adopted, especially the first market in the world we have adopted this concept of local relevance. Estée Lauder was the first brand to put the Chinese model on an advertising when nobody else was doing it in the beauty industry, and we've consistently done that over time. But what has changed for us in China is for a very long time, our growth was dependent on Lauder and La Mer our 2 largest brands. They remain our 2 largest brands. But today, we have a really diversified portfolio. We have Tom Ford that is growing double digit. Jo Malone that is growing double digit. I think we have Jo Malone growing 21% in the last quarter. We had Le Labo growing 70-plus percent in the last quarter. Le Labo, is now the brand with the highest productivity per door in China. So we're really diversifying the portfolio.

And we're seeing a market that is still, obviously, highly dependent on skin care, but the rebalancing slowly but surely on the category. Remember that fragrances is only 5% to 7% of the market, but we have a very strong position there, and we are also growing. So I feel a market that is more stable, high single-digit growth in the market, and we are gaining market share there. And the reason for it, despite the rebalancing of the brands and the category is we've applied the same model of consumer coverage. One of the big unlock for us has been to be on Douyin, the equivalent of the Chinese, obviously, TikTok. And that has allowed us to just capture a lot more newer consumers. But at the same time to make sure that we are preserving desirability and equity. We've ramped up the number of freestanding stores. This is actually the region of the world where we have the highest number of freestanding stores, which allow to dial up equity and experience for the brand.

So I feel really good about the work that the team is doing. I think it's sustainable. We have a plethora of innovation coming from China. Remember, the last thing that is important is 2 years ago, now it's the anniversary, 2 years ago, we've opened our research and innovation center in China, and it was about doing innovation in China for China. That -- now we are seeing the ramp-up and the fast acceleration across Lauder, La Mer and now we are entering all our brands into the research and innovation center to be able to do more innovations, which will allow us to reduce the cycle and to have product even more tailored.

So I think what is behind your question, do I worry about the local brand versus the international brand? As long as you know how to play in China in the multi-channel network and you are locally relevant, I think with the desirability we've built over the years, I think our growth is sustainable in the market.

Okay. And from a category growth perspective, it sounds like you think things are a bit more stable here going forward, and you've gotten back to a nice base of category growth. Just your perspective on any...

Skin care, fragrances, haircare. Makeup is still -- it's still subdued, but I think makeup is a little bit subdued everywhere around the world. But definitely, like one, skin care is strong in China. Obviously, like the market is strong because it's still 65% to 70% of the market is in skin care.

Okay. And it sounds like there's confidence behind the underlying drivers there. Any impact post Iran? Does that impact the way you think about the market over the next few quarters here?

For China specifically?

For China.

No, for the moment, honestly, no disruption. I think there was a visit like over the last few days. Everything seems to be like going fine so far. I don't know how it was not part of the conversation, but I didn't see any type of like major disruption in the market. And I cannot control like the geopolitical discussion, at least on the consumer confidence. The last -- maybe one thing that is interesting in China is one of the only markets in the world that are seeing consumer confidence increasing over the last few months. Obviously, the world is in a tumultuous moment. But China is rebounding. Don't get me wrong. It's still not where it was pre-COVID. But the fact that it's just going up, I think the real estate market is not as bad as what it used to be 6 months ago. The stock market in China is very strong. So all of that is just rebuilding some consumer confidence and beauty is part of their culture and one category that the Chinese consumer always gravitate towards.

Okay. Great. We're seeing some progress in the Americas, but you haven't gotten back to sustained organic sales growth yet. I know clearly, there's been a bit more progress in retail sales than shipments. But just help us understand strategically where you are in your U.S. turnaround, perhaps give us an update on your channel mix today, the growth you're seeing by channels. Obviously, that's an important part of the dynamic, as you talked about earlier, across the overall enterprise, but particularly in the U.S. And is there a line of sight to getting back to consistent organic sales growth as you look at the U.S. and Americas in general?

To answer the last part of your question, yes. Can we go back to sustainable share gain? Yes, and we will get there. Are we there yet? No. But the progress made by the team are pretty impressive because don't forget that we're coming from a decade of market share erosion for us. And the fact that in the last quarter, we've been able to put the 4 category in volume share gain was very important for me and for the entire team that our strategy reignites recruitment. And when you see volume share gain in every category, it tells you that we are bringing new consumers to our brand.

Now obviously, we still have some work. We have skin care and hair care where we're growing also in value, but we want to make sure that consistently every quarter on every brand, every category. Now we are still in a channel shift in the U.S. for us to be able to constantly reestablish this market share gain. But the quick pivot that we've done to Amazon, to TikTok Shop, to opening like a more direct-to-consumer business is also helping us there. Now we need to continue to rebalance it, and I've been very vocal that while we're not giving up on the department store, we still have in some areas too much dependency on the department store. We are rationalizing the tail of the department store. We've also -- there's no need to hide it. We've also decided to discontinue brand from this channel to refocus on some other core channels like specialty, multi and online.

And I think we are in a journey of how -- and we're trying to do it as fast as possible without disrupting completely the market of rebalancing our distribution. But overall, when I see now volume share gain, it tells me that we are in the right direction, and we are going to get to some market -- volume market share -- value market share gain also going forward. But we have had some very interesting successes in makeup. We have 4 of our makeup brands that are gaining market share in the U.S. in the last quarter, Lauder, Clinique, MAC and Bobbi Brown, which for us was like very important to see that it's still a big makeup market.

On fragrances, we are doing -- but we are playing what you see, what is captured by Circana is only a small piece of our business because all the direct-to-consumer where we play more is not captured there. But we know when you start including the freestanding stores of Le Labo, the freestanding stores of Jo Malone, KILIAN and so on and so forth. We just have also some very good momentum on that front. So a lot more work to do. I think we're coming from further away, but very confident that we are also creating the right momentum.

Great. We talked about U.S. and China volatility. Travel retail has been even a more volatile area in recent years. Just help us level set where we are today in terms of potential category growth going forward in the channel, key drivers there and how you think about Estée's positioning today?

In travel retail?

In travel retail.

Look, I think, travel retail for me, we've done a lot of work over the past 2 years to reset the penetration of travel retail in our total business. I've been very clear. Now we are at the mid-teens, which is about like industry average, and we intend to just keep it at this level. I think we had -- everybody knows it in this room, we had over-dependency on travel retail. That happens to be the most volatile channel as we see it like in this moment in time in the Middle East, where we see some of the airports are pretty much like shut down or with very limited amount of conversion in the stores because people are just having other things to think than just buying beauty or any other category of goods. So I feel like now us having reset our penetration of travel retail.

Now obviously, it's a different story if you look at the East versus looking at the West. In the West, we were behind. We're catching up very quickly by deploying all our perfume brands like Jo Malone, KILIAN, Tom Ford. If some of you are traveling throughout the European airport, you'll see a big difference on the presence of the Estée Lauder company, and we're trying to repositioning our portfolio to what is the need and to cater more to the traveling consumer in this region that it is people coming from the Middle East or from India, British consumers, which are like some of like the key consumers.

On the other hand, on the East, but we're seeing a phenomenon and everybody certainly has access to the information is now a higher foot traffic in Hainan than pre-COVID and now finally higher conversion. You remember, there was a lot of like traffic in Hainan, but very low conversion. Now we're seeing conversion like growing and the Estée Lauder company is gaining significant market share in the channel. What we've done for Chinese New Year around the Estée Lauder and La Mer as like creating like a really, really strong momentum.

And we're seeing the Chinese consumers starting to travel again only in the region, only in the East, they are not going West. And their top 3 destinations are South Korea, Hong Kong and Thailand. And we're seeing that even in a moment where -- Nadine will certainly say a few things about the emerging markets, where the market in Thailand is suffering because of like the impact of the war in Iran. The travel retail is booming because the Chinese consumers are going in vacation there because they just don't want to go anywhere else around the world. So I think we're in the right place. Look, it will always be more volatile channel, but I think the rebalancing of the West and the East and the penetration in the mid-teens to our total business in travel retail mix is really manageable for us.

And the last thing I would say, travel retail will and continue to remain a window for our brands around the world. Certainly, many of you have gone to a Hainan or to Heathrow airport or Dubai Airport, Singapore, this is some of the best expression of our brands around the world.

Nadine maybe we can turn to UKEM. Obviously, we saw some divergence in trends by country even before the Iran conflict. Now we have the Iran conflict on top of that. So I'd love to get a bit of a short-term update from you on what you're seeing in the region. And then also turning to the longer term, what do you think are the key growth drivers within the region both from a business and geographic standpoint? And some of the markets that are doing better in that region, are there things you can apply to some of the laggard countries that drive a lot of improvement?

Very true. And that basically reflects exactly the strategy we're having. Starting with the most exciting part, which is the emerging markets because this is where Beauty Reimagined is already very visible in the new setup that we're having. We're driving growth across the emerging markets 2 to 3x the global average overall. So it's truly becoming a growth engine for the company going forward, and we do that profitably. So it's really driving profitable sales already as we speak, representing today around 10% of our mix of business globally, and this is where we want to enlarge it quite significantly beyond the 15% in the long run. And we have got the best possible strategy to really achieve that. It's already in the making.

If you look at emerging markets, why are we so confident as well. You have to know that in some of the highest growth emerging markets like India, Turkey, to a certain extent also the Middle East and Southeast Asia, we have very, very strong positioning as the Estée Lauder companies. We have first-mover advantage in many of them, and we are really leading prestige beauty in many of these markets. At the same time, you have got a high traction in fragrance, where we're doubling down. You have got a high traction in trend-led makeup, in particularly in the Middle East. And in India, which we're really tapping into.

The other thing is we're talking about the young consumer. This is where more than 1 billion Gen Z consumers are, where there is online and the full digital ecosystem is really driven. And we have a very clear go-to-market strategy, but not market by market. This is where we play the similarities. And I think it's important to understand this. This is where the new operating model comes into place, clear alignment from global corporation brands, region and catalyst affiliates on how we're going to win and win big, which means sourcing, recruiting from mass, really positioning the ordinary MAC brands that play the role from recruiting consumers from mass into prestige, scaling them across the different channels. But also fragrance. Fragrance is underpenetrated overall. We've got the right portfolio of brands to win.

The second piece is really online acceleration. Online as a market is disproportionately growing. We are growing with that disproportionately with higher market shares online that we have offline, but also playing the ecosystem. So are entering Amazon in Brazil. We are doubling down on Trendyol, be it local or global players, Shopee across Southeast Asia, TikTok Shop in Southeast Asia and beyond. So this is really the model that works for us. But today, we are much more agile with regards to allocating the resources on the winning intersections that we have, brand, channel, retailer and market.

The third one I would really want to say is you win in emerging markets through local relevancy. You talked about it in China. It's so true for each and every single emerging market. but not only about having the right locally relevant face, it is really about being where it matters for that consumer, be it through Diwali, be it through Ramadan, all the local festivities, and being in culture. And this is where, with our strategy, we are creating locally relevant assets, a full ecosystem on who is representing the brand locally, but also reallocating investment into these moments disproportionately. We always say brand desirability is built globally, but the relevancy is really executed locally, and that's where we're doubling down, and we already see the first big wins coming from that way.

And last, but certainly not least, is really expanding prestige from an accessibility standpoint. When we want to recruit at scale, that means a lot of trial. So we're basically developing all our global iconic icons such as Black Honey, such as ANR in mini sizes. Mini sizes, but so that we can really drive trial and consumption at scale, and that helps us with that recruitment.

And then I think the last but certainly not least one is the recent acquisition of Forest Essentials, Forest Essentials as you may have heard and read in the press, the latest acquisition, the #1 prestige skincare brand in India. And why is it so interesting? It really sits at the intersection of India as one of the fastest-growing prestige beauty markets globally. Secondly, the rise of local brands. And third, wellness and ayurvedic beauty becomes a consumer trend across the globe. So having this as part of the portfolio is not only almost doubling our market share in India from an ELC market share standpoint, but really helping us to tap into another consumer that we potentially couldn't recruit with the portfolio that we're having. So a great example on how this emerging market strategy is coming to life within the biggest markets, but also how we can scale it globally.

And maybe a few words then on a very different dynamic, you asked about Europe and the U.K., right? Certainly, much more challenging, much more demanding structurally, over distributed across the prestige beauty overall, really shifting consumer dynamics into online more than ever, still a very fundamental brick-and-mortar business that has been built historically. We see a lot of progress. If you look at the ELC performance versus the market trends across Italy, Germany, but also the U.K. that we are certainly catching up, you see that the Indie brands are really driving growth. And with our go-to-market across all the Beauty Reimagined pillars, we see already the shift happening. In April, we've been able to gain market shares across Germany, France and also in Italy. In the U.K., we are back to growth from a retail standpoint. So slowly but surely, you can see that there is a lot of progress happening.

And at the very same time, we are true to ourselves on what has to happen. So first of all, fragrance, what you said as skin care is in China, more than 50%, 70% of the sales. This is what fragrances in Europe. This is over penetrated from a fragrance category standpoint for prestige beauty. We are right at the same -- at the right moment in time to really leverage the portfolio, not only in luxury, but also going more into the ultra-prestige positioning.

Then complexion, you talked about Double Wear complexion is our strength overall. This is where we are doubling down. So we're building on the strength. We're pivoting into where the consumer is from an online standpoint. You talked about Amazon, but also TikTok Shop. We've opened TikTok Shop with MAC in the U.K. and in Germany. But it's not only about the sales you do in TikTok Shop shop alone, it's the ecosystem that comes to life. MAC has historically a very strong DTC business with freestanding stores. So what are we doing? We are basically transforming our freestanding stores into creation hubs, which means our makeup artists, they are creating content live in the store itself. And this is how the full ecosystem comes to life. It's not only what we're transacting through the TikTok Shop, but how we're actually driving traffic and conversion through our stores at the very same time. And that's very exciting. And that's also kind of reenergizing the entire makeup category to start with.

And there are 2 structural resets that we do in Europe and the U.K., in particularly when it comes to our brick-and-mortar business, some decisive actions with regards to cutting some of the long tail -- improving productivity, doing a selling restructuring in the sense of reallocating really the resources into the faster-growing channels. That's what we are executing as we speak. Stéphane keeps on talking about PRGP and the execution and everything that we are doing. That's really the next big wave that we are very confident, not only in terms of taking cost out, but really in taking that and reallocating into growth, and that's probably the next important chapter.

So looking ahead, you will see emerging markets continuously growing double digit ahead of the overall prestige beauty market growth in those markets, but also really a key growth driver for the Estée Lauder companies globally. And then in Europe, we will keep on going for growth in the next chapter being where the consumer is #1, but also allocating the resources very decisively into the channels and in the areas, the intersections that we can definitely go after the market share gains.

Great. Stéphane, you gave us some early clarity on fiscal '27 post Q3, fiscal Q3. First, just what gave you the confidence to go out early with the 3% to 5% organic sales growth for fiscal '27, particularly given the Iran conflict and some volatility there, which you've quantified did have an impact in Q4? So just give us a sense behind your confidence there. And then, b, as you think longer term, what are some of the key puts and takes to top line growth in fiscal '27? You've made a lot of internal improvements as you talked about, a skeptic could say, well, if we want to get back to that mid-single-digit range historically, right, we're still seeing some yield in fiscal '27. How should we sort of think about fiscal '27 when we think about the long-term top line outlook, if that makes sense?

So the first thing that why we put the guidance a preliminary view earlier than usual is one because all of you have asked us basically where are you going because we were not guiding for quite some time. But the second thing, jokes aside is I think we have momentum and we know where the growth is coming from. When you see we are back to growth, not yet market share gain in the U.S. We are in market share gain in China. We are growing double digit in emerging markets, like Nadine said. We are growing online around the world that is becoming a bigger part of our business, like across all the markets. that we felt really confident that, one, we could indicate that this year, we will deliver the top end of our guidance. So that was very, very clear for us with 1 quarter to go. I think we have enough visibility to be able to go there.

And you say like in the midst of the Iran conflict and et cetera, Middle East for us is 2% of our business when you include the local market and travel retail. So 2% is not nothing, but we can manage it. So we are managing it. And Nadine in the region is reallocating resources, obviously, as she described it. We have a much more agile model that allows us to redeploy resources around the world to capture the growth where it is in this moment in time. And a lot of growth is coming from like from the U.S., coming from China, but also like Nadine said, even in the U.K., we are catching up, and we're catching share quickly with like in the market. So that's what gives us the confidence.

And next year, when I look at the pipeline of innovation that we have, the fact that we have a full year in most instances, of new distribution, like Amazon in Europe, Amazon in the U.S., in Latin America, in Canada, Shopee, TikTok Shop around the world. Now we're putting our brands into the end of the consumer and where the growth is, like MAC at Sephora in the Middle East in, the U.S. So think about it, we've realigned -- and I'm not saying it's over, but we've realigned a lot of our brands in the right channel, putting the investments. And we're seeing the retail growing. Sometimes you said it, in the U.S., the retail and the net is not totally aligned because we're still structurally changing a few things. But ultimately, when the retail is here, I feel that we have the right momentum, the right distribution, the right innovation.

And then PRGP is over in 6 weeks. In 6 weeks, we are done with all the cases. Remember, it was 2 years long of cases that they need to be approved. Now we still have 27 to execute some of the cases that we've put, like Nadine just mentioned, like, for instance, the realignment of like selling in the region. So which now the PRP goes away, and we're focusing on the G. We're focusing on growth. And this is what we are as a team, really focusing on growth. And we gave a preliminary view that we believe we can grow anywhere between 3% to 5%. And at the midpoint to the high point of this preliminary view, we would be gaining market share globally.

There is a lot of indicator with China and the U.S. being actually quite strong. Emerging markets strong, online is strong with our innovation and the continuous emerging consumer coming to the category. Let's not forget between now and 2030. There's 0.5 billion consumers that will enter the middle class in various places around the world with India and China being the 2 lead markets. So the growth potential is there. For us, we didn't have access to the growth because we were not in the right growth channel. We didn't have the right innovation, and we were not investing enough in consumer facing. The PRGP has allowed us to just cut a lot of costs in SG&A to be able to reinvest and to grow. And that I think we are back into a growth algorithm.

Now one would say, yes, but there's a lot of disruption around the world. I think the PRGP has allowed us also to create an agile and flexible organization that allows us to redeploy allocation and funds in real time in Nadine's region or between the regions, between the brands and really to just like avoid being disrupted by many of what is coming outside.

That's great. So a lot of internal success. Maybe we can turn external for a bit. On the subject of M&A, you've announced some smaller deals. You've considered larger things as companies do from time to time. Just help us understand, is M&A a focus here, particularly given all the internal work you've done. How you think about the M&A strategy in this beauty environment where a lot of smaller fragmented brands are gaining share versus maybe larger type of deals? And just also put it in the context of the internal turnaround. And if you're -- as you think about adding value longer term, how much you could add through M&A versus the internal work you are doing?

Let me start with the last point. I think this organizational challenge, and I've said it, is the biggest organizational leadership and cultural change in our company history in our 80 years. Many of what we've done by the end of the calendar year '26 will be done. All the work that we've done on enterprise business services with Accenture will be completed, all the transfer. And we've already done a lot of things from an IT standpoint, from a consumer care standpoint, from a CRM standpoint, we're really going super fast because we took really the time to plan correctly. So by the end of the calendar year, we will be done.

WPP for the first time in our history, we took over 30 media companies. We were working around the world to just go to one centralized agency. Now obviously, this agency has an office in Europe, an office in the U.S. an office in China and so on and so forth. So we're still able to just act locally, but we have now the power of one media company around the world that helps us to be much more efficient. We are in the midst of transferring everything. By the middle of Q1, we will be done with the full transfer.

Shopify, we've announced Shopify as a partner to just do all our DTC back end. We will have 50% of our operation turned to Shopify by the end of the calendar year. We have done already Tom Ford. We've done Lab Series. If you go to the Tom Ford sites, we've had very strong indicators already of increased conversion, thanks to the new technology that we've deployed. So we are changing the ways of working. So I would say, from an operational standpoint, we're becoming a much more agile organization.

This agile organization, why we want to do it? One, because you need to be much more agile in the world that we are in to be able to, like I said, deploy resources. And two, in the case of M&A, from small to midsized to larger ones, I believe that we are in a much better equipped company than in the past to do M&A and to be much more efficient to scale fast. You will see Forest Essentials, obviously, we want to just win in India, but we want to bring Forest Essentials to the world. And I think today, what we can bring to a brand like Forest Essentials is ability to scale fast without having the costs of like the organization behind it, but having more the knowledge and the scale.

111SKIN, the minority investment we've just done. We have an entire way to just like help this brand because our idea is like if 111SKIN is successful, why not 111SKIN being part of the portfolio in the future. And then if there are opportunities for a bigger deal, we will also go to do it the way we've done it with Tom Ford and we've done it with DECIEM in the past. And DECIEM, look at it today, it is one of the most successful skincare brand around the world and frankly, in every region.

So Estée Lauder has always been part of the M&A conversation. We have had a moment of pause because we had to do the PRGP and the reengineering of the company. But we will go back to it because I believe we are going in the world where organic and inorganic are very important. And I think the share of inorganic is growing a little bit more. Now organic is still very important. Don't get me wrong. I don't believe that organic will be less so than inorganic, but this ability to do it and scale matters. Scale matters for a lot of things, from a manufacturing standpoint, from a distribution standpoint, from an R&D standpoint. And I think the company is going to be much more poised to just be able to do a bigger deal in the future. It has to make sense from a complementarity of the portfolio, obviously, the way we've always looked into it.

Great. Well, with that, we're out of time. I feel like I have so many more questions, but we really appreciate you both being here today.

Thank you, Dara. Thank you. Appreciate it.

Thank you, everyone.

Good day, everyone, and welcome to the Estee Lauder Companies Fiscal 2026 Third Quarter 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. .

Hello. On today's webcast are Stephane de la Faverie, 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, all organic net sales growth also excludes the noncomparable 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. Retail sales performance discussed is based on information available as of April 29, 2026.

As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites to a third party platforms. It also includes estimated sales of our products for retailers' websites. Throughout our presentation, our profit recovery and growth plan will be referred to as our PR GP.

And now I'll turn the webcast over to Stephane.

Thank you, Rainey, and hello to everyone. Today, we raised our fiscal '26 outlook and offered our preliminary view on fiscal '27. We do so with confidence in the trajectory of our business, as our third quarter results extend our strong year-to-date performance and as we begin realizing the benefits of one operating ecosystem.

For the third quarter, organic sales rose 2%. Operating margin expanded significantly, bolstered in part by gross margin expansion and EPS grew 40%, further demonstrating the momentum of Beauty Reimagined. For the 9 months of fiscal '26, we have delivered progress in many areas of our business, 3 of 4 regions grew organically led by high single-digit growth in Mainland China and double-digit growth in our priority emerging markets. The Americas stabilized, and we remain focused on seizing its full potential.

Looking at categories. Fiscal year-to-date, France rose double digit organically, significantly outperforming the industry; and skin care grew low single digits while hair care stabilized and makeup decline slowed. Fiscal '26 is promising to be the pivotal year we intended, one in which we restore organic sales growth and expand our operating margin for the first time in 4 years. We now expect to deliver organic sales growth of 3%, the high end of our prior range. Operating margin on track to be 10.7% to 11%, significantly ahead of the 10% we previously expected at the midpoint and notably better than the 8% of fiscal '25.

Driving these results, an expectation of retail sales growth and share gains in several key markets. In Mainland China, with our high single-digit retail sales growth, we estimate we outperformed Prestige Beauty for the third consecutive quarter of fiscal '26, driven by brands, including La Mer, TOM FORD, Le Labo and the Ordinary. For Travel Retail, in Hainan, we significantly outperformed Prestige Beauty, which itself improved sequentially to gain share as our activation for Lunar New Year drove remarkable performance.

Retail sales rose strong double digit accelerating from high single digit in the second quarter with 10 brands growing double digit led by La Mer, Estee Lauder and MAC. In Japan, where Prestige Beauty declined low single digit, our share expanded overall driven by outperformance in makeup. In Korea, we returned to retail sales growth, up high single digits and gained share in makeup. In both markets, MAC performed exceptionally well.

In the U.S., our retail sales grew mid-single digits. We gained volume share in total Prestige Beauty driven by every category. On a value basis, the ordinary gain share in skin care, while Clinique, MAC, Bobby Brown, Cosmetics and Estee Lauder expanded share in makeup. The company gained value share in the U.S. prestige hair care driven by Aveda and The Ordinary. And we are seeing evidence of Aveda's turnaround given share expansion track data.

These retail sales and share trends around the world a tribute to our team's delivery of Beauty Reimagined. During the third quarter, we continued to execute with excellence across all 5 action plan priorities. We accelerated best-in-class consumer coverage, expanding our portfolio presence in consumer preferred high-growth channels, market, media and price tiers. For Amazon premium beauty stores, we deepened brand reach across the 10 markets where we have launched. For instance, with Clinique launching in France and Estee Lauder in the U.K.

Similarly, we increased our brand reach on TikTok shop in markets from the U.S. to Germany and Malaysia and our online presence in China, launching the ordinary on and Estee Lauder and Mac on vip.com. This work, coupled with strong performance on Tmall and one of the leading Korean online platforms, drove double-digit online organic sales growth in the third quarter. Impressively, fiscal year-to-date online organic sales growth grew 10% leading us to believe we outperform Prestige Beauty in the channel.

In March, we strengthened our ties in specialty with MAC much anticipated entry into the U.S. the month, MAC was the #1 lead brand in makeup across the Sephora stores where it launched. For our second action plan priority, create transformative innovation, we deliver on all 3 areas of breakthrough on trend and commercial. Our newness in France resonated especially well contributed to the category's double-digit organic sales growth, driven by every region.

Le Labo delivered another quarter of remarkable growth with high single-digit like-for-like door growth and strong double-digit organic sales growth, driven in part by a recent addition to the classic collection. TOM FORD's innovation in the category went from strength to strength as the brand followed successful launch earlier in fiscal '20 with the highly sought after

the brand's new entry into prestige price tier with a refillable drove an exceptional consumer response and stronger-than-expected retail sales. Lastly, in France, KILIAN PARIS latest launch, Her Majesty, contributed to the brand's strong double-digit organic sales growth the fastest in the company demonstrated our ability to accelerate growth in promising emerging brands. In skin care, breakthrough launches from La Mer in and Estee Lauder franchise were among several drivers filling strength for those brands in Mainland China.

While we are pleased with the performance of these launches, globally, we did not have the breadth of newness in skin care relative to last year's third quarter. Fiscal year-to-date, innovation has been a vital contributor to skin care organic sales growth, and we have a rich innovation pipeline for fiscal '27.

In makeup, Estee Lauder Double Wear next-generation MAC foundation drove the brand's double-digit growth in the category while capture the multi-use makeup trend.

Turning to our third action plan priority. We boosted consumer-facing investment for the fifth consecutive quarter, focused on high ROI opportunities. La Mer experiential celebration for the launch of the rejuvenating high cream were one of the several driver making La Mer, once again, the greatest contributor to the company's organic sales growth. And Estee Lauder's launch of the all-new Double Wear foundation deliver exciting activation around the world to drive engagement and new consumer acquisition.

We invested in ground-braking campaigns, including Jo Malone's commercial innovation featuring the Jager Sisters driving organic sales growth. The Ordinary showcase its brand equity with its dictionary theme pop-up across 5 countries, as the brand extended its double-digit organic sales growth.

Our fourth action plan priorities fuel sustainable growth through bold efficiencies. We achieved a significant milestone in the PRGP's restructuring program by quarter end, having approved initiatives to achieve the high end of the target gross saving range. In April, we expanded the size of the restructuring program reflecting additional initiatives expected across the pillar of the program. This includes the expansion of the position impacted, which largely reflects the anticipated exit of select and productive doors in department stores and freestanding store store channel, as we increasingly tapped into the high-growth potential of online.

This was a decision we did not take lightly, as it will impact Beauty Advisor globally as we evolve our business to better align with consumer shopping preferences. We remain committed to completing business case approvals for the restructuring program by the end of fiscal 2026. We have a line of sight of additional growth benefit driven primarily by optimization of our selling model, we are increasing the target range of gross savings.

For the entirety of PRGP, we have taken decisive actions to reshape our cost structure and operations to drive speed and agility, which is now evident in our organization. We remain on track to achieve the vast majority of PRGP's full run rate benefit in fiscal '27. Since launching Beauty Imagined, we are well on our way in executing the biggest organizational leadership and cultural transformation in our company's history, while successfully managing internal and external disruption and restoring organic sales growth and improving profitability.

Finally, for our fifth action plan priority. We have now fully established One ELC, our operating model, aligning brands, regions and function as one team with one culture and one operating ecosystem. We swiftly deployed one team to begin fiscal '26, simplifying the organization with fewer layers and silos and clear ownership. More recently, in February, we unveiled one culture guided by our beauty commitments, reinforcing how our team work every day grounded in accountability and bold entrepreneurship thinking.

On our last earnings call, I spoke of the work underway for our one operating ecosystem to build a more connected and scalable enterprise transform by AI. At that time, we had established enterprise business services selecting Accenture and elected to modernize our direct-to-consumer omnichannel experience with Shopify. In April, we appointed WPP for unified enterprise light approach to media buying to enable greater scale, precision and impact. By partnering with these, an over best-in-class organization, we are transforming from a fragmented data landscape to a more unified one, enabling real-time insights, a single consumer view and more effective activation across brands and markets.

We made significant progress with Accenture over the last few months, beginning to consolidate vendors across brand, region and functions to drive simplification, ensure governance and eliminate long-tail span. We have completed go-live across consumer care, CRM and tech infrastructure and are pleased with the early proof points that we have achieved in record time. All told, we plan to have enterprise business services fully deployed by the end of calendar '26.

Before I close, I'm thrilled to welcome to the Estee Lauder Company's portfolio, the #1 prestige skin care brand in India, Forest Essentials. In March, we agreed to build upon a long-term partnership as a minority owner by acquiring the remaining shares. With the transaction expected to close in the second half of the calendar year, Forest Essential is an exquisite Indian beauty brand grounded in the science of modern ayurveda, and we are excited to expand the brand in India and share it with the world.

Additionally, in April, we made a minority investment in 11.11 Skin, a luxury skin care brand, which is ideally positioned for pre- and post-procedure growing demand. This exemplifies our minority investment strategy to build brands for the future like we did with DECIEM and Forest Essential.

In closing, with strong year-to-date results and the momentum of Beauty Reimagined, we are confident we will deliver our now higher fiscal '26 outlook. Looking ahead to fiscal '27, our view is for prestige beauty's growth to accelerate, as we expect retail sales growth from the China ecosystem, including Travel Retail, to improve to mid-single digit and the global demand for prestige beauty to remain robust.

In our preliminary plan, we intend to deliver another strong year in fiscal '27, as we expect accelerating organic sales growth of 3% to 5%, gaining prestige beauty share at the mid- to high end of the range and operating margin of 12.5% to 13%. We have the right brands, the right team and a clear momentum onward and upward.

Before I turn to Akhil, I extend my deepest gratitude to our colleagues around the world who have achieved so much for the Estee Lauder Companies. I also want to recognize our colleagues, retailers and suppliers across the Middle East, as they navigate a challenging time in the region. We are committed to continuing to support the safety and well-being of all our employees in the affected area.

I will now turn the call over to Akhil.

Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we delivered strong performance in the quarter with sales growth, continued margin expansion and strong cash generation. Across One ELC, we are executing against our strategic priorities with great efficiency, continuing to advance Beauty Reimagined with focus, discipline and speed.

I'll begin with a recap of our third quarter performance and then turn to outlook covering a raised fiscal '26 outlook and a preliminary view on fiscal '27. For more details on our third quarter results, please refer to the press release we issued this morning.

Starting with organic net sales. We grew 2% year-on-year, driven by double-digit growth in fragrance. Performance in the category was broad-based across most brands and all geographic regions, led by double-digit growth from our luxury brands and in both the Americas and Mainland China.

Looking at our geographic regions. Positive results across all product categories, except hair care, drove mid-single-digit net sales growth in Mainland China and double-digit growth collectively in our priority emerging markets. Across the 4 regions, we delivered mid-single to double-digit growth online, reflecting continued momentum from expansion. In North America, sales declined low single digits, reflecting continued pressure in brick-and-mortar, including retailer bankruptcies, shop-in shop closures and softness for some of our brands.

The disruption to our business from the conflict in the Middle East negatively impacted our third quarter sales growth in UCEM by approximately 1 percentage point. The impact to our consolidated results was not material. I'll discuss our assumption for the remainder of the fiscal year related to these disruptions when I address our outlook.

Turning now to margins. Gross margin for the quarter was 76.4%, an expansion of 140 basis points compared to last year. This was largely driven by strong net benefits from a focused PRGP execution and programs covering all aspects of operational efficiencies, including our 0 waste initiatives, which drove another reduction in excess and obsolescence this quarter. These net benefits helped to offset headwinds from incremental tariffs and inflation. This also reflects a favorable impact of 95 basis points related to an in-period charge we took last year for underabsorbed overhead costs. Our improved sales leverage also contributed to expansion in the quarter.

Looking at operating margin, we expanded by 360 basis points delivering a margin for the quarter of 15% compared to 11.4% last year. Changes in our business mix, along with the shift in spending to the fourth quarter led to better-than-expected results. Our disciplined investment allocation and PRGP net benefits drove a 4% reduction in nonconsumer-facing expenses and improved operating leverage even with the normalization of employee incentive costs. This funded a 9% increase in consumer-facing investments or 5% excluding the impact from FX.

We continue to invest for growth, enhancing brand desirability and reinforcing the execution of Beauty Reimagined. Our effective tax rate for the quarter was 31.8%, up from 30.8% last year. Diluted EPS was $0.91 for the quarter compared to $0.65 last year, an increase of 40%, driven by our sales growth and cost leverage. This also includes a dilutive impact of $0.02 related to business disruptions in the Middle East.

Looking at our overall PRGP, we continue to execute with discipline delivering results ahead of our expectations. With the establishment of One ELC operating model, we are continuing to make measurable progress against our strategic priorities, driving sales growth, improving our cost structure and fueling sustainable, long-term value creation.

In terms of restructuring costs, through March 31, we recorded $1.1 billion of total cumulative charges, primarily related to employee-related costs. Further to Stephane's comment on evolving our focus towards high-growth channels and reflecting approved initiatives through April 29, we now expect total restructuring and other charges of $1.5 billion to $1.7 billion before taxes. We still expect approvals for specific initiatives under the restructuring program in total to be completed by the end of fiscal 2026.

Shifting now to another key priority, cash flows. For the 9 months, we generated $1.2 billion in net cash flows from operating activities. This is a meaningful improvement compared to the $671 million generated last year, and primarily reflects higher earnings, excluding noncash items. Also contributing to the improvement was a favorable change in operating assets and liabilities despite the significant increase in restructuring payments. We invested $306 million in CapEx, as we continue to prioritize consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the 9 months, CapEx was down [ 23% ] versus last year, reflecting the phasing of projects. These results reinforce our ongoing focus on improving free cash flow.

Turning to our outlook. The current geopolitical and macroeconomic environment remains uncertain and continues to drive global volatility. Starting with fiscal '26, our solid year-to-date results supported by continued net benefits from a PRGP and disciplined cost management give us confidence in raising our fiscal '26 outlook.

In terms of the conflict in the Middle East, our outlook assumes a greater year-on-year impact from disruption to our business in the fourth quarter relative to the third as shipments for key shopping moments had already gone out before the conflict began. This helped to minimize the impact to our third quarter sales and profitability. For the fourth quarter, we expect an unfavorable impact of approximately 2 percentage points to sales growth and $0.06 to EPS.

Now looking at our fiscal '26 outlook. We expect organic net sales growth of approximately 3% at the high end of our prior guidance range. For the full year, the impact of business disruptions in the Middle East is expected to be less than 1%. We assume gross margin of approximately 75% and operating margin of 10.7% to 11%. The strong margin expansion is in spite of a more normalized level of employee incentive costs, which is expected to have a greater year-on-year impact in Q4 than in the first 3 quarters of the year.

Diluted EPS is now expected to range between $2.35 and $2.45. This represents a year-on-year growth of 56% to 62% and includes a dilutive impact of approximately $0.07 related to business disruptions in the Middle East. We also assume a weighted average share count of approximately 365 million shares. Please refer to a press release issued this morning for other assumptions included in our fiscal '26 full year outlook, including those regarding evolving trade policies and enacted tariffs.

For fiscal '27, our preliminary view is based on strong progress across Beauty Reimagined and our PRGP as well as our assumption of low to mid-single-digit growth in global prestige beauty. While we are in the process of finalizing our fiscal '27 plan, we currently assume net sales growth of 3% to 5% for the full year and operating margin of 12.5% to 13%. As Stephane said, we are confident in the trajectory of our business, while recognizing ongoing external uncertainty and volatility.

We plan to share a more complete view on fiscal '27 in August when we report our fiscal '26 full year results. At that time, we will refine our view as needed based on our assessment of prevailing geopolitical and macroeconomic conditions as well as changes in foreign currency exchange rates.

In closing, we remain focused on executing our long-term strategy to become the best consumer-centric prestige beauty company with clear priorities of sales growth, margin improvement and strong cash generation. Across One ELC, we are advancing a multifaceted transformation with discipline and speed, and we are deeply grateful for the dedication, resilience and passion of our employees around the world who make this progress possible. Together, we are positioning the company to deliver sustainable long-term value creation.

That concludes our prepared remarks. I'll now turn it over to Rainey.

Before we start Q&A, please note that management will only be addressing questions related to our fiscal '26 third quarter results, outlook for fiscal '26 and preliminary view on '27, as set forth in the press release we issued this morning or discussed on today's call. The company will not be commenting on the status of discussions with or the possibility of a transaction. The company does not intend to provide any further information ahead of an official announcement detailing and agreed upon transaction or a termination of discussions.

[Operator Instructions]. And now let me turn it over to the operator for the Q&A session.

[Operator Instructions]. Our first question today comes from Dara Mohsenian with Morgan Stanley.

I was hoping to maybe get a bit more perspective on long-term margin potential, you're obviously making greater-than-expected progress on margins in fiscal '26. You've announced the greater job cuts and cost savings. So I just wanted to get some updated perspective from you on how you're thinking about the path, the margin expansion as you look out past the guided to fiscal '27 level? With all the progress you're making, you think you can get back to the peak high-teens margins you had in your business at 1 point?

And perhaps just give us a general sense as you look out past fiscal '27 on the incrementality of cost savings and reinvestment needs as you look out longer term. I know you won't quantify that, but just a general sense of the continued opportunity there and the need to sort of reinvest behind the business?

No, thank you, Dara, for the question. I was expecting this question. So when you think about it, so -- and I've said it now consistently over the last few quarters, we're executing the biggest transformation in our company's history at every level of leadership, cultural, operational, you name it. And I think we've demonstrated over the last 3 quarters and actually since the launch of Beauty Remargined, is now the fifth quarter, that we are executed with speed and agility.

We are back to growth now for the first time in 4 years. We're expanding margin. Now Dara, if you think about the margin that we've expanded or we are planning to expand this year at the higher end of the guide for the year, plus what we are -- the preliminary view that we are giving for fiscal '27, we would have expanded margin by 500 basis points from the starting point of Beauty Reimagined. We were at 8% margin. We could finish around 11% this year, and we have a preliminary view of 12.5% to 13% for next year.

So obviously, this is an enormous amount of work that is coming from our ability to just improve gross margin. You saw gross margin has expanded by 140 basis points into this quarter. The reduction of the nonconsumer facing that is consistent, again, minus 4%, which is showing the discipline that we are putting in the management of our SG&A. And today, we've announced the PRGP continuous and new ideas that we are putting out there to continue to further optimize our SG&A in favor of improving the consumer-facing and investing behind our brand.

And I was very clear about like now when in February '25, when we launched Beauty Reimagined that we needed to invest behind our brand, and we are seeing the retail momentum and the sequential improvement in many of our brands geographic channels around the world. So when you think about it, coupled with the new operating model that we are putting in place and this operating model is built in partnership with best-in-class partners around the world. You name like Accenture, Shopify, WPP that we've announced last month, which is going to allow us to create a unified media activation model, you start thinking that all of what we are doing is to build a P&L that is built for leverage.

And it's very important for us that we unlock additional growth. And the momentum that we are seeing this year is what is giving us the confidence to get and to give you the preliminary view for fiscal '27 at 3% to 5%, which I want to be very clear, at 3% to 5% like Akhil would say, at the mid to the high point of this view, we would be gaining market share, and that is going to create a lot of leverage in our P&L. And you do that you couple with the emerging market growth, the online growth, all of that is going to create more leverage for the operating margin over time.

And I want to make it clear. Margin recovery is a milestone. It's not a sprint. But -- and I really am really beyond proud of what we are doing as a team today to show the momentum. And I want again to stress that if we deliver the top end of our view for next year, it will be 500 basis points improvement to 13% of metal margin. And with the leverage that we are building in the P&L, I believe we can continue to improve over time.

The next question comes from Filippo Falorni with Citi.

So thank you for the addition of the preliminary fiscal '27 guidance. That was very helpful. I was hoping you can expand a bit more from a geographic and category standpoint, where you see the acceleration in the global prestige category? And from Estee Lauder specific standpoint, where you see the biggest opportunity in terms of improvement in market share? Just curious what regions are driving the acceleration you're expecting and where you see the biggest opportunity?

No. Thank you, Filippo, for the question. I'll start, and certainly Akhil will add few few things. The thing that I would say to start with is the category of beauty is still extremely resilient and very attractive, as we speak. We're seeing many indication of the life cycle of the consumer is expanding, consumer entering younger into the contact category. They are staying longer also with us. This is the reason why we've launched this big venture into longevity led by the many of our brands. We're seeing sort of new category also then pre and post procedure. This is the reason why we've done a minority investment in 11.11 Skin, but we have many of that in many of our brands.

We have emerging market that continues to grow thanks to what I've been saying for now quite some time, 500 million new consumers that are going to enter the middle class between now and 2030, the accessibility of beauty through online channels, specialty multi that is growing in frankly every geography around the world. So when you think about -- you take this macro change and the continuous robustness of the category, coupled with what we've demonstrated with 3 of the 4 regions that are posting growth over the last 9 months, France is in double digit in the last quarter, online in double-digit, priority market in double-digit, China is in the fifth quarter of consecutive market share gain.

And we are doing it in a way that I'm extremely proud, but because it's very well balanced between the channel but also the brand. We have 6 brands in double-digit growth in the quarter in China, besides like obviously, the La Mer that continues to be very strong, but we have TOM FORD, we have Le Labo, we have many brand. We have also that is in recovery, I've said it in my prepared remarks. We are growing significantly ahead of the is actually sequentially improving, but we are improving much, much faster than the average.

And I would say, last, but not least, the stabilization of North America and the U.S. for me was super important. I have communicated at the beginning of Beauty Reimagined. It is about rebalancing the growth between the region between the category. And the fact that in the U.S., our investments are paying strong dividends in the sense that every of the 4 category are growing share in volume. It was about reactivating recruitment, and we are doing it. And we are doing it also by gaining not only volume share, but by value share with the ordinary and on 5 makeup brand in the U.S.

So all of this indication shows that, Falorni, we're not only diversifying the growth by geography, but we're also diversifying the growth by category. Now in the quarter, we have had very strong positive momentum in France. But when you look over the 9 consecutive months, skincare is accelerating and makeup and haircare are sequentially becoming like stronger. And obviously, the launch of MAC in Sephora in the U.S. on TikTok shop around the world are the proof point that the strategy from the consumer coverage, from an innovation acceleration and investments are working. So I would say in a sense that when you put the macro condition behind beauty alongside the acceleration that we're seeing in our geographies and in our categories and the diversification of the growth, we feel very confident putting our outlook or just the preliminary view that we've given for next year and which will position us into a market share gain, again, as I said in the prior question, if we deliver the mid- to the high point of the preliminary view.

Just Stephane touched very well upon our growth trajectory. I wanted to touch a little bit upon the margin progression and also build up on Dara's question. So at 13% margin, 12.5%, 13% margin, our gross margin is north of 75%. Our SG&A or total OpEx at 62%. So there's still significant runway as Stephane said, on margins. And why we feel confident is because if you look at even this year, we started with a guide of about 9.4 to 9.9. And it's really the comprehensive nature of our work, which starts by looking at discounts to operational excellence to One ELC model, which Stephan talked about, which really covers many meaningful parts.

Shopify is one of them. It's a total online transformation. With the leadership of Brian and team, we are doing a total tech transformation. There's a full-on project on procurement. We announced WPP in the media, so we are going to drive significant ROI on our consumer-facing. With EBS on Accenture, that's a whole program to drive a better One ELC streamline model across various parts of the world. So what you are seeing is a very comprehensive program to drive cost and with increased -- slightly increased announcement of restructuring, this gives us significant runway beyond the 12.5% and 13% margin guide we gave.

So between those 2 combinations of growth flywheel that Stephane talked about and a new cost efficiency with restructuring, but everyday efficiency muscle, we are building in the organization up and down the chain gives us the confidence to drive not only growth but margin cash and total value creation.

The next question comes from Rupesh Parikh with Oppenheimer.

So just going back to Americas and maybe specifically North America. So growth there has been flattish. So just curious, as you look to FY '27, do you expect to turn the corner from a growth perspective? And just in terms of some of the inventory destocking happens, would you expect those to go away next year?

Rupesh, thank you. The simple answer is yes. We expect basically to go from where we were declining for a decade to the stabilization we're saying to the acceleration. And that's a massive work that the team is doing. So like am I happy where we are in North America? I think the team is doing a fantastic job. We are not there yet. And we still have some work to do, but the team is really working very hard to rebalance the channels and to have consistent performance behind the brands.

But look at it objectively in the quarter, having the 4 categories in volume share gain and having the ordinary that continues to do a fantastic job in skin care and gaining market share both in volume and in value, having 5 brands in makeup, gaining share in value in the quarter is showing that the Beauty Reimagined is working in this market. Now obviously, we're coming from a position of strength. Like I said, we have many brands in top rankings, but we had to pivot, and we are pivoting very fast where we are distributing our brands in the market.

Now we have 12 brands in Amazon in the U.S., performing extremely well. We have the launch of MAC Sephora that is only 4 weeks old in the quarter, okay? So we just launched at the beginning of March, and MAC is already gaining 10 points of market share in the entire quarter. But I'd just like also want to highlight that it's been just like skyrocketing in terms of market share gain in which is one of the key categories. So we're seeing mainly proof points of the acceleration in the market. We are reactivating in recruitment. We are putting more innovation in the market. We are moving to, like I said, Amazon, TikTok Shop, more brand into Sephora, continuous acceleration with Ulta. We have like fantastic support from all our retail partners, and we have online growth in the high single digits in the U.S., which is also very encouraging that is just giving us all of this confidence that we can return to growth next year.

And then I would say just one thing, Rupesh, like we've done all of that with exiting some of our brands and some channels and also having to navigate disruption like bankruptcies in some retailers that is costing us up to 2 points of growth in the quarter. So now if you exclude all this disruption, we would be even closer or like certainly very close to like in our market share again. And we are narrowing the market share loss. In the quarter, we've only lost 6 basis points in value versus prior year, but gaining significant volume, and that was for me the key indicator to put the foot on the gas pedal and to just accelerate in North America.

And I think that was your question, I hope I'll answer what you wanted. Sorry, on the inventory. The inventory in North America in a very good position, and we are managing, like I said, in every geography, in every channel. We're shipping to the demand, and I'm very confident that we are in the right place pretty much everywhere. Is there 1 or 2 SKUs that are above what we wanted. This is normal. We are managing through it, but nothing unusual to manage for us at this point.

The next question comes from Lauren Lieberman with Barclays.

So I wanted to talk a bit about channel strategy in the U.S. So you guys have been outspoken and made a lot of progress, obviously, on Amazon and you've had the launch with MAC in Sephora, but we read this week that Bobbi Brown may be exiting U.S. department stores and department stores have long been, let's call it, the analogy is to use, but a challenge as the channel itself has been deeply pressured. So just perspective on exposure to department stores, willingness to kind of continue to make kind of bold moves in that sense to exit channels outright to reposition because it's a big swing if the reporting on Bobbi is correct.

Yes, no, thanks, Lauren. You're right, we are continuing to resize our -- the channel in North America. And we are -- and frankly, it's not only North America, I would say it's in our market that it is in the U.S. that is in the U.K. and in Australia to a certain extent also. And we are moving to high-growth channel. This is why we've been really fast and diligent in putting our brand on Amazon. This is why we moved MAC into Sephora, and I really want to thank the Sephora team and our team for the fantastic support for a really, really great launch.

Continued support from our partners at Ulta where we're doing great things. But we have to continue to rightsize the department stores, and I've been very clear. And part of the PRGP expansion, if you look at it, we are reducing -- so 70% of the expansion from an employee workforce, our beauty advisers from channels that are dilutive, especially in department stores and freestanding store, and we have rationalized it. And in some places, we are a brand that we are exiting from some channels to really focus on the high-growth channel.

To answer your question on Bobbi brand. Bobbi brand is a fantastic brand. We love the brand. There's plenty of proof points where the brand is growing in Asia, and we have plenty of proof points where the brand is growing in the high-growth channel such as Amazon or specialty multi. And this is where we are putting our effort and I've been very clear all along that Beauty Reimagined was about rebalancing the geography, rebalancing the category, but also rebalancing the channel to make sure that we are where the consumers are shopping. So these are some of the tough decisions that we have to make, but we are making them with speed, agility and this is going to create more momentum for us in the market.

If I could just add 1 thing, Lauren, which you are very well familiar. I mean one of the untold story of Estee Lauder Companies is how well diversified our channels are around the world. If we look at globally, our online business is almost 1/3 of our business. Our direct-to-consumer is more than 30%. Even in the U.S., online is getting closer to 40% and direct-to-consumer is more than 30%. So worldwide, we have capabilities on around 8 to 10 big channels in the world, and we are bringing these capabilities -- cross capabilities around the world.

For example, one of the things Stephane has done is how to work with pure play? We now have a global team that drives pure-play progress around the world. So on products like Amazon, TikTok, we are taking the progress of 1 country to another at a rapid pace like we've never done before. So it's an extraordinary ability to pivot. Market is transforming, but as part of Beauty Reimagined #1, we are trying to lead that change through consumer coverage and whole organization is working across the board on that.

The next question comes from Chris Carey with Wells Fargo.

I wanted to ask about the segment. You flagged double-digit growth in emerging markets. I believe you had constructive commentary on France in this call, if I heard that correctly. So clearly, there's some momentum in key areas. It does suggest the U.K. is perhaps a bit more muted. Can you give us a sense of how you see the U.K., how the strategy is to improve the market are evolving? And perhaps in general, as you think about this region more broadly, how you would see the key growth drivers as you march towards this organic sales target that you would have over the next over 12 months-or-so?

Yes. No, thanks, Chris. The UCAM is a tale of so many different stories because obviously, you have the U.K., you have Europe and you have the emerging market. Thanks for noting. The emerging market for us, we're very happy with the momentum that we're getting in the market with double-digit growth in this quarter, and we have had some very strong positive momentum for now quite some time in this quarter. India has been absolutely phenomenal for us. We have like in a market like Vietnam, Indonesia, Turkey that are doing well.

And surprisingly also, we have had good net sales growth in the Middle East because we were getting ready for Eid and Ramadan, so we had shipped just before to get ready, and we had fantastic campaigns, great activation, new product into the market. And obviously, all of that has been somehow disrupted by obviously the conflict in the region. The interesting thing also within the Middle East, UAE is the region within the Middle East that is the most affected with this trial. Obviously, we have actually maintained strong position in Saudi, where for the quarter, we are flat in sales with only a 2% decline in March.

So it tells me that we have a strong position, and we will navigate through this disruption. Obviously, we are hoping, and like I said, for the safety of our employees and our team suppliers and et cetera, that this is going to become to raise this realization very quickly. With that, I think we will continue to build on the momentum.

When it comes to Europe itself, Europe is more muted, Chris. We have had, obviously, some success in France and in Spain, where we are gaining market share in France, we are really deploying all our niche and brand at speed, and we're seeing a lot of like good demand in this market. But generally speaking, the consumer sentiment in Continental Europe has been the most affected around the world outside, obviously, of the Middle East region, and we are navigating through this disruption by being very strategic on where we are investing.

For instance, we've put a lot of investment on Double Wear behind Estee Lauder and it's been fantastic. We have some great activation on The Ordinary and The Ordinary is gaining market share in the region. So we are more targeted and more specific on how we are deploying our capital in the region. Now when it comes to the U.K., and I know my team was not happy when I told a few quarters ago that I was not happy with the performance, and we've worked very hard together to just turn around. And I'm very happy to report that the sequential improvement in the U.K. is back in positive territory.

Now we are not there yet and [indiscernible].

The next question comes from Bonnie Herzog with Goldman Sachs.

All right. I just had a quick follow-up on EBIT margins next fiscal year. I guess I'm wondering how critical it is for organic sales growth acceleration to ultimately drive op margin improvement versus your PRGP savings? And then I did have a question on the impact from duty-free changes at Beijing and Shanghai airports. You had mentioned this last year. So just hoping for an update on where things stand and if the resolution of these issues should ultimately support a sequential improvement in growth in F Q4?

[Technical Difficulty]

Pardon me, ladies and gentlemen, it appears we've lost the connection to our speaker line. Please standby while we reconnect. Thank you for your patience.

[Audio Gap] part of the driver of margins, but we have multiple tools in the toolkit to continue to drive margin expansion. Of course, on a long-term basis, growth is critical to drive this, but we are still in the middle of a massive cost transformation. So we feel good about the cost work, which, of course, has an opportunity to do even better when that kind of margin -- that kind of sales growth comes through. So in summary, what I'm saying is we have a very strong cost program. which, of course, depends on growth, but is in itself a huge margin expander in itself.

Yes. And Bonnie, just 1 quick thing on sorry, for a quick that we have had here, I'm glad that we are back. So a Travel Retail things are moving in the right direction. And our Travel Retail business posted a low single-digit growth in the quarter, which is a net sequential improvement compared to what we've been. And remember, we said that there was an issue -- a potential issue with the retailer transition, especially in Beijing and Shanghai Airport and obviously online. But the impact has been less than initially expected. I have to say, I want to recognize again my team in Travel Retail and also our partners, retailer partners in Highland because they've worked tirelessly to make sure that we were not going to miss Chinese New Year, all the key activities.

So frankly, things are getting better. And as a result, we are also rebalancing where the growth is coming from. Hainan has been absolutely fantastic for us. We grew over 30% in the quarter in retail, which is significantly of the department. And I think I mentioned it earlier that we have 6 in double digit with Lauder, La Mer, Jo Malone, Clinique, MAC and Bobbi Brown growing. We are accelerating. We are accelerating the recapture. And at the same time, as we are rebalancing within the China -- Travel Retail China ecosystem, we're also accelerating Travel Retail around the world. And I've made it very clear that the investment that we are putting in Travel Retail West, if you are lucky to travel around the world, you are going to see better presentation, more consumer experience in all key airport that it is from to Singapore, to Bangkok, you name it, our team is working tirelessly to deploy new brands, especially all our luxury Kilian, TOM FORD

So we have a lot of work to continue to do, and we are confident that Travel Retail is back to stabilization, and we are hoping past, hopefully, the disruption in the Middle East that we are going to be able to continue to grow in multiple journeys.

That concludes today's question-and-answer session. If you were unable to join for the entire webcast, a playback will be available at 1:00 p.m. Eastern Time today through May 15. Please visit the Investors section of the company's website to view a replay of the webcast. 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.

Good day, everyone, and welcome to the Estee Lauder Companies Fiscal 2026 Second Quarter 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.

Hello. On today's webcast are Stephane de la Faverie, 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 those 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, all organic net sales growth also excludes the noncomparable 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.

Retail sales performance discussed is based on information available as of January 29, 2026. 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 our retailers' websites. Throughout our discussion, the profit recovery and growth plan will be referred to as our PRGP.

During the Q&A session, we ask that you please limit yourself to one question so we can all the time scheduled for this webcast.

And now I'll turn the webcast over to Stephane.

Thank you, Rainy, and hello to everyone today. We reported strong second quarter results, marked the 1-year anniversary of Beauty Reimagined and raised our fiscal '26 outlook. Our second quarter performance further exemplify the momentum we have created across our 5 action plan priorities. Having delivered 4% organic sales growth, our growth and operating margin expanded and EPS grew 43%, showcasing once again our ability to manage expenses.

For the first year, we made promises, we kept promises as we expanded our consumer coverage across online and brick-and-mortar in every region, overhaul our innovation engine with new leadership, faster-to-market launches and a renewed consumer-first mindset, increased consumer-facing investment every quarter to accelerate recruitment, enabled by significant savings from the PRGP and created one ELC, one new operating model, aligning brands, regions and function as one team with one culture and one operating ecosystem.

When we introduced Beauty Reimagined, our ambition was bold, execute the biggest operational, leadership and cultural transformation in our history to become the best consumer-centric prestige beauty company. Thanks to the passion, creativity and resilience of our team around the world, we have come far in 1 year. Yes, there is more work to do, but much has been accomplished.

In the first half of fiscal '26, our global retail sales trend improved from the first to the second quarter from down 4% to flat as the decline in travel retail moderated. Even more encouraging, our retail sales grew 4% in the first half, excluding travel retail. In Mainland China, we outperformed prestige beauty in the quarter, again with double-digit growth. We gained share for the quarter and calendar year '25, led by La Mer and TOM FORD, showcasing the strong desirability of our brands compared to international and local peers. In Hainan, our retail sales grew high single digit in the quarter, led by Estee Lauder and La Mer. In Japan, we outperformed prestige beauty in the quarter, driven by MAC and Le Labo.

For calendar '25, we gained share in France to strengthen our #1 category rank. In the U.S., for the quarter and calendar '25, we gained volume share in total prestige beauty. We also grew value share for the quarter and calendar '25 in skin care led by the ordinary and hair care. In addition, Estee Lauder gained share in makeup for calendar '25. These retail results and share trend reflects the exceptional execution of Beauty Reimagined over the last year.

For our first action plan priority, we moved rapidly to expand our portfolio presence in consumer preferred high-growth channels, market, media and price tiers. We expanded our presence on Amazon Premium beauty stores now with 12 brands across 10 markets. We also announced our brand reach on TikTok Shop in the U.S. and Southeast Asia and launched our first brand in the U.K. and Germany. This work, coupled with strong performance on Tmall, Douyin, JD, Notino and Trendyol drove high single-digit online organic sales growth in the first half, leading us to believe we outperformed prestige beauty in the channel.

For fiscal '26, online is on track to exceed the 31% of reported sales reached in fiscal '25 as we increasingly tap into the full potential of this high-growth channel. We increased our presence in travel retail across the West, including with Duty Free America as well as new and upgraded doors for our luxury fragrances in European and Middle Eastern airports, contributing to double-digit retail sales growth for fragrances across several major retailers in the first half of fiscal '26. This strategic expansion is providing a double win, driving growth and diversifying our travel retail business. As we expanded our pharmacy reach in Europe and entered the channel in Latin America, while strengthening our ties in specialty multi with MAC up-and-coming launch in the U.S. Sephora.

For our second action plan priority, create transformative innovation, we focused on 3 areas of breakthrough, on-trend and commercial. In China, innovation resonated especially strongly. Estee Lauder's 3 breakthrough launches in the longevity skin care science space contributed to its double-digit organic sales growth in skin care in the market. Our China innovation lab created Re-Nutriv oil in 15 months, quick for skin care and demonstrating how we are accelerating our speed to market.

And TOM FORD, strong double-digit organic sales growth in China was driven by highly sought-after on-trend launches in lip and face as well as France. Globally, The Ordinary's innovation and expanded consumer reach drove strong double-digit retail sales growth in the first half, demonstrating that our new model allows us to support growth for our own indie brands to drive greater scale.

For makeup, Estee Lauder's Double Wear concealer has been a game changer in the U.S., achieving the top-ranked new product in prestige makeup based on unit for calendar year '25. Within hair care, Aveda's new Miraculous oil catapulted to be the brand top-selling product through the first half. For fiscal '26, we are on track for innovation to represent at least 25% of sales. And as we work towards increase the percentage of innovation launched in less than a year from 10% to 30%, we are tracking to 19% for fiscal '26, above the 16% we initially expected.

Turning to our third action plan priority. We boosted consumer-facing investment focused on high ROI opportunities. We invested in our freestanding stores, opening new door for our luxury fragrance brands to showcase their unit experiential retail while selectively closing doors for MAC and Origin to drive a more productive fleet. Impressively, Le Labo's strong double-digit organic sales growth in the first half of fiscal '26 reflects its expanded reach as well as double-digit like-for-like door.

We also invested in groundbreaking campaigns for commercial innovation with several notable for MAC, which contributed to the brand's return to organic sales growth in the first half of fiscal '26. La Mer campaigns for 11.11 shopping festival and holiday also proved to be a winning investment, contributing to La Mer being our best-performing brand for the first half of fiscal '26 given its organic sales growth.

For our fourth action planned priority, fuel sustainable growth through bold efficiencies, we continue to realize strong savings from the PRGP, which Akhil will describe. I want to personally thank the team for working together with speed to bring this fruition.

Finally, for our fifth action plan priority, our step to reimagine the way we work evolves today as we unveil one ELC, our new operating model, aligning brands, region and function as one team with one culture and one operating ecosystem. We have simplified our structure in support of one team with fewer layers and silos, along with clearer ownership to make it easier to get things done and done well. And guided by our newly announced beauty commitment to our team, we are leaning into one culture of bold thinking, accountability, agility, unity and focus.

Lastly, we have advanced our work to create a robust operating ecosystem for more connected and scalable enterprise. In the second quarter, we've established our new enterprise business services, selecting Accenture to transform how we deliver select shared services globally as we accelerate the deployment of AI throughout the organization. This exciting partnership adds to the ecosystem we are building with leading technology providers, including Microsoft, Google and Shopify to fuel our ambition to be the best consumer-centric prestige beauty company.

With the momentum of Beauty Reimagined and our first half results, we are raising our fiscal '26 outlook today by narrowing the organic sales growth range towards the high end, increasing operating margin expansion from 165 to 200 basis points at the midpoint, reflecting previously expected headwind like tariffs and now greater consumer-facing investment and raising EPS growth from 33% to 43% at the midpoint. This outlook reflects the confidence in our turnaround as well as the significant work that we still have ahead to drive better performance in the U.S. as well as in the U.K. despite its return to growth in the second quarter. And while the macroeconomic environment is challenging in the Western Europe market, we see opportunities to improve our results. For China, we are encouraged by the strong desirability of our brands and innovation but cognizant of still subdued consumer sentiment.

In our priority emerging market, after a significant acceleration to double-digit organic sales growth in the second quarter, we are confident that our new organizational design is enabling us to better tap into growth opportunities.

For the second half of fiscal '26, we have a rich slate of innovation. Already out in skin care, Clinique launched its new dermatologists developed skin care line and La Mer introduced eye cream to pair with its successful rejuvenating night cream. For makeup, Estee Lauder Double Wear is launching next-generation matte foundation with more wear, more shade, more benefits. The brand is already the leader in foundation and looking to strengthen its leadership around the world. And Clinique is fueling the nostalgia trend with the Chubby Stick launch.

For fragrance, newness from KILIAN PARIS, Le Labo and TOM FORD builds on the category's terrific first half as our best-performing category with 10% organic sales growth. In hair care, Bumble and bumble introduced a styling product at an exciting time as it enters salon-centric in the U.S.

In closing, for fiscal '26, we expect to return to organic sales growth and expand our operating margin for the first time in 4 years, setting the stage to restore sustainable sales growth and a solid double-digit adjusted operating margin in the next few years. I am immensely grateful for the opportunity to lead this great company, especially as we celebrate the 80th of our founding. We have an extraordinary team, an extraordinary portfolio of brands, and we have momentum onward and upward.

I will now turn the call over to Akhil.

Thank you, Stephane. Hello, everyone, and thank you for joining us today. Enabled by Beauty Reimagined, our focus continues to be on long-term consumer-centric value creation through sales growth, margin improvement and strong cash generation. We are delivering solid progress across all 3 priorities, driven by the team's unwavering determination to build on a strong foundation, advance key initiatives and increase organizational speed and agility. While there is more work ahead, we remain focused on disciplined execution and are well positioned to drive sustainable long-term value.

Before sharing our updated full year outlook, I'll start with a recap of our second quarter performance. For more details on our second quarter results, please refer to our press release issued this morning. Starting with organic net sales. We grew 4% year-on-year. This was led by 6% growth in both Skin Care and Fragrance, which was supported by increased consumer-facing investments behind go-to-market activities and innovation.

Targeted expanded consumer reach also drove growth as we continued to execute against our Beauty Reimagined action plan to accelerate best-in-class consumer coverage. These category results fueled double-digit growth in both Mainland China and collectively in our priority emerging markets. In North America, sales were flat with sequential improvement from the first quarter. Growth online from our continued expansion was offset by a decline in brick-and-mortar.

Turning now to margins. Gross margin for the quarter was 76.5%, an expansion of 40 basis points compared to last year. Our expansion was again driven by strong net benefits from our PRGP, including operational efficiencies and within excess and obsolescence ongoing reductions through our zero waste initiatives. Our improved sales leverage also contributed to expansion in the quarter. These results helped offset headwinds from incremental tariffs, change in our mix of business and inflation.

Turning to operating margin. We expanded 290 basis points, delivering 14.4% compared to 11.5% last year. Our disciplined investment allocation and PRGP net benefits drove a 3% reduction in nonconsumer-facing expenses, even with the normalization of employee incentive costs, helping us to maintain cost efficiency and operating leverage. This funded a 7% increase in consumer-facing investments, driving growth and continuing to strengthen brand equity.

Our effective tax rate for the quarter was 39.8%, down from 42.6% last year. This was primarily due to lower tax expense related to previously issued stock-based compensation. Our rate in the quarter also reflects the estimated unfavorable impact of recently enacted U.S. tax legislation, along with a higher effective tax rate on foreign operations due to new valuation allowances on certain deferred tax assets, primarily in Latin America. Sales growth and cost leverage drove diluted EPS growth of 43% versus last year. EPS increased to $0.89 from $0.62 last year.

Looking at our overall PRGP. We continue to execute with focus and discipline, advancing initiatives to better position the company to improve its cost structure, fuel growth and deliver sustainable long-term value. This quarter, we made significant progress in advancing our restructuring component of our PRGP, entering into a strategic agreement for enterprise business services in connection with the historic transformation of our global operating ecosystem.

As Stephane mentioned, this global initiative includes consolidating certain service providers, expanding outsourced services and standardizing end-to-end processes using advanced technology. This enables us to unlock greater productivity and efficiency across the organization. Expected charges for these initiatives include professional service fees, employee costs and contract terminations. We expect these initiatives to deliver net benefits that ramp up over time as the transition progresses and service levels normalize. As we execute the migration, we do expect some near-term cost pressure as we operate in parallel with benefits building thereafter.

As operational scale and efficiencies are realized, they are expected to drive OpEx improvement and keep us on track to achieve our overall PRGP savings and margin progression. In terms of restructuring costs, through December 31, we recorded $904 million of total cumulative charges, primarily in employee-related costs.

Turning now to cash flows, a key priority. For the 6 months, we generated $785 million in net cash flows from operating activities. This is a significant improvement compared to the $387 million generated last year, primarily reflecting higher earnings, excluding noncash items. Also contributing to the improvement was a favorable change in operating assets and liabilities despite the meaningful increase in restructuring payments. We invested $204 million in CapEx, continuing to prioritize consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the 6 months, CapEx was down 25% versus last year, reflecting the phasing of projects. These results underscore our strategic focus on improving free cash flow.

Turning now to our expectations for the remainder of the year. We are raising our fiscal 2026 outlook. We remain cautious of potential near-term headwinds, including those from macroeconomic, geopolitical and retailer-specific uncertainties, though we are encouraged by our momentum and year-to-date performance.

Starting with organic net sales, we are narrowing our range and now expect full year sales to increase in the range of 1% to 3% compared to last year. At the midpoint of our outlook range, we assume growth across all regions, except for the Americas, where sales are expected to be flat. In the second half, we expect organic net sales to increase low single digits with higher growth anticipated in the fourth quarter relative to the third. This reflects an incremental transitory headwind in the second half of the year in Asia travel retail from the change of duty-free retailers servicing the Beijing and Shanghai airports, including the related online businesses.

Turning now to our outlook on margin and EPS. We now assume an operating margin between 9.8% and 10.2%, up from our previous assumption of 9.4% to 9.9%. This improvement reflects both our strong first half performance and greater gross margin expansion than previously expected. We anticipate operating margin expansion in the second half. This reflects third quarter contraction of approximately 50 basis points compared to last year as we invest more in consumer-facing programs to support our largest innovation schedule for the year. This contraction also reflects tariff headwinds.

Diluted EPS is now expected to range between $2.05 and $2.25, up from a previous range of $1.90 and $2.10. This assumes a weighted average share count of approximately 365 million shares and reflects year-on-year growth of 36% to 49%. Please refer to our press release issued this morning for other assumptions included in our fiscal 2026 full year outlook, including those regarding evolving trade policies and enacted tariffs.

In closing, as we mark the 1-year anniversary of our Beauty Reimagined strategic vision, we are energized by our performance and progress towards restoring sustainable growth, a solid double-digit operating margin and strong cash generation. We remain focused on disciplined execution and long-term value creation.

To our teams around the world, thank you for your dedication, passion and unwavering commitment to be the best consumer-centric beauty company together as one ELC.

That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

[Operator Instructions] The first question today comes from Bonnie Herzog with Goldman Sachs.

I guess I have a question on Americas, where you just mentioned that you expect growth to be flat in the year. I guess it does appear a little light in context, I guess, of the much easier comps from last year and then the progress you've been making with launches on Amazon, et cetera. So just curious how you're thinking about the underlying performance in the Americas? And what are some of the key moving parts to keep in mind?

And then if you could just also provide any color on the cadence of growth? Will it be more balanced or skewed towards F Q4? Just think about the context of the full company guidance.

No. Thank you, Bonnie. I'll take that, and Akhil can add some. So look, just let me just go back a little bit in North America first. And obviously, I'll talk about the Americas in total. We come out of 10 years of market share loss in the Americas. And I'm really proud of actually the momentum that the team have put into this market because when you look at the calendar '25, we've been able to gain share in volume. And that was very important, and I've said it multiple times, we needed to reengage our brand to recruit consumers, and we've been able to do it across many of our categories and many of our brands. So we are now in a volume market share gain.

And on top of it, we are also in a share gain in value in skin care led by the ordinary and many of our brands that are pulling the total. So we are seeing some momentum but we are coming out of obviously having a lot of like market share loss over the years. We still have the #1 brand and the #2 brand in skin care, the #1 and the #2 brand in makeup with Clinique and The Ordinary in skincare and Clinique and MAC in makeup. We're seeing a lot of strong performance with Estee Lauder and MAC at Ulta. We're very excited and have communicated it in October, November that we were entering MAC U.S. at Sephora. And this is actually a big milestone for us after many, many years of not playing in like all specialty multi universe. So yes, we are seeing great momentum, and we are moving Bonnie in the right direction when it comes to North America.

That being said, there's still a rebalancing of all the channels that we are in the process of doing, as highlighted by Beauty Reimagined. We've moved fast with Amazon. We are repositioning the department stores and we are exiting distribution as the distribution erodes, and we are moving fast into the specialty-multi. So I believe there is great momentum, and I see a lot of more momentum going forward for our brand overall.

Now the Americas is also a combination of North America and also Latin America while Latin America has been very strong at the beginning of the calendar '25, we've seen a slowdown of consumer consumption in the market. And I think one of the main challenges that we see is the enacted tariffs are starting to hurt consumer confidence in Latin America. But overall, I want to say I feel very strong. We have momentum in the market. Volume share is back, and we are moving our brands. So I do believe we will see additional momentum going forward into the market.

And to the second part of your question about the cadence, and we've indicated it in the prepared remarks and in the press release, we see a stronger Q4 than we see in Q3 overall for the company because of some of the adjustment that we are seeing, especially in the East with travel retail. one of the thing that we are experiencing in travel retail is still some level of disruption, especially when it comes to Beijing, Shanghai airports but also the online business with Sunrise. As you know, certainly, Sunrise has stopped operation. All the operations have been transferred with a mix of China Duty Free, Avolta and Wangfujing.

So there's a little bit of a transition that we felt in Q2 that goes into Q3 but I really believe that there's going to be strong normalization based on the great relationship that we have had. And I want to just remind that Q2 was delivered a very strong Q2 that beat our expectation despite actually challenging in travel retail, thanks to very strong performance in China and acceleration also in some markets in the East -- in the West.

So I think, again, we have momentum and there's a rebalancing of growth but our ambition is really to deliver the top end of the guidance that we've put in top line and in bottom line. So we've narrowed the midpoint but really our objective clearly stated today is to deliver the top end of the guidance.

The next question comes from Filippo Falorni with Citi.

Stephane, I was hoping you could expand a bit on the Travel Retail business. If you can give us a state of the union of the total travel retail business. And especially in Hainan, we've seen clearly an improvement in conversion rates in spending in duty-free stores. So what gives -- what's the outlook as you think going forward for that part of the business? And maybe can you comment a bit on the other parts of the travel retail business in North Asia, especially South Korea and Japan? And especially as we think about the back half of the year, where when you think about on a 2-year basis, you're comping more normalized shipment level. So what -- how are you thinking that could play out in the back half of the year?

Thank you, Filippo, and I'll try to make a state of the union that doesn't last too long because it's a very complex things that is happening in travel retail. Now the one thing I would say, let me start from where we really have strong momentum, and I see like travel retail accelerating. It is indeed in Hainan. And I think it is clearly documented that traffic is picking up in Hainan. And I'm really strong -- I'm really happy with the work that the team did in Hainan. In calendar '25, we are growing and we are ahead of the department. And we are -- so we are gaining market share. What I'm excited also, we're getting market share across a more diverse portfolio of brands that we have done it in the past, which if you remember, all our growth was coming from Lauder and La Mer. Now we have Lauder, we have La Mer. We have MAC, we have Jo Malone. We have TOM FORD that are really performing in the channel very well.

And one of the reasons why we've seen this performance, and we are back at driving retail with a lot of eventing because the traffic is there but conversion is still low. When you are there and you create really retail entertainment, we are able to convert the consumer. And I'm happy to report today that the month of January in Hainan was in high double digit for us, again, gaining market share across many of our brands. So very excited by -- especially going into the Chinese New Year time frame, it is very important, a very clear indication that we are back able to convert traffic into sales.

Now I want to be very clear, Hainan is only a part of travel retail East. And I think this is where maybe there's a little bit of a misconception of how big is Hainan in the total. But travel retail East is a combination of Hainan again, the airport of Beijing and Shanghai, the Universal app where people can buy online product but there's also, frankly, the rest of APAC that is highly disrupted Korea. And we're seeing some recovery in the rest of APAC, but it's still very small in comparison of the China ecosystem.

So now let me just explain what happened in Q2 -- our Q2, the last quarter of the calendar year in the ecosystem of Shanghai and Beijing and the Universal app. Obviously, you know that all of this business is being in the midst of being transferred from Sunrise, like I said, to CDF, Wangfujing and Avolta. There's a bit of a disruption in the market happening in this moment in time as we are transitioning, and that's the normal course of doing business. Concessions sometimes move from one retailer to another. But the Universal app, that was a significant part of the business was shut down in Q2 and remains shut down as we speak. So obviously, our ability to just like convert is more limited.

Now if you look at China Mainland and travel retail, we outperformed in China Mainland in Q2. And in the total travel retail, to your expectation, maybe we delivered less. My point is it's an entire ecosystem that we need to look at where we are capturing the sales. Going forward is very strong. I want to be very clear. It is actually -- this change is a good thing, especially at the time where we are managing our inventory very carefully. We are shipping only to the demand, and we see this change being the right thing. We have a very strong partnership with CDF, with Wangfujing with Avolta locally and globally. And we are in the process of putting the right GBP to make sure that we can accelerate in the course, the remaining course of this fiscal year but frankly, beyond.

And the second part of your question, obviously, like Japan and the rest, Japan, actually, I'm really happy because we are demonstrating in this moment in time that even in a disrupted market because you know, obviously, there's some geopolitical tension between various markets in the region, we've seen a dramatic reduction of traffic even though we've been able to just gain market share. And this is the #1 thing that we are focused. No matter if there is growth or no growth, we want to be in a market share position, in a market share growth. And that's what we are demonstrating.

Now early into this calendar year, we're seeing a shift from Japan to Korea and over market in the region, and we are ready to welcome the consumers with all our brands really fully deployed. So I want to be clear, even though there's a bit of a disruption in Q4 into Q2, we remain extremely confident about the momentum that we are building and our ability to just convert traffic into sales across all our brands.

And one thing just to add quickly, Filippo, the untold story, which Stephane is basically double-clicking here is the outperformance by ELC in the channel. It is in the West where we had stated early on as Stephane had said we'll win in West TR. We are winning there. We are winning in Hainan by quite a distance, and we are winning in markets like Japan, Thailand and other places. So the outperformance by ELC in travel retail, parts of travel retail, along with China is the significant encouragement we take for our business as we look forward.

The next question comes from Steve Powers with Deutsche Bank.

I wanted to pivot, if I could, to profitability in the quarter, which, as you highlighted, was strong, both on gross and operating margin. If I drill in on there a bit, though, Skin Care delivered most of the upside, if not all of the upside. Fragrance was also positive but more in line, I think. I think on the other side of the coin was Makeup, which is still essentially kind of operating at a breakeven level. Maybe you could just talk about what you're seeing in that segment and how you see the progression of profitability for Makeup to contribute more as we go forward?

Thank you. Thank you, Steve. A couple of things. As we are looking to go to solid double-digit margin, we are looking to improve margins across the board, across categories and across regions. Now specifically answering your question on the Makeup profitability this quarter, it was also impacted by the return we took on the innovation that is coming in quarter 3. So there is a temporary effect there, which understates Makeup profitability for the quarter. However, your broader point on makeup profitability is very clear to us. And as Stephane and I have communicated, this is an area where we believe we can have significantly better margins overall. No reason why it should be very dissimilar to other categories over a period of time.

Through the work we are doing on rightsizing our fixed cost in these categories, through the work on PRGP and through the acceleration we are now starting to see even in this category on sales. And with the big launch coming up of Double Wear and some of the improvement we are seeing on makeup, we expect to see profitability to improve. But this is a key pillar that we are working on, Steve. In quarter 2, you did notice a little bit of a onetime due to the return we took on this innovation but those are the some of the salient points.

Just one thing, Steve, on the Makeup because I think it's very important. And look, we've been always transparent. We have a lot more work to do on Makeup, and we are -- with the team here in New York and frankly, with all our teams around the world, we're continuing to just improve things. I'm not going to repeat what Akhil said but a lot of things that we are doing in this moment in time related to our strategy on Beauty Reimagined is to expand distribution. We've entered TikTok Shop in the U.S. with Clinique and MAC, which has allowed actually MAC to just already be in the market share gain in the lip category, which is so important for MAC in the U.S. MAC has entered TikTok Shop in Germany. I said it again, we are about to enter. We are weeks away to enter Sephora U.S. with MAC, which is going to be a big game changer for the brand, and we are working on more opportunities. Innovation is being ramping up.

One of the thing I've mentioned in my opening remarks is the fast acceleration of the innovation coming in less than a year. Remember, I've committed to triple that. We are already exceeding our expectation this year. We were thinking about 16% of our innovation was going to come in less than a year. It's going to be 19%, the majority of this innovation is coming from Makeup. Obviously, we can go much faster in makeup that we can do in the other categories.

So we are going fast. We are deploying our Makeup brand in the right distribution. We are rationalizing distribution. I think I also mentioned it in my prepared remarks in terms of the freestanding store to make sure that we are more profitable. And we are going to have all the added benefit of the PRGP that continues to flow through like the P&L this year and in fiscal '27 because while the PRGP ends at the end of this fiscal year, the execution of it will continue into fiscal '27, and we will basically get some benefit.

So we are on the path for recovery. It is true that Skin Care is going faster because of the scale. We're very pleased with the progress that we are doing in Fragrances. I think Makeup requires more scale, and this is why we are deploying our brand and accelerating innovation to be able to just resolve also this issue that we have with the makeup category.

The next question comes from Lauren Lieberman with Barclays.

I wanted to ask a little bit about China. You called out not just the obviously strong results but in the release, you talked about the period around 11.11 being a big component of that. So was curious if you could talk about the promotional environment around 11.11, what you're expecting in that regard for Chinese New Year. I think the market overall, lots of beauty players have talked about wanting -- wishing the environment to be less centered around those big selling moments and more balanced across the year. So just curious sort of what you're doing to drive stronger, let's call it, like everyday performance and to generate excitement outside of those key -- historically key holiday periods.

Thank you, Lauren. It's obviously a very important discussion that we're having with the team. So yes, and thank you for acknowledging the very strong performance that we have had in China. I want to say it's now fourth consecutive quarter that we grew share in all 4 categories in China. And that's very important. And yes, the big period like 11.11, like 618 are more promotional than others. But it is -- these are highly concentrated level of sales. And the good news is that during this period, the Estee Lauder brand became, again, the #1 prestige brand on Tmall and doing. La Mer is the #1 brand in luxury and Tmall and Jo Malone, the #1 brand in prestige fragrances on Tmall.

So it is important for us to be present and to be strong during this moment because it allows us also to recruit a lot of consumers and retain them through the year. But the interesting thing, when you go into China, every day is a moment, okay? There's every day that there is a shopping festival in some sort. Obviously, Chinese New Year, we are about to enter. We are into it because it starts on February 15. And it's a little bit later this year. That's why there's a bit of disruption in the month of January. We have to look at January and February together. But it's actually traditionally a period that is less promotional. It is about more gifting. It is about more experience that we are bringing to the consumers. And that's what I mentioned like earlier when we had the question on travel retail about also creating retailtainment.

So our team, both in travel retail, China and in China Mainland are laser-focused in creating eventing VVIP reach to the consumer. So we depend less on the high promotionality of the 2 major shopping festival being 6/18 and 11.11. And there's plenty of others. There's like International Valentine's Day, there's Chinese Valentine's Day, there's Women's Day. I could go on and on, on the number of events. We're also driving our freestanding store fleet. We are accelerating the number of freestanding store in the market. And this is certainly the part of the distribution we've accelerated the most that allows us to just bring experience to the consumer. So we don't rely so much on the high-traffic promotional moment.

So I feel we are in a good position. I mean just to quote a few reasons. We've gained in Q2, 22 basis points in skin care, 87 in makeup, 100 in fragrances, 85 in hair care. These are not small gain by any means. And frankly, that was not only driven by 11.11, but also the post 11.11 going into December in the preparation of Chinese New Year. So rest reassured that we are laser-focused on balancing the year so we can continue to raise the consumer-facing price in the market as well as really increasing the number of experience and connections we are creating with the consumers. But the momentum is good.

I've been also very clear that China calendar '25, we were lapsing 2 years of negative trend. The good news is that we've accelerated, and we've accelerated above the market. The consumer sentiment is still subdued. But when we create the right experience, not only through promotion, we are able to convert them. So we are thinking that '26, there's still a lot of opportunities but we are now starting to lapse much stronger base of '25 into '26.

And one thing just to add, Lauren, that our discount levels in China are coming down while we are driving this outstanding growth and outperformance of the market. So not only is, of course, sales coming, discounts are reducing and then, of course, profitability is improving.

And we are doing the same in travel retail China. Also, we are just like cutting the discount, the retailers also -- and in the midst of this transition with the new retailers. This is obviously a conversation to just make sure that there's less discount in the market, and we drive more conversion through experience going forward. All the channel is evolving to be much more experiential, which I think is a good thing for the long term of our brands.

The next question comes from Rupesh Parikh with Oppenheimer.

So I just wanted to go back to the North America segment. I was hoping to get more color just in terms of some of the dynamics between sell-in and sell-out and whether you expect that gap to be improved as you -- or close as you exit the fiscal year.

So Rupesh, thank you. And our -- when we did quarter 1, we did have a significant gap, which we talked about on the call, we had about 5-point gap, and Stephane and I had said that this gap should reduce. In quarter 2, this gap has significantly reduced and should continue to be lower than where we were in Q1. We do expect a going gap of a couple of points, mainly driven by the fact that as we move to these online platforms, some of the media that we are investing, which is the A&P on these channels gets a reduction from sales line versus an OpEx line. So this is not -- this doesn't impact profitability. It's simply the arrangement or the contract, which reduces sales. So when on these channels are in growth mode year-on-year, that mix causes that.

The other factor has been inventory where we have made significant progress. So our inventory, frankly, everywhere in the world are lower or in line with where we need it to be, including in North America. Now North America is, of course, a shifting retail landscape, so we have to constantly manage it. But what we are seeing is a clear improvement in difference between retail growth and net growth.

And I also wanted to follow up on Bonnie's comment earlier, which is that, look, North America first quarter was down. Second quarter is a positive, and we said full year would be flattish, which means the rest of the year after quarter 1 should be positive for North America. So we -- and that's what we are working towards. So of course, when we combine quarter 1 net sales growth, which was a negative, we had the full year flat. So North America trends are also improving. And should quarter 2 to quarter 3 to quarter 4, we expect more in positive versus flat, including quarter 1, the full year was flat.

Hopefully, that clarifies, Rupesh.

The next question comes from Dara Mohsenian with Morgan Stanley.

So I just wanted to follow up on the U.S. Can you give us a sense now that calendar '25 is in the books, how much of your business has shifted more to what you characterize as higher growth channels versus the percent of mix that's maybe in some of the heritage channels that are performing as well? And just give us an update on where you stand in the brand evolution as you move some of the brands towards -- increasingly towards these higher-growth channels and just where we stand in that evolution and what the plans are going forward?

Yes. Thank you, Dara, for the question. So look, in North America, today, and I think we've mentioned it, we are continuing to decrease the penetration of department store in our total business. That's your question. And today, it's like at 30% or less. Frankly, it is way less on some brands. Obviously, Lauder, Clinique and MAC are still brands that have like a higher penetration in the department store than other brands that have a very limited penetration. We are, as demonstrated, increasing really fast our penetration to the online players like Amazon and now TikTok Shop. We've moved a lot of brands.

We have 12 brands in the U.S., on Amazon U.S. So this is really outstanding to have been able to just move that quickly in the channel. Again, MAC is moving into Sephora, but we have really strong partnership with like Ulta and with many of our brands there. So like the penetration of specialty-multi is increasing. The penetration of the online player is increasing. The penetration of our direct-to-consumer business is also increasing, especially our brand.com but also freestanding stores in luxury fragrances. We've opened some stores, and we are planning to open more in the future as the consumer -- the luxury consumer is gravitating towards even in the U.S. towards more experience, unique brand proposition selling environment. So we are really on the right path to just like being able to just like make this move and to be less and less dependent.

Now I want to be very clear, the department store remain a very important and strategic channel for some of our brands, and we are working with our partners all the way from like Macy's to Bloomingdale's to like even Saks in this moment in time to just make sure that we capture the consumer. We have a very strong position, often leading position in these department stores, and we need to just protect it. But at the same time, we are clearly stated as part of our Beauty Reimagined that we are moving where the consumer is moving. There is like no decision there.

So I feel good. We have -- that's why we've been able to just maintain our market share. And frankly, most of the volume growth that we have had and the gain in volume is coming from the high-growth channels. A lot of this growth, it's not hard to just see that it's also coming from the high and very strong performance of The Ordinary that is in high double-digit growth in this market that is 100% in high-growth channel. And this is actually one of the strengths having the brand from La Mer to The Ordinary that are positioned in all these channels being able to just capture the consumer where they are. Thanks, Dara.

The next question comes from Chris Carey with Wells Fargo.

I wanted to ask about Europe. We've seen some stabilization in the sequential improvement in the market. Can you just expand about State of the Union and specifically comment on the U.K. and your outlook for the market in the medium term?

Yes. No, thank you, Chris. Thank you for noticing the sequential improvement. Europe is a tale of multiple cities. Obviously, our region is U.K. and I want to remind everybody is like Europe is the U.K. and is obviously the emerging market. So if I look at the sequential improvement that we are seeing in the total area is really coming from the emerging market but also from the U.K. going into -- back into positive territory into the last quarter. I've said it multiple times, the U.K., we were actually not where we should have been. We still have a lot of work to do but at least we are moving in the right direction.

Europe, consumer sentiment is still very subdued. We've seen a lot of challenges in France, in Germany, to name like a few markets. But at the same time, actually really strong performance in markets like Spain or Italy, where we are gaining share in fragrances. And this region of the world is highly penetrated in the category of perfume. So it's very good for us to be able to demonstrate that we are able to just gain market share in this category. So we have a lot of work to do.

I'm actually pleased with the beginning of momentum that we are getting into the U.K. and many of the playbook that we've used in the U.S., we are applying to the U.K. We've moved some of our brands into the Amazon platform in the U.K. We are rationalizing distribution. We are accelerating the work we are doing with specialty multi. We've had really great support and great performance at Sephora U.K., obviously, like Boots, our historical partner to name a few. So great, great momentum. And frankly, where I am the most excited based on the new organization we've put in place are the emerging markets. Our priority emerging markets delivered double-digit growth into the quarter, which is a sequential improvement, and it's driven by Turkey, by Middle East, by Thailand and even mid-single digit in India that is such a very strategic market for us.

So I think it's a tale of, Chris, of so many different cities -- and stories, sorry, about like this very complex region. But again, it's moving in the right direction. More work to do but the team is laser-focused on activating with excellence all the launches. And I think things from Clinique to Lauder innovation that are coming in the second half of this fiscal year are so important for this region. Double Wear is the leading foundation in many of these markets, and we expect a lot of things from this launch and hopefully, some sequential improvement -- continuous sequential improvement in this geography.

The next question comes from Peter Grom with UBS.

So I was hoping to just get a sense on kind of the top line trajectory in the back half of the year and just the expectation for higher growth in the fourth quarter versus the third quarter. Can you maybe frame the difference you would expect between the quarters? And I guess, as we think about the fourth quarter, are there still some of these disruptions or repositioning changes that will be impacting growth? And I ask this more in context around the exit rate and maybe how this should inform our view on the top line trajectory as we look out to '27.

Yes. Thanks, Peter. So essentially, look, we had a strong first half, plus 3%. Right at the beginning of the year, we had telegraphed that we would have back half in Asia, especially in both in China and travel retail will be anniversarying more larger basis. So we had said that at the beginning of the year. It was a part of our guidance, which we had communicated. Now to your point around back half, like Stephane said, we expect to see continued mid-single growth in China or better but some of this is the stimulus that the Chinese economy had, which is anniversarying. Our goal is to outperform that market but we expect market itself to take a little bit of a backstep from the double-digit type growth we put together. That's one.

Secondly, the other point is that when you look at our APAC and TR segment, you see that the largest base period was quarter 3. So we do see a little bit of that in the quarter 3 to quarter 4 phasing. And then as we communicated, there is this transition, which Stephane and I talked about, of retailers, which is not a longer-term item to your point around exit rates but it's a transition where one retailer takes business from another, you have ordering transition that goes on. So these are the main things that impact slightly in the back half. Of course, as we exit the year, our expectation is that we had said beauty market would be 2% to 3% this year. That was including travel retail, which has been challenged. As travel retail bases off that period, beauty market itself should be better, assuming other things remain the same in the West and China continues to do mid-single.

And then our goal -- our stated mission very clearly is which we are demonstrating in China, in U.S., in Japan is that we want to start leading these markets in a very clear way, which we are already doing unquestionably in China, in Japan, in parts of emerging markets. So I think that is basically what is underlying our back half guide and then, of course, what you should expect going forward.

Yes. And Peter, I want to be very clear that there's no misunderstanding from anybody. We are going for the top end of the new guidance that we are giving, both in top line and bottom line for this fiscal year, okay? So that's very clear. That's the mission that we have. We're going for it. Obviously, we are giving ourselves a range because of like volatility that we all have to manage. And frankly, being able to deliver this very strong first 6 months of the year with the amount of volatility that we have had and consumer sentiment being subdued, I think I'm really proud, frankly, of what our team has done. And I think it's showing the momentum that we have on Beauty Reimagined and I think should give you the confidence that on the long term, we are in the right trajectory. We are accelerating. We are doing the right thing, and we are rebalancing also our growth between geographies, between brands.

And frankly, we're putting the one operating ecosystem in place for us to just be much more agile. And in this midst of time, we are refreshing our long-range plan. And you can expect us when we come at the end of the fiscal year in August that we will give you more visibility of our mid- to long-term growth. But I've also said it, and I repeat it today, our objective past this transition year is to gain market share. That's what we are doing this transformation. This is why we are diversifying our growth. This is why we are simplifying the ways of working.

We've brought a lot of new partner in-house today. We've talked about Accenture. We've talked in the past about Shopify. We have great partners like Google, Microsoft and so many others that are helping us to really act with speed and agility and let alone all the PRGP where the saving will continue to flow through this year and into next year and create a lot more efficiency.

So I feel really good about what we've done in this first year of Beauty Reimagined. The momentum in the first half is strong. Even the retail sales ex-travel retail at plus 4, lead us believe that we are gaining market share in many, many markets as demonstrated in China, in the U.S. in volume and so on and so forth. So I feel good. We are going for it. We're going for the top of the guidance, and that's the mission that we -- every single of the employees of the Estee Lauder Companies have today, and we're going for it.

That concludes today's question-and-answer session. If you were unable to join the entire webcast, a playback will be available at 1:00 p.m. Eastern today through February 19. Please visit the Investors section of the company's website to view a replay of the webcast.

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.

All right. Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. I'm very pleased to open Morgan Stanley's Global Consumer and Retail Conference by welcoming back Estee Lauder here.

Before we get started, I do have to note a quick disclosure. Please see the Morgan Stanley research website at www.morganstanley.com for important research disclosures, and feel free to reach out to your Morgan Stanley representative with any questions.

So joining us today from Estee Lauder are CEO, Stephane de la Faverie; and Chief Digital and Marketing Officer, Aude Gandon. Thank you so much, guys, for being here.

Thank you.

So I thought, first, Stephane, you're a year in Beauty Reimagined. You seem to be building some momentum. How would you describe where the business stands today across the 5 pillars you cited and implemented under the program? What's really starting to click? What are the areas you're making the most progress in? What are the areas where you think you have more work that you really need to do this early in the program?

No, thank you, Dara. Thank you, first of all, for having Aude and I and the team sitting in front like today, we're really excited to talk about like our progress that we are making as part of the Estee Company Beauty Reimagined program that we've announced now almost a year ago.

I would say over the 5 pillars that I think you know very well, I think we are -- some are well underway and some obviously continues to require some work for us. And I think if I can summarize it from the first 3 pillars of Beauty Reimagined, which is consumer coverage, accelerating innovation and putting more investment in consumer-facing, I think we are very well on the way.

When you look at the consumer coverage around the world, I think we've demonstrated as a company that is turning 80 years young next year that like finally, when we are putting our mind into going where the consumer is, we are going fast from Amazon to Shopee to TikTok Shop like around the world. But even pharmacy, where we've seen like tremendous demand on skin care around the world, especially in Europe and in Latin America, we're moving with speed.

Today, in the U.S., we have 11 brands on Amazon. We've launched Amazon also in the U.K. We've launched Amazon in Mexico, in Japan. And we are continuing to explore around the world many more opportunities. And I think as a result of that, it has allowed us to just like reconnect with lapsed consumers, but also bring a lot more new consumers, frankly, like to the brand. And we've seen like momentum in the U.S. with our ability to maintain share and even growing share in China, were, frankly, in China, for many years, we've been always at the forefront of consumer coverage.

The second thing is on innovation. I'm quite pleased actually at quite how quickly now we are bringing innovation to market and the impact that we are making on our innovation. And I'll give you a few examples like Double Wear, Concealer is still one of like the top makeup launch in the U.S. And we always joke like from the Estee Lauder brand, people didn't believe that we could actually put to market one of the top makeup product in the calendar years.

We've done it also like for the Ordinary, we have like a lot more innovation that we're bringing in the Ordinary, you've certainly seen in the track report that is basically consistently back in double digit now. So this innovation is really clicking and like going at pace across many categories.

Now I want to just be completely honest because when we announced on February 4 that we were accelerating innovation to more than 25% of our sales. And even by saying we're going to triple the innovation in less than a year, obviously, it takes some time. So we are at the beginning of the journey of innovation, and you're going to see across all 4 category and brands, us accelerating innovation.

From the consumer-facing, I've reported it very clearly with Akhil, we've increased consumer-facing by 4% when we decreased actually the nonconsumer-facing by 4%. So we are continuing to invest in the market. And I really believe this is what is allowing us to recruit a lot more consumers to the brand and really to get the momentum that we published in Q1, which I believe that we have -- maybe we can talk also like beginning of Q2.

I think on the rest, on the PRGP, we are well on the way, but there's a lot more work to be done, okay? So I think when you look at it like from an employee standpoint, we've announced in February that we were going to eliminate between 5,800 to 7,000 positions. Today, we are well above 4,000. But there's still some work to be done in outsourcing, in procurement. And frankly, as we go in the program of the PRGP, our profit recovery and growth plan, we're finding opportunities every day that allows us to really reengineer the P&L for growth in the future.

And the last piece, I would say, is the culture and the culture takes time. We are making some evolution, but I really believe that we have a lot of traction from our teams at the centers and our teams around the world and our partners, and I think we're just making some progress. But this always in my head, when we published this Beauty Reimagined strategy, that was not something that was going to take only a few months. Culture takes time to evolve, but we are committed as a company and as a team to just evolve the culture to just be able to reignite with growth and be, again, a company that gains market share consistently.

Great. That's helpful. And then, Aude, given you recently joined Estee, maybe give the audience a bit of perspective on your background and why you found the opportunity attractive at Estee to become Chief Digital and Marketing Officer. And also what you're really most focused on, what you see as the biggest opportunities at Estee going forward?

Yes. Thank you, Dara. So I joined a bite less than 4 months ago. I spent 2 decades in media and in creative and then worked in product marketing at Google. So I worked on the marketing tech side and then joined Nestle. So I was the CDMO at Nestle for 5 years.

And the reason behind for me joining Estee Lauder it's, first and foremost, the portfolio of brands. We have incredible brands. And when you're a marketer, if you have the brands, the brands which are trusted, which have a long-lasting power, which have a legacy, but also which are still relevant today for the consumers. And I think that's what we see right now.

We have -- we're gaining momentum as well because we're bringing this brand back where the consumer is, and that's how we can see the increase of sales. So the power is there. And when you have that base, then we know that the growth can be there.

And in terms of focus, the first one is going to be and is on media. We have increased the investment on consumer-facing. But I think what is key today is making sure that we are investing in the right place. For us, we really are rebalancing our media investment to a more brand building, brand awareness. I think the industry overall at a large sense, we went pretty far on lower funnel and more performance. And at the end of the day, what makes a difference, especially in our categories is the brand.

Is this brand relevant? Do I trust the brand? What is the storytelling? Is that brand kind of is actually meeting who I am or who I want to be. So we are really doing this. We know that it actually has very high impact on performance because brand building is actually -- there's a whole COE on the long and the short term of it. It's actually building short-term sales and long-term sales. So it's also increasing the ROI of your media investments. So that's the first kind of point of what we're doing right now.

Also working very actively and lowering the acquisition cost of our media, so we can create a higher lifetime value. And when you do that, so when you're lowering the acquisition cost and you're actually increasing your investments on brand building, that's how you really get an increased lifetime value of your consumer. We're doing this, of course, by making sure we're collecting data and we're leveraging data, so we can increase the ROI of our media investment as well.

And in media, definitely, we're also, therefore, relooking at how we partner with our agencies. We are really refocusing them as well on brand awareness, brand relevance, making sure that we are buying the right media, and we're also basically delivering the right content in the right place. We said we want to be the most consumer-centric luxury and prestige company part of Beauty Reimagined and making sure that you have -- you go and talk to the consumer where the consumer is, but also with the right content is very key. And so that's also a point of focus for me.

Great. And on the marketing side to follow-up, how important is personalization? And what's the real big breakthroughs in terms of effectiveness of that marketing spend? Is it using the data? Is it cutting agencies and efficiencies there? How do you really drive that marketing efficiency?

Personalization is key because I think everybody wants more and more to get the right message for them. They're not interested by a message, which is not for them. And I think this is the big difference now that we are definitely into a digital world.

Data is definitely really helping us because you can first really make sure that you understand your audience better and you understand what they're looking for or what they're interested in or also what can be an unmet need. And that's also a really kind of key point of focus for us is really also understanding, getting under the skin of the consumers and understanding what is trending, but also what they could be interested in the future.

Personalization for me has been a promise for a very long time. We got better because of data and digital, as you mentioned. I think AI is what is really going to make personalization true. I think before, we had pockets of success overall as an industry in personalization. I think AI is changing the game completely because you can also start now to actually personalize the content. So it's not just the key message or how you do your targeting with the content you have is we're going to be when we start being able to actually personalize content to very specific individuals and serving it on the platforms where they are.

Great. Stephane, you talked about culture when we talked about the 5 pillars. We've been focused on building a flatter, faster, more accountable organization. Do you think you're starting to see significant paybacks from those efforts? Where do you stand on that front? And what's actually changed in terms of the workflow day-to-day and the culture so far as you see it?

Yes. It's a good question. If you remember, when I started and I announced Beauty Reimagined at the beginning, I said it's the biggest operational transformation that the company that has gone through in its history and very quickly added a few months later, the world leadership and culture, because ultimately, like it's one thing to just change the organization. It's another thing to just like making sure that the new processes and ways of working stick.

So I would say we are well underway. The thing that I'm the most proud of that we've been able to do in a very short period of time is that my entire new leadership team is in place. If you read through all the announcement, obviously, with Aude like being here, more than 70% of my executive team is either new to the company or new in their position in executive team.

So including me, Akhil, obviously, Aude being one of like the newcomers in the company. And I was very specific and deliberate on how I build it with our Chief People Officer, Michael Bowes, to really where we needed like a specific skill set like the one that Aude brings in media, in digital, in marketing, O'Brien, Franz, in tech and data and ultimately, our latest appointment with René Lammers, the new Chief Research and Innovation Officer that comes from PepsiCo.

So these were like really some -- I won't say gap, but some really elements where we needed to evolve. So I think the first thing was started from the executive team, and I think the executive team is well in place and leaner.

The second thing, as part of PRGP, like you said, we've reduced tremendously the layers of the organization. On the VP and above, we've reduced by 20% the workforce. And I think what we're seeing already in the organization is decision being made much faster. There's less processes, there's less handoff through the organization that is in marketing, in the function, in the commercial areas, and that is already making a big difference.

The next thing, I would say, also the fact that I've changed the reward system for the company. You saw it because we published it like in our filing; we've changed how the company is rewarded in the past. Everybody was like -- the brand was rewarded on the success of their brand in a given market, the regions on their regions, the function on what they were doing. Today, the entire organization is rewarded on the success of the enterprise, on the success of the Estee Lauder Companies. which has allowed me to also change the geography of the P&L from the brand to the region.

And today, we are seeing a lot more agility already since July 1 when we implemented that where regions are moving resources from brand A to brand B or affiliate A to affiliate B, depending on where we're seeing the success. So we're seeing a tremendous level of agility that we've never seen before because I always say to my team, we have a plan at the beginning on July 1. Let's say we need to deliver x this year what we've promised in terms of guidance.

How we end the year has to be at this promise or better. How we deliver can change greatly depending on the volatility and happen in the market, the success of a brand or in innovation. In the past, it was really hard to just move money around. And that in a matter of like a few months is giving us a lot more agility.

And I would say there's areas where we still need to continue to do a lot of work. You saw that a couple of weeks or 3 weeks now, we've announced a big new partnership with Shopify. Obviously, Shopify has been top of mind over the last few days being one of the key actors to bring the goods to consumers around the world during like the Black Friday to Cyber Monday time frame.

And that obviously is also a new way of working that is different, relying on the best external partner from a tech standpoint and from a DTC standpoint to be, again, delivering at scale what is more than 30% of our business like globally.

And the last thing I would say is -- or the last 2 things, I would say, is our outsourcing projects. So we still have like a lot more work to do. Maybe we can talk about that later. This is also going to be the next phase of how we are changing.

Yesterday, we filed an update on the appointment of the lead BPO that is really going to help us in the rollout of the enterprise business services. And that alone, this is going to be a major change on how we are going to operate the back of house versus basically the front of house, and our ability to connect with the consumer in a greater way.

And to support all of that, it's not only the executive team that has evolved and throughout the organization, but we've also made some update to our Board. We've appointed 2 new Board members, Dana Strong, the CEO of Sky; and Annabelle Long, who is one of the top VC and a recognized person like in China. And that really completes for us from executive team to Board to the ways of working internally. And all of that is helping us to really shape the culture to be much more agile, faster and a lot more ambition to be able to reignite growth for the future.

Great. That's helpful. And then, Aude, you've leaned much harder as an organization into social selling, emerging channels, TikTok Shop, Douyin, et cetera. Can you just discuss what it really takes to succeed in those channels, how that might be different than the heritage channels? And just how you think about driving new customer acquisition in these new ecosystems. And maybe, Stephane, you can talk in general about driving traction and incremental consumers into the Estee franchise.

Yes. Yes, it's definitely -- it's always a work in progress because I think this is a world which is evolving absolutely every day. The starting point for me is to -- that we need to accept that the upper funnel and lower funnel, which is the way that we've been looking at how to reach the consumer, how to sell to the consumer is completely good. It -- look, the funnel has collapsed is what I like to say.

For a very simple reason, you do have -- now you have consumers who can discover a brand or a product and buy it in 2 clicks. And it may not be on a traditional kind of commerce site, but it's on a store where it's actually on an Instagram or TikTok, you mentioned TikTok Shop. And so it means that we need to rethink completely the way we look at how do we sell and how do we reach to the consumer, how do we tell our story, how do we sell our benefits.

And what is very simple for me is every content, every piece of content needs to be shoppable because that's the way every moment that we reach a consumer can be a shoppable moment. And so it really means that we need to make sure that we actually merge everything that we talk about brand building with commerce because it can be very often, it can be just one session of a consumer.

It also means that I think you had COVID where everybody became very digital, and then there was a post-COVID. And what we see now is we're reaching a certain maturity. And I think emerging channel and heritage channels are actually complementing each other. And I think for a while, we were pushing one against the other. We don't see it anymore.

Consumers can buy online, but then they're very happy to go to stores as well to experience the store, to get -- to be able to touch the product, the packaging, try first, try the colors, for example. And so that's also the way we need to look at it. So it's how we want to be consumer-centric. So we need to be where the consumer is. We don't make the choice for them. They need to -- they make the choice for us.

And we need to make sure that we make content extremely kind of adaptable to this. And so that's why Shopify, for example, is key for us because that's how you really integrate your commerce into everything that you do, into all your marketing. And so for anyone who's been buying lipstick or foundation in the past, I always take that example. When you're on Shopify, one of the key things is you always forget the shade you like every time.

When you're on Shopify, it means that if a consumer has bought online or has bought in store, thanks to Shopify, you can refine what you bought before and what you like. And so it's a sale which is going to be closed, and that can be online or in-store, and that's the way we're really looking at it. But -- so content is really key, and we're looking at how we can completely transform, and we are transforming the way we do content because we need a lot of content. We need the same campaign can have thousands of versions of this content to serve the different platforms.

I think one other thing, I would say, that I want to stress is we're building an ecosystem. And I think we've realized very quickly in the course of this calendar year that we were missing some key elements of the ecosystem. And I think you think in the West, like what TikTok Shop, like does today, TikTok obviously started as a media channel, and we still consider it mainly as a media channel, even though there's a shopping enablement to it.

But the interesting thing is like the moment we've put Clinique on TikTok Shop, we've seen within 10 days, doubling the traffic on Amazon. And Amazon is becoming an eco-funnel for the rest of the ecosystem that it is the specialty multi, the department store and so on. Then we've seen the same thing with MAC. When we put MAC recently on TikTok Shop, we've seen actually traffic in the freestanding store increasing, which has resulted in us gaining some market share, especially in the lead category.

So it's very interesting because for a very long time, we were like called as like being too dependent on the department store, and I cannot argue differently, we were too dependent on them. But more importantly is like it was not actually the right question. We were really too dependent. I think we were just missing some element of the ecosystem that allows us to recruit and because we had the retention. But ultimately, we are in the game of recruitment and retention. And this is what we are doing.

And you can see like in the U.S., which has been quite pleased is the ability to just reignite retail unit share gain over the past quarters. And this is for me the indicators on how the ecosystem is starting to work all in sync, and so this is what we've tested in the U.S., we are doing it in many other markets.

Now you look at China, where social commerce is also there. It's different because it's not nascent. It's still nascent in the West, where it's still very mature with doing in China. Now doing is a much more closed ecosystem because you basically like you have the entertainment, you have the shopping, all in the closed ecosystem.

So you have like less, I would say, flow of consumer between the various channels that it is like Douyin or Tmall or JD and then a department store. So you need to activate all of them in sync. But in the U.S., that is very interesting what is happening today. And we may be in a world where, frankly, the ecosystem will work very differently in China and in the West. And that's where we are testing with like some great success today.

Great. Well, that's a good segue into the U.S. You've made a lot of progress over the last year with expanding into some new channels, broadening your brand availability. Just maybe give us some insight on how confident you are that, that can drive sustained U.S. top line growth over time and at some point, get you back to sustained share gains or at least a point where you're not losing share in the U.S. So I'm interested in sort of sustainability going forward off of this increased penetration in new channels, et cetera, that's been emerging over the last 12 months here.

I think my #1 job I've learned this year is to be confident. So I'm really confident that we are on our way to just like turn around the U.S. because if you think about it, and you've been following us for many years, I think we've been in a market share loss for many, many years. And I think what I'm really proud of in a very recent -- in short period of time is that we've been able to just like maintain share.

But more importantly, like I said earlier, is that we are now in a unit market share gain. So we're gaining market share in dollar, in skin care and in hair in the last quarter, but we are gaining market share across multiple categories in unit. And that was for me the biggest indicator. This is what I've asked my team, we need to go back in recruitment.

Now it is clear that the U.S. consumer is also price sensitive in this moment in time. It's resilient, but price sensitive. And we've been able to just like acquire via the Ordinary, via Clinique, the small size in fragrance is a lot more of the new consumer.

So when I see the momentum that we're getting on the Ordinary that is consistently gaining market share and double-digit growth. We have Estee Lauder brand that has gained market share in all 3 categories, one of our largest brands in the last quarter. And it's been now 5 quarter in a row that Estee Lauder is gaining market share in makeup.

We have gained market share in Le Labo and Jo Malone. And the interesting thing I just want to say like for the audience here, when we look at the track data, there's a certain number of data that are captured in the track data like Circana and others. But we have like more than 30% of our fragrance business that is in direct-to-consumer that is not in the track data.

And this business in the freestanding store and brand.com, especially for brands like Le Labo and Jo Malone is like flying for us. So that's also what gives me the confidence that is you need the track data, but I need to also look at my total universe on what we are operating, and we are doing extremely well.

And I want to just give a little bit because we are on the back of like Cyber Monday and Black Friday. And obviously, the data are fresh, and you saw like the Adobe number like for the industry being up 9%. We are well above this number for all our brands, thanks to our direct-to-consumer, so brand.com, freestanding store, TikTok Shop and also, obviously, the addition of Amazon Now where we have 11 brands. So I see a lot of traction.

Now obviously, I'm talking about like 4, 5, 6 days, basically, which is the period. I don't think it defines necessarily the quarter. So I'm not basically giving an indication of what the quarter is going. But our ability to win in the most competitive moment without being crazy in promotion, but by using correctly the top of the funnel, the bottom of the funnel, better conversion, I know not only we can drive sales, but we can drive more profitable sales during this moment in time.

So it is a journey. Again, many, many years of share loss. We are now stabilizing on our way to just like gain market share again in the U.S.

Okay. Great. Let's segue from that competitive period of time in the U.S. to a competitive market, which is China. You done a great job in the last 1.5 years regaining the share momentum there. But you are coming off a depressed base and a number of years of pressure. So just your level of conviction that you can grow ahead of the category going forward. And also maybe just an update on the category and if it continues to stabilize and move back to higher growth levels, particularly around 11/11, it would be helpful to get an update on the health of the category itself.

No. And Dara, you said it. I think China has been, obviously, for a couple of years, I would say, very depressed like market. Let's not forget one thing. It basically was depressed on a much higher base. Because if you remember during COVID and post-COVID, 100% of the Chinese consumption from around the world got repatriated in China, Mainland and within the China ecosystem that included Hainan and some other like China and travel retail.

So we had an explosion of like the sales and the concentration of the sales on the China ecosystem. And then we had 2 years of like depressed sales. What I'm really proud of is that now we are on 3 quarters of consistent market share gains. And last quarter was particularly strong for us. We had 7 brands who gained market share in the market, including some of our largest one, like La Mer continues to do well. We even had like Le Labo that was close to triple digits growth in the market with very, very strong like-for-like. It was not only because of distribution expansion because still the brand is very new in the market.

So very good momentum. What I see about China, for the moment, I still call it a stabilization in the market, even though the market was in high single digits. And we had a very brief conversation together just before like going on stage. What is -- there's some -- if you remember, December or January of last year, that when the Chinese government started to put a lot of consumer stimulus in the market. It was not necessarily driven targeted to beauty. It was like in electronics, in cars and things like that. But obviously, all of that drove a lot of traffic to different platform, and we benefited from it because we have very strong consumer coverage like in China.

But just to tell you a little bit of what happened on 11/11, which gives me great confidence that I think the market is in stabilization before I can say that the market is going back. From October 1 to November 23, which is what we consider basically the Super Bowl of beauty in China because 11/11 is not 1 day. If anybody thinks it's only 1 day, it is basically a month long of activities and consumer activation and et cetera. We are in double-digit growth, and we are confident that we gain market share. So we don't have the official basically tracking, but we are confident that we've gained market share in China in this moment in time.

And frankly, we have a lot of our brands, including the bigger ones that are just doing extremely well, thanks to great innovation that we have on La Mer, on Estee Lauder, on MAC has been like growing very, very strongly in the market, like TOM FORD.

So I would say that gives me actually great confidence that, one, the desirability of our love of our brand in China is intact. And that was very important because you don't gain market share in this period of time unless you have a high love mark on your brand and consistently across many, many brands.

The second thing I would say, I think if anybody thinks that China is going to resume to a consistent double-digit growth as a market, I don't think we are there yet. I think China, because of its size, is more of a mature market today. And I think if we can consistently get to the, I would say, higher -- low single-digit growth for the market, I think that will be fantastic. But what we've experienced on the post-COVID and the beginning of COVID era of a consistent double digit, I think with the size of the market, I think it's unlikely. Now it could happen on a quarter. But I think if I look at it on a period of 3 to 5 years' time frame, I don't think so.

But the -- for us, the brands are intact. Our innovation capability is intact. I talked about Rene Lammers, our new Head of Research and Innovation, is as we speak like today is in our new research and innovation center in Shanghai, really working with the team to really accelerate the innovation for China for China. So we will continue to invest in innovation for China. We will continue to invest in consumer-facing. And we have some of the brands that have the highest level of desirability in the market. So I'm very confident on our ability to continue to win.

And the last thing I would say, because of travel retail and all the work that we've done to really reposition our inventory in the market to the right level and shipping to the right demand, I think we are coming to the tail end of having the reset in travel retail and in the China ecosystem. The interesting news is like during the Golden Week, the traffic was up double digit in Hainan, and we were ahead of the market also. So it gives me great confidence that also now the entire ecosystem is a little bit more stable. But again, I would not call it like a double-digit market, yes.

Great. That's helpful. It sounds like a lot of progress in the U.S. and China. Maybe a bit of update just on Western Europe and you're positioning there. It's been a market where you've had a lot of market share success historically, not as much in recent periods. So just any thoughts there would be helpful in comparing and contrasting them.

Yes. No, briefly, you're right. Like this is obviously very important. I think this is a part of where we need to put a lot more work for us. And I think what we've seen in the U.S., we are deploying in many other markets or what we've seen in China, trying to deploy it to other market. I think Continental Europe; the consumer sentiment is pretty low in this moment in time. You have markets like France and Germany that are pretty depressed.

In our position, markets like Italy and Spain are doing much better, and we are gaining market share in perfume in Spain, in Italy and many other markets. But I would say this is where we need a lot more work for us, including the U.K. The U.K. has been an historical stronghold for us. And I think we've basically lost momentum over the years, and we have a lot more work.

Now what I'm excited about is I think we've announced it like a few months -- a couple of months ago that we've launched the Ordinary on Amazon in the U.K. Now we've launched Clinique on Amazon in the U.K. And already after only 4 weeks, Clinique Black Honey lipstick is the #1 prestige lipstick on the platform. So I'm basically seeing the same momentum happening in the U.K. with Clinique that we've built over a year ago in like the U.S. So that gives me great confidence that we can take this model and really deploy it in the U.K.

And I think the last thing I would say is big focus for us are the emerging markets. Last quarter, we published that we had on our key priority emerging markets, we grew double digit, led by Mexico and India. But today, only 10% -- roughly 10% of our business is in emerging markets. I've made it very clear. We want to be mid-teen. So we are putting -- Akhil and I with the team are putting a lot more investment. We called out the major investment that we've put like in India. I was in India with like the team only a few weeks ago where we really strategized on the acceleration of the market. But I was in the Middle East, I saw tons of opportunity. I was -- last week, I was in Mexico, reviewing the entire opportunity for Latin America, even Mexico.

Even though the market is slowing down in Latin America, the markets are slowing down. There's still a lot of opportunity for us. And as we are deploying our brands in pharmacy, for instance, with the Ordinary and Clinique. So I see a lot of opportunity that will allow us to just be from low double digit to mid-teens in penetration on the emerging market. And this is where the bulk of new emerging consumers are coming around the world. And I think we are well positioned from a distribution coverage to go after these consumers.

Great. That's helpful. There's a lot of work going on internally at Estee. Obviously, this is a large undertaking, this turnaround even for the most seasoned management team. You talked about you've brought in a lot of outside leaders to the organization. You've made some internal changes.

Just, a, do you think generally, you have the right people in place at this point? Do you think you have sort of the brands and the portfolio that makes sense? So changes from a leadership and brand perspective from here? Or are you in a good place in your mind? And just also level of confidence that the team you've assembled really can sort of meet the challenges in a very dynamic marketplace, which we were talking about earlier before we got on stage.

Yes. Look, I think, yes. I'm really -- first of all, I'm super humbled and pleased and honored that people like Aude, O'Brien and Rene just like decided to join the company from a much bigger company to take on like this challenge for some of the things that Aude said because we have great brands. The foundations are solid.

So taking on this challenge of the turnaround of the Estee Lauder company and showing that we already have momentum in less than a year, shows that, frankly, the foundations are. So it gives me great confidence as first time like CEO that starting with this foundation and starting with this great team that we have assembled is actually the right thing to just like do for like the future transformation.

So look, we have the support from the team, we have the support from the Board, the support from our retail partners or all our partners around the world. I think I see the momentum. And if you follow me a little bit on LinkedIn, you will see basically that my feet as the one of Akhil and like all and all the other leaders haven't touched the ground. We've been like around the world doing town halls, but meeting, strategizing, also really making sure that there's the right level of freedom in the market and in the brand to just be able to just react in real time to the consumer.

And this is one of the things that I always tell the team, yes, you have the Estee Lauder brand. The Estee Lauder logo is the same wherever you go around the world from New York to Shanghai to like Tokyo to like Manila. But at the end of the day, how do you activate the brand locally has to be more and more so relevant today.

So I think we are building a very strong team everywhere around the world that can take the blueprint of what these brands are about, what has made them so resilient and still there almost 80 years ago, Estee Lauder brand is turning 80 years young next year. Clinique is in its 60th year. But then you have brands like younger, like the Ordinary that less than 10 years, which are digital native. All of these brands are just like behaving like today with the right level of agility thanks to, frankly, the great team.

I always like quote our Chair William Lauder. At the end of the day, we have great brands and great people. And with that, actually no doubt that we're just going to turn around the company and having like proved that the momentum that we have had in the last quarter is not an accident of the last quarter, but it's going to be a consistent like growth to be able to resume market share growth for the industry, for the company.

Great. Well, that was a very helpful discussion. We're out of time, but we really appreciate you guys being here and joining us.

Thank you.

Thank you.

Thanks, again.

Thank you.

Thank you.

Good day, everyone, and welcome to the Estée Lauder Company's Fiscal 2026 First Quarter 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.

Hello. On today's webcast are Stephane de la Faverie, 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, all organic net sales growth also excludes the noncomparable impact 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 site and through third-party platforms. It also includes estimated sales of our products through our retailers' websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP.

During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you with the time scheduled for this webcast.

And now I'll turn the webcast over to Stephane.

Thank you, Rainey, and hello to everyone. It is good to be with you to discuss our first quarter results and share the great work our teams are delivering across the action plan priorities for Beauty Reimagined. Let me begin with the first quarter.

We delivered organic sales growth of 3%, a significant sequential acceleration from the 13% decline in the fourth quarter. We are pleased by the diversity of our performance. As Mainland China contributed nicely to a return to growth, the rest of our markets in total improved sequentially, including high single-digit growth in our priority emerging markets, led by Mexico, Turkey and India's double-digit growth. And Travel Retail grew on a favorable comparable compared to last year low base.

We also got off to a strong start to the fiscal year with significant improvement in operating profitability. These results reinforce the confidence we have in our fiscal '26 outlook, a pivotal step towards restoring sustainable sales growth and rebuilding our operating margin to solid double digit in the next few years. The first three action plan priorities of Beauty Reimagined: Accelerate best-in-class consumer coverage, create transformative innovation and boost consumer-facing investment are increasingly amplifying each other to drive accelerating retail sales growth in key markets.

In China, we significantly outperformed Prestige Beauty as our retail sales increased double digit ahead of industry, up high single digit. Seven of our brands grew double digit with Le Labo nearly triple digits. We gained share in every category as well as both brick-and-mortar and online. Impressively, we have gained Prestige Beauty share in 5 of the last 6 quarters, which is unparalleled among the biggest Prestige Beauty players.

In U.S. Prestige Beauty, our retail sales growth accelerated sequentially. In the quarter, we grew 8% in Skin Care versus the category up 6%. The Ordinary drove our share gain in skin care, while we also gained share in Hair Care led by Aveda. All told, we maintained our Prestige Beauty share calendar year-to-date. The Estée Lauder brand achieved its third consecutive quarter of overall share gain in the U.S., thanks to excellent uptake in innovation. This quarter, it gained share in each of Skin Care, Makeup and Fragrance. Impressively, we delivered strong unit share gain in U.S. Prestige Beauty, demonstrating our strategic actions are driving new consumer acquisition.

In several of Western European markets, Prestige Beauty continues to see slow growth, in some cases, negative growth. In France, the biggest category in Prestige Beauty in Western Europe, we gained share in France and Spain. For the U.K., the largest market in the region and where Prestige Beauty is much more resilient, industry sales growth reaccelerated to nearly 10%, and we realized a strong sequential improvement in our retail sales trends. We still have much work to do in the U.K., but we are moving in the right direction.

Our improving retail sales performance in many key markets around the world is a testament to our team's incredibly strong execution of Beauty Reimagined, starting with accelerating best-in-class coverage. We are advancing with speed to reach consumers where they are, capitalizing on the learnings that we have had with Amazon in the U.S., Canada and Japan. We opened Amazon Storefront in Mexico with Clinique, The Ordinary and Estée Lauder and the U.K. with The Ordinary.

We announced our presence on TikTok Shop, launching Clinique, M·A·C and Dr. Jart in the U.S. as well as The Ordinary in Malaysia and Singapore. Impressively m·A·C was awarded TikTok Shop Top brand Campaign Award for 2025 in Personal Care and Life, recognized for the stellar grand opening and tremendous initial success. Our newest TikTok Shop has served to strengthen the performance across channel given how consumers discover, engage and transact. This collective action in our online consumer coverage complemented first quarter growth from our existing presence on fast-growing retailers like Tmall, JD, Douyin and Notino. As a result, global online organic sales growth accelerated to double digit from mid-single digit in the fourth quarter, leading us to believe we outperformed Prestige Beauty in this strategic channel.

For our European Travel Retail business, we made great progress in expanding our consumer coverage in Fragrance through new retail activation, new doors and upgrading the existing fleet across our luxury portfolio. This strategic expansion contributed to our double-digit retail sales growth for France across several of our major retailers in the region for the quarter.

We also drove similarly strong retail sales growth in the Americas Travel Retail for Fragrance, in part from our all new distribution with Duty Free Americas.

Looking at innovation, newness from Tom Ford, Killian Paris, Jo Malone London and Aramis kicked off France rich pipeline for fiscal '26. These launches, some of which created allo benefit on existing products, combined with the Le Labo outstanding growth made France our best-performing category, rising 13%. We continue to expect France to be Prestige Beauty's fastest-growing category for fiscal '26, driven by luxury, the largest mix of our France business and where we are the leader as well as over the next few years, driven by both domestic markets and the travel retail channel.

On that note, we are thrilled to have opened our new France Atelier in Paris, where our team will blend state-of-the-art technology, data-driven intelligence, leveraging AI and olfactory expertise to craft the next generation of extraordinary scents, all while innovating much quicker than we have in the past.

Skin Care further drove our organic sales growth in the first quarter. We had an exciting slate of innovation in high-growth subcategory and across Prestige price tiers, including breakthrough launches in eye, acne and longevity targeting all age groups. This introduction, coupled with newness from earlier in the calendar year, contributed to Skin Care's growth. We continue to boost our consumer-facing investment to drive new consumer acquisition, focusing on high ROI opportunities like our brand building, freestanding stores and demand generation media activation.

We opened 14 net new freestanding stores for our Fragrance portfolio, including a row of new boutique in New York City Sal District for Frederic Mall, Tom Ford, Jo Malone London and Killian Paris. We introduced stunning new campaign from Tom Ford debut of Black Orchid Reserve to I Only Wear M·A·C and La Mer Gives Skin Life. And we are reengaged in creating new consumer experience across travel retail corridors.

To fuel our first three action priorities, we made great strides delivering on the promise of PRGP, which Akhil will describe in more detail. Finally, we are especially encouraged by the momentum we are building as we reimagine the way we work, our fifth action plan priority. Our new executive team is fully in place. Our four newly reorganized regions are fully operational and throughout the organization, we are empowering faster decision-making.

As you will recall, we committed in February to increasingly collaborate with partners in areas of business where they can support us to become the best consumer-centric Prestige Beauty company in the world. We are, therefore, thrilled to announce our new partnership with Shopify to modernize and scale our direct-to-consumer business in a phased approach, creating a best-in-class omnichannel consumer experience globally.

Looking ahead, for the balance of the fiscal year, we continue executing on our action plan priorities, including investing in exciting holiday activation and expanding consumer coverage. As announced yesterday, this includes M·A·C entering U.S. Sephora spanning select stores as well as online and Sephora at course, which allows us to better connect with younger consumer and accelerate M·A·C turnaround in the U.S.

Before I close, I want to share a few accomplishments from our just published fiscal 2025 social impact and sustainability report. Since we announced our first set of public goals in 2019, we are proud to have achieved several of them across climate, water, waste, sourcing, ingredient transparency and impactful social investment. In introducing additional 2030 goals, we are reemphasizing our focus on women and girl advancement guided in spirit by our founder with a new commitment to contribute $50 million to support health, education, leadership and entrepreneurship.

In closing, the first quarter marked the beginning of our return to growth as anticipated for our fiscal 2026 outlook. While the macroeconomic environment globally continues to be dynamic with a variety of headwinds and tailwinds, we remain vigilant and focused on achieving our ambition for Beauty Reimagined. I am incredibly grateful to our employees around the world who delivered a strong start to fiscal '26 onward and upward.

I will now turn the call over to Akhil.

Thank you, Stephane. Hello, everyone, and thank you for joining us today. Overall, we are encouraged with our return to growth and the improvement in margins and cash flow results, thanks to the tremendous efforts of our teams globally. We are determined to continue driving value creation and executing with excellence and urgency across the pillars of Beauty Reimagined.

Before I share an update on our reaffirmed full year outlook, I'll start with a quick recap of our first quarter results. For more detail on our first quarter performance, please refer to our press release issued this morning.

Starting with organic net sales. We grew 3% compared to last year. This was driven by double-digit growth in Fragrance and low single-digit growth in Skin Care. Together, these led to high single-digit growth in both Asia Pacific and Mainland China. Sales from our Makeup and Hair Care categories declined, partially driving the low single-digit decrease in the Americas.

Turning now to margins. Our gross margin expanded 60 basis points and was 73.3% in the quarter. This was driven by sales growth as well as strong net benefits from our PRGP, reflecting operational efficiencies, lower promotional activity and ongoing reductions in excess and obsolescence. These results more than offset the headwinds from inflation and foreign exchange transactions.

In terms of operating margin, we expanded 300 basis points to 7.3% compared to 4.3% last year. This expansion reflects net benefits from our PRGP. Specifically, they drove a 3% reduction in nonconsumer-facing expenses, even with the normalization of employee incentive costs. As a result, we were able to fund consumer-facing investments, which increased by 4%. We are delivering on our strategic priority to improve operating margin for the full year as we strengthen overall cost efficiency and leverage under our PRGP.

We are continuing to fuel consumer-facing investments that build brand desirability while maintaining discipline on nonconsumer-facing expenses. Our effective tax rate for the quarter was 40.5%, up from 38.8% last year. The quarterly rate is based on our estimated full year geographical mix of earnings and is expected to improve in the second half of the year as profitability builds throughout the year. In addition, the elevated rate includes the unfavorable impact associated with previously issued stock-based compensation. We are evaluating tax planning opportunities aligned with the strategic changes we have been making to our organizational structure and mix of business.

Our return to sales growth, combined with strong cost efficiency and leverage, more than doubled diluted EPS to $0.32, up from $0.14 last year. In terms of our overall PRGP, building upon the work we did last year, we are continuing to execute with rigor, discipline and clear purpose to optimize key elements across our cost structure. We are driving momentum across the P&L, focusing on operational excellence to improve gross margin, streamlining our organization to enhance agility, effectiveness and efficiency through ongoing restructuring and leveraging our competitive approach to procurement to reduce costs and maximize ROI across all areas of spend.

These efforts continue to advance our PRGP initiatives, creating fuel for growth, improving profitability and positioning the company for sustainable long-term value creation.

Proceeding now to the restructuring component of our PRGP. Through September 30, we recorded $697 million of total cumulative charges, primarily in employee-related costs.

Turning now to cash flows. For the 3 months, we used $340 million in net cash flows from operating activities, a significant improvement as compared to the $670 million use of cash last year. The improvement primarily reflects higher earnings as well as a favorable change in operating assets and liabilities despite an increase in restructuring payments. We invested $96 million in CapEx, prioritizing consumer-facing investments to fuel growth while optimizing all other CapEx investments. For the quarter, CapEx was down 32% versus the prior year, reflecting the phasing of projects. With a full year outlook to invest roughly 4% of projected sales and CapEx, we are maintaining a more efficient and normalized level of investment to drive long-term sustainable growth. Also in the quarter, we paid $150 million in deferred consideration associated with the fiscal 2023 acquisition of the Tom Ford brand.

Turning now to outlook. We are reaffirming our fiscal 2026 full year outlook. While we don't expect a linear path given macro volatility and prior year comparisons, our first quarter results give us confidence as we remain focused on delivering our full year outlook. In terms of organic net sales, we still expect flat to 3% growth for the full year. We anticipate stronger performance in the first half with favorable comparisons in Asia Pacific, driven by our Global Travel Retail business as well as in Mainland China.

We are seeing improvement in consumer sentiment in Mainland China, though it remains subdued and has yet to fully recover from historical lows. In our Global Travel Retail business, we have good momentum in the West, fueled by consumer-facing investments and distribution expansion. That said, persistent challenges in the East continue to pressure retail sales. We expect these challenges to have a greater impact in the second half, particularly as we face tougher comparisons to last year when Mainland China returned to growth and our Global Travel Retail business started shipping in line with retail. Despite this anticipated variability, we are encouraged by the start of the fiscal year and by our return to growth.

Before I close, let me reaffirm our assumptions regarding evolving trade policies and enacted tariffs. Based on information available and net of our planned mitigation actions through October 24, we continue to expect tariff-related headwinds to impact profitability by approximately $100 million. This does not include any subsequent or future changes. We continue to evaluate additional strategies to further mitigate these impacts, including more PRGP initiatives and potential pricing actions.

In closing, our focus remains on being the most consumer-centric beauty company and creating long-term value through sustainable growth, margin improvement and cash productivity. To our teams around the world, thank you. Your dedication to executing across all pillars of Beauty Reimagined is reflected in our results and is driving a return to sustainable sales growth and rebuilding our operating margin to solid double digit over the next few years.

That concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

[Operator Instructions] Our first question today will come from Lauren Lieberman of Barclays.

I was hoping you could talk a little bit about volume trends versus price mix. I know it's not something you usually talk about regularly, but it is disclosed in your 10-Qs. And I think this quarter, given some of the comparisons and the distribution gains, there probably has been a nice move in volumes within your overall organic sales growth. But I'd love to just hear a little bit more about your perspective on the importance of driving volume over time as part of the algorithm.

Yes. Thank you, Lauren. I'll start and maybe Akhil can just like add some flavors to it. I think let me start from like the comment that I made on the U.S. because like for us, we saw in the quarter significant share gain from a volume standpoint, which has been driven by several things. Some of the price adjustments that we've done with new launches in part of the Beauty Reimagined, all the new innovation that we've put forward, if you remember, have clearly committed to make sure that we have the right price point at the right price band for every single of our four categories.

And we've done that already with like products like Studio Fix in M·A·C, but also we've done it in other geographies where we adjusted prices, namely Clinique in U.K., where we have had great, great success with the repositioning of like DDML. But in the U.S., the most significant part for us was actually the market share gain in units that is showing that we are bringing new consumer to the company and to our brand. And if you remember, that's part of Beauty Reimagined, it was really important for us that we are investing in the demand generation at the top of the funnel to just bring new consumers to our brands.

So I think we're seeing the momentum from a unit standpoint going on. Obviously, it's driven by also macroeconomic trends that's where we see a lot more demand at the entry of Prestige, and we've seen a strong acceleration with The Ordinary. We've seen a rebound also with M·A·C in the U.S. and starting to see some momentum in many markets. So I think it's a combination, Lauren, of categories, consumer demand also, but price points that we are driving throughout the organization. And we believe that allows us to just bring a lot new consumer to the company overall and contributing to the market share gain in many markets and the rebound and the growth that we are seeing in the quarter.

Yes. Thank you, Stephane. Lauren, as we have spoken, fundamentally, the strategy is to start winning more consumers. So as part of that, one of the things we have done, and Stephane has talked about it in many forums, we have looked at our pricing to be in the right bands in many core categories where our pricing -- we adjusted pricing, and we have seen overall unit response. In addition, after many years of inflationary pricing that we have done, we did take a careful look at our overall portfolio and our pricing this year is lower than overall in the prior year, simply because as inflation has subsided and overall industry had taken a lot of pricing.

So we believe -- of course, our business is made up of many different categories. I mean, makeup -- and so it's hard to make unit comments, but with the 3% organic sales growth, and pricing, we believe, is sub 2%. We expect to have unit growth barring the mix. And of course, we are working to understand the drivers of unit mix and volume by business where it makes the most sense because if in our business between Fragrance and Skin Care, it's hard to make an overall comment. But our goal is to drive unit. Our goal is to bring more consumers and we are starting to see positive results here. I hope...

One quick thing, Lauren, just to add like a very data point that is important. Where we see the biggest move in terms of unit is also in the perfume category for us. And we've had a significant influx of innovation, and that's also like linked to what, Akhil, and I said about accelerating innovation, accelerating innovation at the right price point, and we are seeing a lot more also smaller sizing driving the growth over the world for perfume. And this is 1 of the things that we are seeing, and we are doubling down and accelerating going forward.

Yes. We returned to unit growth this quarter, which is a great positive.

The next question comes from Dara Mohsenian of Morgan Stanley.

First or term clarity -- you referenced the strong start to the year with 3% organic sales growth in fiscal Q1, but kept the full year top line guidance at the high end, that implies the balance of the year is more in line with Q1 or below if you use the lower end of the guidance. So just conceptually, is that conservatism or early in the year? Trying to understand if the Q1 result gives you more optimism, particularly given the comments about a stronger first half.

And then also just longer term, obviously, solid share gains in Mainland China in the last few quarters, you've made a number of internal improvements. Just as you look out longer term over the next few years, do you think those share gains can continue, maybe give us a bit of a short-term report card on what's driving that and how sustainable those factors may be as you look out?

Yes. No, thank you, Dara, for multiple point question. Let me start maybe with Dianne because I think it's going to be important to really understand like the impact of China also like on the full year guidance, and I'll start and Akhil give some flavor about the balancing of our year.

So first of all, in China, we are really happy with our share gain. As mentioned in our prepared remarks, we are like well ahead the market, and we are in double-digit growth. We have 7 brands in double digit, and we have actually many more in positive for the quarter. And that's been really encouraging because for us, it is no longer just growth on a few brands. But it's basically across the portfolio, across categories. And like I said, also in brick-and-mortar and online where we are getting significant share.

So when I see China, I see, obviously, a stabilization through a slight acceleration of the market that is mainly like driven by us. We're seeing a peak of consumer confidence on the Chinese consumer starting to rebound, but don't get me wrong. It's still subdued compared to historical peak. But we're seeing all of that moving in the right direction. But if you remember, our balance between the first half and the second half are very different because we are still lapsing in the first half of our fiscal year lower number, both in China and travel retail.

And in the second half, this is where we're starting to anniversary the beginning of the recovery that we experienced last year in China, which obviously we are early in the fiscal year. And while we are as a team, extremely confident in our outlook for the year, we need to understand the balance between the two. And I would say a few macro environment things that are taken into consideration. One, there's still a lot of volatility out there. And I said like the environment is extremely dynamic. Trade policies are still there. Obviously, it's still very fluid as we saw even in the middle of the night. Things are like changing. And 1 day is positive. Some days, we have to just mitigate new news, but we are navigating a lot of volatility and there's still many areas of the world where while we are seeing a recovery of consumer confidence, as I said, like in China, it is still very subdued in other areas, mainly in the West and in Europe.

So all of that taking into consideration gives us that we still have to navigate early into the fiscal year, a great start but a lot of volatility. And I think what I wanted is Akhil to just give a little bit more flavor also how do we see the balance of the first half and the second half.

Yes. Thank you, Stephane. Dara, I mean, when we gave you the full year guidance, it was a very thoughtful guidance, which was -- which allowed us to run our long-term play to start investing in a business, start driving retail and really consistently doing the right thing to build retail. So that guidance was well done. We are pleased to see that we are progressing against that guidance. However, to your question on why we are not reaffirming guidance, first of all, the macro environment continues to overall be challenging. We are pleased to see the progress in China definitely and not only pleased to see the overall market progress, but significant outperformance as Stephane called out in China.

So we are happy to see that. But when you look at the broader beauty market around the world, there are pluses and minuses. So there's still there, and of course, we're also happy to hear the trade news this morning, but the environment continues to be overall macro with significant variability. Secondly, our industry outlook we gave you was 2% to 3%. We still believe that is the outlook. If we see positive to that, our intention, as Stephane has consistently said, is to grow share. So not only we want to be in line with the market, you want to be ahead in key places, as we have said.

And then last point is our cadence. Our cadence, as you can see, last year, our Travel Retail business was significantly lower in shipments in first half and China also was having significant declines. That is in our first half. So when we see the positives this first quarter and what we expect in the first half of the year, that will be helped by that base period. Second half base period would be more challenging in Travel Retail and China. So all of that was incorporated in our full year outlook.

Of course, we are not giving you specific quarter outlook, but we expect quarter 2 to see similar type strengths. As we have seen, we have the strong holiday plans. We are executing with excellence in all our markets. So there is definitely a front half backup story. But overall, we are confident that we want to grow in line and ahead of retail, which we said about 2% to 3%. And that's why we kept the broader guidance because of the variability. So hopefully, this gives you a good perspective. And then we will continue to invest when we see the right opportunities because we want this turnaround that we are architecting to be sustainable for many, many years to go.

The next question comes from Filippo Falorni of Citi.

I wanted to ask on margins. Obviously, performance in Q1, both at the gross and operating margin line. Can you just discuss your outlook for the year? Is it broadly unchanged, both at the gross and operating margin? And just the solid start, does it give you more confidence in potentially being towards the higher end of those margin targets, just given the strength of the business and also like the news this morning on tariffs? And then maybe just lastly, what's embedded from a reinvestment standpoint, if you can talk about that as well?

Thank you, Filippo. So overall, when we gave the guidance on margin, 9.4% to 9.9%, it included that the gross margin will be likely flat to positive, we will offset the tariff impact as -- within the year-on-year and try to build a flat to positive gross margin. So a lot of our gross margin progress was going to come from SG&A, which is what we demonstrated in Q1. So that's the overall picture, which means, as we said in our prepared remarks as well, that consumer facing, we will invest, which was your other question.

So we invested in consumer-facing positive and nonconsumer facing was down, which is creating the leverage. That's what you see -- saw play out in quarter 1. Of course, you have to remember that in quarter 1, there is not a lot of tariff because these things come as a variance release. So there is a lag between when tariffs happen and when they hit our P&L. So you should see that impacting gross margin in rest of the year starting from Q2, Q3 to Q4. So the guidance we gave on gross margin still broadly stands.

Today morning, announcements are definitely a favorable welcome. The improve things not only on tariffs, they improve things on consumer sentiment, which is very important for all the businesses operating in both countries. So that we take as definitely as a positive, but the tariff amount dollars while we haven't done the math, it is not going to be material because we do not bring -- I mean our manufacturing is not coming in from China here. We do bring materials. So overall, we stand by our margin progression. We, of course, want to drive this margin progression quarter-on-quarter.

But as we said, our goal is to deliver it on the year. we see an investment opportunity, we will reinvest. We have consistently reinvested since Stephane and I started giving guidance in February. We increased consumer facing last year, as you saw, while the sales was down and we increased it this year as well. So that is part of a plan to build a sustainable long-term turnaround.

Yes. And just maybe one thing like, Filippo to just like confirm all of that. We're not changing our guidance for the time being. We are just like reaffirming our guidance. But it is important that you realize that as a team, we're feeling really confident because of the strong start of the fiscal year, especially with what we've delivered in Q1 because a lot of the action that we put as part of Beauty Reimagined that it is consumer coverage, that is the acceleration of innovation or as Akhil said, the fact that we've increased consumer-facing investment by 4% in the first quarter are starting to just really activate the demand, and we've seen actually in many places, as we discussed earlier with 1 of the questions, that you need growth going.

And I would say, like just to give some sign of like additional confidence, and Q2 is a big quarter in beauty in general for us because you're going into 11/11, you have like Cyber Monday, you have the holidays. So this is just like one of the largest quarter we are basically pleased with the beginning of the quarter. We have a strong holiday programs that are in place. And while it's too early to comment on 11/11 in China, Golden Week, which was the first week of October was really strong, and we believe that we grow ahead of the market, again, in a very dynamic China, which -- and actually, the interesting also note, it was not only in China Mainland, but we've seen actually a recovery of air traffic even in China, where air traffic was up 14% in land, which drove a lot of strong demand, and we were in double-digit growth during Golden Week.

So all of that gives us the confidence that we are off to a very strong start of the year. It is not about guiding any way shape or form in Q2, but it is about saying that we are confident, and we are refining our guidance in the year. And as we are seeing all the benefits of beauty remargin from a consumer facing starting to pay dividend, then we will adjust the year accordingly.

The next question comes from Bonnie Herzog of Goldman Sachs.

I had a question on Asia travel retail. Could you provide just, I guess, a little more color on inventory levels and movements in the quarter? And then overall, I guess, how would you characterize the demand backdrop and conversion trends that you're seeing within Travel Retail? I guess I'm trying to get a sense of if we're past the trough and when we should start to see better conversion trends, especially with some of the benefits of your activations.

Thanks, Bonnie. I'll start. Look, Travel Retail is still very volatile. That's where we start basically like with the market. And you've asked specifically a question for TR Asia, like in general, but TRS is actually in a good place and we're seeing a lot of positive. But let me focus on TR East. It's a tale of different cities because I think we are starting to just like in the last some of like the worst decline but let me divide Asia in bucket because we are seeing a lot of momentum for instant in Travel Retail Japan. We were in double-digit growth like in the first quarter, which was good.

If you look at the rest of Travel Retail APAC, if you exclude China and Korea, we also believe that we are gaining share with some positive momentum, especially in the emerging market on. Now when you look at the China ecosystem of Travel Retail, and I reaffirm what we've said, we are back to the right level of inventory, and we are managing the inventory based on the demand, and this is the way we are doing it for now and for the future. And we are back in line to industry penetration of travel retail that we intend to maintain as long as the demand continues to be what it is. What is interesting within the China ecosystem of Travel Retail, we signed for the first time, as I said in the past question, traffic starting to be positive again in September.

I was myself in Ireland a few weeks ago and experienced actually a high foot traffic. Conversion when it is still light, is still down. I don't want to just like say that conversion is picking up. But we, as the stellar company, are putting a lot in place to drive retail activation. We are investing in retail podium with like Estee Lauder, with Jo Malone, with Le Labo, with Tom Ford. We are really deploying the entire arsenal of our brand, which led us to believe that the strong performance that we've seen during Golden Week, which tends to just drive a lot more traffic showed us actually gaining market share.

Now obviously, Golden Week is October 1 to October 8. So I'm just not concluding anything for the quarter. But I'm like showing some beginning of rebound through strong retail activation on our part, but also traffic resuming and some level of conversion getting better when you provide the right experience to the consumer.

Yes. Thank you, Stephane. And just to add to it, Bonnie, your comment on inventory. So as we have consistently communicated, both Stephane and I that, look, our travel retail inventory are now more rightsized relative to the retail we are seeing. And we are working to drive retail, which, of course, as you asked and Stephane commented, is coming back, but not everywhere overall. It's coming -- starting to come back in parts of Travel Retail. So our inventory is -- you should feel good that our inventory is in the right range. Of course, we adjusted up and down based on the retailers, working capital needs, et cetera, but there is nothing that should concern anybody that our travel retail inventory is elevated or less.

It's in the right place, and it is significantly lower than where it was 1 year ago, both in absolute terms and ratios of forward-looking retail. So we feel good about that, which has really allowed us to focus on building the business and really managing it to retail and all of the points that Stephane made. And on Travel Retail, we are starting to really double down in the West and Americas. So not only our position of strength in East, but now we want to position ourselves in a much stronger way in the Global Travel Retail.

The next question comes from Steve Powers of Deutsche Bank.

You've mentioned in the past several lines that you felt coming into the role that Estee Lauder just hadn't moved fast enough into new channels to keep up with the consumer. Clearly, we've seen lots of action in recent quarters to close that gap, be it Amazon, Shoppe and East, Southeast Asia, Amazon or even the move to M·A·C into Sephora. So I guess acknowledging that consumers will continue to move around and you'll have to adjust. I'm curious as to what degree you think you still have opportunities to catch up and how that plays into future planning? And I guess a little bit of how that varies across regions, if you could.

No. I think, Steve, thank you. First of all, thank you for acknowledging that we are moving with speed like where the consumer is on. I've made it very clear to you and to frankly, first of all, to the entire organization is we're moving where the consumer is moving as long as where we go, we can build equity and desirability for our brand. And this is what we've done today, like you actually yourself mentioned, we are in Amazon in the U.S., in Canada, in Japan, in the U.K., in Mexico, and we are continuing to look for other places. We have like TikTok shop, which is really interesting for us because TikTok shop not only -- I don't necessarily consider it as a channel, I consider it as really an ecosystem that allows us to recruit new consumers, and we are able to retain them on the channel and on other channels.

So it was also Shoppes in Asia. It was like Kakao also where we accelerated our brand. M·A·C in the U.S. with Sephora is a major step in the right direction. Let alone also the partnership that we've announced 24 hours ago with Shopify that is really going to allow us to be best-in-class direct-to-consumer where we are really tackling all our online connection and freestanding store connection with this really first-in-class partnership that we've announced.

So I think you're seeing us moving with speed and clarity of what it is. And so I've been, frankly, like tracking around the road next nonstop over like the past few months, in the past few quarters, there is not a market where the team is not focused on looking at new channels but also going deeper in the channel. I can tell you for instance, that in Europe, Continental or even the emerging market, the team is, as we speak, rolling out more distribution for Tom Ford, we've added 14 net new freestanding stores across our France brand led by [indiscernible] you're seeing us really moving quickly. And I can tell you, this is now deeply embedded in the organization. We are growing fast and the new organization that we've put in place with the new cluster geographical region and the brand and who does what in the organization allows us, frankly, to just move much faster through the organization and frankly, deploy the innovation according to the need of the retailers where we move and deploy much more sophisticated media targeting that allows us by age group and by retail and by region to deploy our media and to really go after the highest ROI possible.

So you can count on us to think -- to see our brand being deployed again in more channels in the future. But again, as long as this channel maintain, preserve or enhance our brand equities around the world. Hope it helps.

The next question comes from Peter Grom of UBS.

So I wanted to go back to Filippo's question just on margin, but more on the phasing, Akhil, I think back in August, you mentioned greater operating margin expansion in the back half and that it would build sequentially through the year? And I guess, if that were still the case, based on what we saw in the first quarter that would suggest maybe some decent upside relative to the full year guidance. So recognize that you have greater confidence today, but just wanted to ask if there's a change in view on the phasing.

I think overall, when you look at our margin range between 9.4% to 9.9%, I mean, our 7% margin that we have is still lower. So clearly, we will build in absolute terms sequentially. And I think in our business, we definitely should continue to look at sequential progress relative to -- even on a quarter-on-quarter barring for seasonality. So we are not changing our -- it's 1 quarter of information -- there's not enough information for us to change that phasing.

Of course, we are working to make sure every day, we are adding things to plan. so that we can, of course, deliver our plan in spite of any situations and hopefully, be able to come better than that, that would be the ambition of any company. And that's our ambition as well. But at this point, there is not enough information to change our phasing. What you are seeing this quarter definitely is the good work on SG&A and investment in consumer facing. However, to build consistent sales, we do want to make sure that we have enough fuel to invest so that we can keep driving the business.

So -- and the work on PRGP is broad-based. I just want to reiterate that while we are focusing on the quarterly point, the bigger point is the company has built a cost muscle in a way that it never had before beyond the growth work the points we talked. So the cost muscle that we have built is allowing us to look at COGS area, allowing us to look at OpEx area through the enterprise business services work we have set, procurement work, continued restructuring. So we continue to believe the significant long-term opportunity on SG&A.

While your question is definitely related to the specific quarter phasing, we believe there is a significant opportunity as both Stephane and have commented on expanding margin to solid double digit over the next few years. And that is the work we are every day focused on while, of course, giving you good guidance on quarter and quarterly phasing. So the overall upside remains, and we are working to bring that home every day, every month.

And Peter, what I would add to just Akhil, I just want you to just like see, obviously, like what I said like a few minutes ago. Very strong confidence of where we started the year. In case, so we're starting -- we're off to a very strong start with the 3% growth and the 300 basis point margin improvement. We -- as Akhil said, obviously, we are not there yet to the full year profit, which we continue to build, and we have actually a path to get there. I'm absolutely -- I reinforce the fact that we are confident in delivering the guidance that we gave, both on the top line and the bottom line, on the growth margin, investing in our brands and et cetera.

What I'm actually really encouraged in what we're seeing is actually the fast reacceleration of our retail in geographies like China, the ability to maintain our market share in the U.S., which is the first time in many, many years, as I mentioned many times, but also our ability to just like grow in unit, again, which means that we are bringing new consumers. Let alone, we haven't really talked much about innovation. We have a slew of innovation coming in Q1, but we have a lot coming in Q2 and Q3 that we can discuss, which is going to allow us to just connect with the consumer at different price point, different age groups, different categories, every single of our brands and regions are working on deploying new innovation.

So I think you are going to see a continuous acceleration of ourselves and the continuous rebuilding of the operating margin towards the guidance that we are giving for the year and towards the solid double-digit operating margin for the future. And that's really what we are laser-focused as a team at delivering sequential improvement and proving the organization and the world that we can do it sequentially, but in a very strong fashion as demonstrated in the first quarter.

The next question comes from Chris Carey of Wells Fargo Securities.

So I have a question that tracks well potentially with how you answered the prior question. I think as we look over the next few years toward solid double-digit margins, there's a few different ways you can get there. Obviously, growing the top line is paramount, perhaps you can improve gross margins a bit or you can manage lower your cost structure over time. I think I hear, of course, that you're certainly committed to staying well invested over this time horizon, so as to deliver the most important metric, which is sustainable accelerating revenue growth. So can you just talk about perhaps your ability to sustain stable, let's call it, SG&A dollars over the next few years, even while you'll be leading into consumer-facing investments?

I think sometimes with the cost savings program is difficult to parse out the net numbers, but just the ability to kind of hold stable cost even as you're investing. And connected to that, there's a pretty significant earnings leverage opportunity in the tax rate. I get a ton of questions about this. And candidly, I don't always have great answers. Can you just give us a sense of how tax planning will factor over the next 3 to 5 years and what the opportunities are?

Yes. Thank you, Chris. Let me take the first part of the question, and Akhil will just go into the tax. Look, I think your question kind of answered already a little bit where we are going because if I just take it a little bit like from beauty margin, we're doing all of the amber.We are improving gross margin. And if you remember, in fiscal '25, we made significant improvement in our gross margin. And this year, we said that we are maintaining it while absorbing the impact of like you know the tariff. But actually, you said it, Chris, we're building a lot of leverage in our gross margin for future because I made it very clear that the innovation that we are bringing to market, not only is at the right suggested retail price for the consumer, but is also built to be accretive to the category where we are launching it. That is Skin Care, that is makeup, that is hair, that is like perfume. So we are just like really making sure that we are building it.

We've also demonstrated a significant discipline on the management of inventory that also helps us from a cash flow management tremendously. And I really believe that we are going towards like being best-in-class and our value chain team is continuing to do a -- to create a lot of efficiency that when we go to unit growth as we are starting to experience, we're going to get a lot of leverage because that's important. The P&L that we are building is being built for leverage. SG&A, we decreased 3% in Q1 and through the PR GP, and I can't believe that it's -- like Chris, you are like question #7, we haven't even mentioned PRGP up to this point. But PRGP is here to create also a lot of leverage to reduce the penetration of SG&A in our total P&L.

And there is a strong discipline now the way that we are managing expenses and we are always putting expense in favor of consumer facing to further accelerate the top line because with top line, we know we'll get more units, we will get more leverage. Gross margin will improve. Percentage of SG&A will go down. And then we are able to ignite growth and obviously get a lot of leverage from an operating margin. So we haven't really talked about the PRGP today, but PRGP is going in the right direction, giving us actually the right momentum to invest in consumer-facing and to delay the P&L of the organization to be much more agile, to be faster, but more importantly, also to create a lot more efficiency that is going to allow us to, frankly, go not only to maintaining share, but to beat and -- to beat the market and to grow share in the future and to get a lot of leverage.

So that's the way I would like you to see the P&L and what we are building and the momentum that we are there actually quite early into the process because we are not even at the 1-year anniversary of the launch of Beauty Reimagined. We're only in the third quarter and a lot of progress have been made, and it gives you kind of a sense of where and how the P&L is going to be dealt. Obviously, tax is something that we are focused on, as Akhil said, and is just going to say a few more words about it.

Yes. Yes. And before I go into tax, I just want to add 1 thing on the margin part, which Stephane said. Like with 3% sales growth this quarter, you can see the leverage that we got. So there are multiple paths to the solid double-digit margin. One, like you said, gross margin where we ended last year at 74%. That still has significant upside on gross margin. We -- and when you break our SG&A into consumer-facing and nonconsumer facing, in nonconsumer facing, we are already demonstrating to you significant cost reduction.

And with a company that could be much bigger on sales, that trend on nonconsumer facing, we intend to continue. Even within consumer facing, we are bringing significant tools to drive ROI, so we intend to buy marketing inputs at much better price and much better effectiveness, so not only we will improve nonconsumer facing, we intend to improve consumer-facing investment ROI in a significant way. So there are three pronged ways to go from the current margin we have to solid double digit across all of those three pillars as Stephane said.

On tax rate, we have commented on our higher tax rate. We gave a guidance for 36% this year, which should be lower than last year, so it should start to move in the right direction, but there is significant -- we are not happy with this tax rate. It is driven by our geographical mix of earnings. We are looking through PR GP restructuring to look at tax planning opportunities. A significant part of our business is international markets, as you know. So that is driven by that. Plus the stock comp effect, negative effect of stock comp previously has impacted us.

So we intend to give you more clarity as we work through this year and drive this favorability on tax rate. I mean every point of tax rate gives us significant improvement as you're pointing out. And as I commented in the last call, this is clearly a piece of work we are doing. These things do take a little bit of time and have to be done very methodically and in the right way. But this is clearly one of our top priorities. So expect to hear more from us in the coming calls.

That concludes today's question-and-answer session. If you were unable to join for the entire webcast, a playback will be available after 1:00 p.m. Eastern Time today through November 15. Please visit the Investors section of the company's website to view a replay of the webcast.

That concludes Estee Lauder's conference call. I would like to thank you all for your participation and wish you a good day.

Great. So it's my pleasure to welcome Stephane de la Faverie, Estée Lauder's CEO; and Amber English, President of Digital and Online to the Americas, to our conference, Amber -- both of you for the first time actually. So thank you so much for being here.

We have a ton of ground to cover, but before we do, Estée has a video -- short video they want to present for, so we're going to roll to that, please.

[Presentation]

Great. We're done.

Done. Everything is...

We're done, and now we break. Okay. Great. So thank you so much for being here. And one more thing I just wanted to reference is the forward-looking statements disclosure, so everyone read this as we talk. Okay. So Stephane, Amber, again, thanks so much for being here. The video just helped a lot was laying out the 5 pillars of Beauty Reimagined, which you first shared with everyone externally anyway in February.

And a lot of these things have been on par with things that we've written about thinking this is what the company needs to do. It's only been 7 months, but I would love it if you could maybe offer some perspective on which of these pillars you're kind of where you're the furthest along, what maybe requires more time to see through. And then, Amber, I thought it would be cool if you could offer some perspective on what Beauty Reimagined means in the Americas organization.

No. Thank you for having us today to share the strategy. I think, look, I would start by saying we are entering fiscal '26 with momentum and somebody wrote a very smart headline at the beginning of the year saying, Be Your Own Activist. And this is what we have been doing since I moved into the position.

Joking aside, there was a lot of like saying, are we going to be as a team to just do the level of transformation that the Estée Lauder company requires for a transformation. I would say across the 5 pillars that we've made some progress. So I think the first one, which is certainly the most proud of is the ability now to move where the consumer is moving. And the first thing has been the consumer coverage, making sure that we put our brands where the consumer is, which is Amazon Premium Beauty store in the U.S., but now also in Canada, in the U.K. and in Mexico more recently, Shopee in Southeast Asia, TikTok Shops around the world and has allowed us, frankly, to just really change the trajectory of our market share, especially in the U.S. and China.

And that was the most important for me and the team to be able to say, is the strategy working? Is this ability after many, many years of market share loss in the Americas to turn that around and to be now in market share gain. And with the stabilization of China, not only stabilizing the business, but also going into market share gain.

The one that certainly will take a little bit more time, but we are already seeing some green shoots is innovation because innovation, you don't turn it around in 2 minutes. Even though we've been saying that we are going to triple the innovation bringing to market in less than a year, breakthrough takes time. It's just like you can't just like bring something like we've done for Estée Lauder with longevity in less than 6 months to market. So you're going to see a lot more innovation. And what I've committed for this fiscal year, we will be already north of 25% of the total business coming from innovation.

And what I would say also from an investment standpoint, I was very clear that we could have taken a very different position at the beginning, which is say, cut the investment, drop to bottom line, improve the overall margin. But the important thing was for us to reignite growth to just get long-term sustainable growth and reignite solid double-digit operating margins. So we are investing, but Amber will talk about it. We are investing a lot more efficiently that we've done it before and also making sure that it's more balanced between the brand and the region, so making sure that we don't rely only on geography and few brands and few products around the world.

And last but not least, PRGP, our transformation for the company is going in the right way. It is difficult. It is transformative. It is the biggest operational transformation of the company history, but we are moving in the right direction. And I think we're seeing a lot more simplification as the video is highlighting it and a lot more fast decision-making throughout the organization.

Yes. From an Americas perspective, I think consumer-facing spend and investment as well as consumer coverage have been the 2 themes. We're super excited that we have gained market share for the first time in a really long time as Stephane and I keep saying. And I think the momentum of that is giving us confidence in the pillars of the Beauty Reimagined strategy.

And I think launching on Amazon, we've been very public. We have 11 brands on Amazon U.S., as Stephane, we've launched Amazon Mexico, Canada, U.K., and we've developed this playbook that now in the U.S. is being scaled across multiple different markets.

And the stat I just looked up over the weekend as I was preparing is, our launches in the U.S. at the pace we were launching, we launched a new brand every 5 weeks. And so we've gotten really good at this, and we've gotten to understand the platform. And the other KPI that I would share is really giving us confidence in this decision is the brand Halo impact that it is having not just on the Amazon channel, but our business in other channels of SMC/department stores, et cetera. And so it's having this all boats rise impact in terms of the market.

Moving a little bit to our media model. We have been very drastic with the changes we've made there. I'll be quite honest. It needed a bit of a revolution in how we were thinking about it. And we broke the funnel, the traditional funnel up into 2 parts, demand generation and demand capture.

I think in the past, we were really good at demand capture and focusing on the ROI that we could get there. But we really maybe took our eye off the ball from a demand capture perspective. And so not only launching on Amazon from a megaphone perspective and it being the world's largest media platform, it's also allowed us to sort of think differently about how we create demand generation for our brands, not only from just a voice, but narrative and equity and new product launches.

The other interesting stat I'll share is the 2 brands we launched on TikTok Shop a couple of weeks ago, both M·A·C and Clinique. Our search term of Clinique doubled on Amazon within 10 days of launching on TikTok Shop. And so there's this very different ecosystem that is now really in this market around how you have to think about distribution decisions, but then also the media amplification that all of those can drive. It's not just did you launch in a certain store or a certain outlet. And so we've really harnessed, I think, the power of both TikTok Shop and Amazon to reinvent our media model in a way that's allowing us to acquire new consumers and then also have a really big Halo impact on our total business, not just our Amazon business.

Okay. Great. Let's keep moving at innovation. So in beauty, like you said, it takes time to build an innovation pipeline. But at the same time, everything you've been talking about is about the need to be faster generally. So how do you ensure you aren't cutting corners in the important area of new product development, breakthrough innovation. And one of the things that we think about and have heard about from other beauty players is that there just hasn't been a lot of breakthrough innovation, real molecule technology in beauty in a very long time.

Yes. I think the first thing that we have to say like cut -- first of all, we don't cut cost. We're finding some efficiencies because one thing we never mortgage is quality and performance of the innovation that we're going to bring to market. To a certain extent, I agree with you, there's been like a lack of true innovation coming to market. There's been a lot of renovation of known product with some announcement to it. But I think recently, when you look at what we've done with Estée Lauder and Re-Nutriv surfing on the wellness trend and bringing the first true longevity beauty product that has had like a resounding success in many places around the world.

And we intend to -- we look at innovation in 2 buckets, one, which is really the big breakthrough innovation and which requires a lot more investment from R&D and time to development, which I call almost the advanced technology. And then there's the on-trend innovation. You need to be there where the conversation is happening at a moment in time. And for that, what we found actually, the efficiency we've built through AI have been absolutely amazing.

When I say that we're going to triple the innovation that we bring to market, it's less than a year, it's not by cutting corner, it's by simply building efficiency. Just to give you 2 really important stats. On products, you need stability. You need roughly 6 months of stability. Now I can get 6 months of stability view in 72 hours. Now it's not that I'm just not doing the 6-month stabilities, but after 72 hours, I have a 95% plus guarantee of what is going to be the outcome. So I can trigger purchase of components, raw materials and et cetera, without taking risk, which allows to reduce the time of development.

The second thing is also we've used AI to reduce the critical failure of engineering of new packaging because we want to bring new packaging. It's not only new molecule, but it's also delivery for new packaging, how you bring it. There's a risk of packaging failure. It exists in the industry. We've reduced by 94% the critical risk by simply using AI and doing it throughout the company. So cutting corner is not -- is actually building efficiency via AI that reduce the risk, increase the predictability of the result that allows us to just bring more product to market. And you've seen products like the new Clinique Moisture Glow that we are bringing or the Double Wear Concealer that has become the #1 makeup launch this year by a brand that is turning 80 years old next year. So our ability to just bring new innovation faster to market at a higher impact, you're going to see more of that going forward.

Great. We've also noticed and it was highlighted in the video, but an emphasis on more accessible price points when it comes to products that you've launched particularly over the last year. So how should we think about it? Is it about attracting new consumers to your brands? Or is there an element of repositioning some of your brands and given -- and in the backdrop of the beauty market where you've had some high-quality new entrants at different price points than what was the case historically?

I think it's a fantastic question. I think it's both, Lauren. And I think the reality is that we -- in a post-COVID era, I think a lot of like the beauty products have increased dramatically their price of brands around the world. So in some instances allow us and the decision we're taking this year is to reposition some products. You've seen the new foundation of M·A·C Studio Fix that we've decreased the price. We've relaunched the DML with a new SPF product in Europe where we decreased also the price. And we're seeing the moment we do that a lot more consumer that we are reengaging with the brand.

I think on this one, it's more like lapsed consumer. But new innovation, we are also conscious that there's a lot of pressure on the consumers around the world, that it is in China or in the U.S., in Europe, in the emerging markets, being able to bring small sizes or innovation at the right price point allows us to win. Again, the example that I used earlier of the Clinique Moisture Glow at less than $50 position in the right channel has allowed us to just like bring back a lot of consumers to the brand and position Clinique to consistently be in market share growth.

So you're going to see -- we have a strategy, a clear strategy of where the growth exists by price band today by category, subcategory brand. And I'm very clear with the team, unless we play in 70% to 80% to 90% of where the growth is at the right price point, we don't go. And the other KPIs which we've put in place, all innovation that we bring to market needs to be accretive to the category or the brand that we are going to play in. So it's the right price point with the right accretiveness to recruit new consumer and to reengage lapsed consumers that we may have lost over the years.

Okay. Great. Time to talk about China. We made it 15 minutes period. So both just over the next 12 months and also medium to long term. So first, just a very simple question, and then we'll get into maybe a more interesting. But you've talked about the maturing of China, making it a more predictable market. I just want to know what you're assuming for growth for China in the medium term beyond the mid-single digits you've talked about for the fiscal year and kind of what underpins that assumption?

I think, look, like you said, we just guided to mid-single digit for us, and we want to gain market share. So I believe like the Chinese market is maturing and is stabilizing to a low single digit for the market in the moment where we are. Obviously, predicting what will happen in the next 2 to 3 years in China in the current context, before even the new program of President Xi Jinping that will be announced in March is a little bit presumptous like not to do it.

But what I'm really encouraged is our ability quarter-over-quarter to gain market share and do it in a way that is more balanced. Again, it is not just the Estée Lauder brand and the La Mer brand. La Mer continues to be market share gain. Lauder is back into positive, but we're seeing TOM FORD in makeup, Jo Malone and Le Labo has been absolutely a runaway success. And lately in -- a few months ago, we've launched The Ordinary in exclusivity with Sephora that is already a top 10 brand in Sephora in China. And now we are rolling out a new platform like Tmall. So we are diversifying our portfolio to be able to gain market share and to deploy at the top of the luxury but also at the entry of Prestige in China.

Okay. What can you tell us about the competitive environment currently in China, just local versus multinational brands and promotionality in the market?

I think there's been a lot of focus on like the disruption of the market. Will the local brand disrupt like the work that the international brand. And I think it is true that in a post-COVID era, we've seen a rapid acceleration of the local brand, which is not dissimilar to what we've experienced in Korea and in Japan or frankly, we are also experiencing in India as we speak. But the difference is it's interesting in the last 6 months, the international brands are growing faster than the local brands.

And they're growing faster through the top tier of like the luxury, meaning like Estée Lauder, Re-Nutriv, La Mer, Le Labo, but also Clinique now, which we haven't talked a lot in China i2s in double-digit growth, thanks to some products that we've tailored and designed for the market. So I think you have a rebalancing of the market where depending on the data, anywhere between 30% to 40% of the market is in the end of the local brand, which still basically leaves anywhere between like 50, 60-plus percent in the end of the international brand.

The exciting data also in China, there's still excess of 100 million to 200 million consumers that are going to graduate to the middle class between now and 2030. And our ability to capture this consumer having been in China for more than 30 years is high. We have the credibility. We know how the market works. 99% plus of my team in China is Chinese, knows the ecosystem that is becoming increasingly complex. And I think we have the right tool to win in the market.

Okay. Great. You mentioned a few other emerging markets in that answer. So I'm curious to talk about your strategy for accelerating growth in those other emerging markets. Where areas of particular focus? And how should we think about the profitability of these markets and investment needs? Like where do you have significant scale that you're already quite profitable and others where it's more of a time to build?

I think we can tag team with Amber on this one, having part of like in Latin America and the emerging market. But I would say the emerging market is critical and central to our strategy. And I've been very vocal on the fact that I'm not yet happy of what is the penetration of emerging markets in the total, about 10% of our global business is in emerging markets. The largest market being India and obviously, Southeast Asia is growing very fast, but still very small.

We are nurturing this market. I want at least in the foreseeable future, but the sum of the emerging market to be at least mid-double digit, like 15%, 16% penetration to the total business, led by India. Now you've asked the question of profitability. This market tends to be very profitable, a lot of growth from -- accretive from a growth and from the bottom line. But they require a lot more investment. They require different strategy.

For instance, in India, one of the winning strategy has been the deployment of small sizes across our brands, like it's a small Double Wear, small A&R, a small DDML because the ability for consumers to get access to a luxury product is still limited. In India, 90% of the market is still mass, 10% is prestige. Prestige is growing faster, but it's very limited the number of consumers. So our ability to bring the luxury product at a more affordable price point, the future innovation is going to be critical for us to win in the market.

But we are committed. We just approved a massive investment in India to really accelerate the market because the market has tremendous momentum. And as you may know, also, we have a minority in Forest Essentials in India, which is one of the largest brand, at least from a DTC standpoint, it is actually the largest prestige brand in India, and we are working with our partners there to just continue to expand that presence. So a lot of potential equally in Latin America.

Yes. From a Latin America perspective, it's really about sort of where the consumer is from a distribution standpoint. So looking at both Mexico and Brazil, Mercado Libre, Amazon, Ulta is entering the Mexico market. And so we're really encouraged by the early signals we've seen both from an Amazon Mexico perspective, but then also some of the new platforms that have emerged that our brands are already on. So overall, I think it's a great growth engine that I think we're excited to invest in.

Okay. Let's -- sorry, where are my questions. So looking at your outlook for the company, Stephane, over the next 12 months, what markets, categories, channels, where do you feel the most confident versus where do you think there's risk to your outlook as it stands today?

It's a very good question because the world is not growing at the same speed of all the category at the same speed. What I'm really encouraged is how robust the U.S. market is in this moment in time, not only us being able to gain market share, but the market continues to be very strong. And I think it's linked to the fact that beauty, especially luxury beauty is still affordable luxury and a lot of people are gravitating towards it, while they may not be able to just buy new homes or new cars because interest rates are still very high.

But like this little luxury, the famous thing that Leonard Lauder used to call the lipstick index in this moment of high or subdued consumer confidence, I think luxury beauty tends to perform greater than many other consumer goods category or other luxury good company. China, I'm encouraged about the stabilization if we can just get as an industry and us as a company to continue to gain market share. And the early signal of July and August are extremely strong about our performance in China. So we're very excited about it.

Where I think there's a little bit more risk is Continental Europe and especially Northern Europe, think about France, Germany, the U.K. There is a rapid slowdown of like consumption. I think consumer confidence is also very subdued. We have a lot more work also to do as a company. And the playbook that we've created for the U.S. and China, we are in the process of deploying it in this market because the truth is that when you understand the ecosystem that now we are creating and operating under in the U.S. with Amazon, TikTok, the department store specialty multi, it's not dissimilar to what is happening in the U.K. and in many of the Continental Europe market. But we need to make sure that we deploy it, we invest, we're consistent. But the consumer confidence is a little bit worrying.

On the other hand, you have also markets like Japan that have been absolutely a bright spot of the luxury industry, and we've been gaining market share, but Japan has basically very quickly reduced. The yen gets stronger. There's less basically tourism happening. There was also some phenomenon this summer where there was like rumors of earthquake and et cetera, which frankly, we've seen a dramatic reduction of the tourism in Japan, which have hurt a little bit like consumption. So I think it's overall rebalancing, positive on the U.S. and China, which happens to be the 2 largest beauty market in the world, which is good, but some challenges in more Continental Europe and more mature market in Asia, which we still have some work to do.

Okay. In your guidance, at the lower end of the range, you'd be below market. So I'm just curious, is that being part of the guidance range? Is that about share loss? Or is it about shipments versus consumption and continued destock? Just...

Yes. I want for everybody here to differentiate, especially in this year of transition because still fiscal '26 is a year of transition for us. And I want to disconnect share loss that is a retail KPI versus what we guide, which is net sales. We've guided 0% to 3%, but our retail is stronger than our net because we're still rebalancing a little bit of the retail to gross to net by optimizing inventory.

Remember, the first big commitment that Akhil and the team made to all of you is like rebalancing the inventory in Travel Retail. And that was the commitment that I made in February at the first call and say by the end of the fiscal year, we will be back to the right level of inventory. Promise made, promise kept. We are like in the right place, and we've reduced dramatically the penetration of travel retail.

That being said, we still have pockets around the world, especially in North America, where the inventory, we're still working through it and create a bit of a disconnect between the retail and the net. But our commitment is to gain share in retail and hopefully, by time, reducing the gap between the retail and the net to just be able to make sure that the retail and the net are a reflection of our market share gain.

Amber, I wanted to talk about channel mix in North America, both sales and margin. But sales online, I think, are roughly 1/3 of North America, but slower growth and less profitable channels still account for the majority of sales in the market. So I guess, what are the implications of these smaller, but higher-margin online businesses growing faster? -- Is it net accretive to growth? I mean -- and profitability anytime soon? I just sort of time line for thinking about the drag from department stores and other channels that are similarly challenged versus the really dynamic nature of the outline business?

Yes. From a growth perspective, I think there's still a very real customer that loves our department store business, and we want to protect that experience for her. Of course, then I think the expansion of our brands into other channels that are faster growing that I think are acquiring a younger consumer has been part of the mix that has also been missing in the past that we've since shored up.

From a profitability standpoint, it's in line with other channels. Our new distribution and our more faster-growing ones, I would say, is in line. So we -- from a profitability standpoint, are fine. The thing I think is so interesting is there's obviously going to be a natural migration of consumers finding these different platforms as they emerge, right? 5 years ago, no one was buying anything on TikTok and here we all are.

So I think there's going to be a slow drip of the mix channel. It's not going to be something overnight that all of a sudden, you're reengineering things to have to respond to it. But I think it's important for us to still remember that how do we continue to optimize and be efficient with our department store channel that is very important and big for us while also investing in these emerging channels that are still providing a new consumer outlook for us.

Okay. So -- but as we look forward, I mean, is it 2 years before North America reported can be into growth mode just because of the weight of the decline, protecting and respecting the customer that wants to shop in department stores is also just a reality of the department store industry.

Yes. I'm not prepared to give a sort of exact time line, but I think we are encouraged by the total market growth we are seeing at a retail level to Stephane's point on market share gains that is giving us optimism that I think that it's balancing out.

July, I'm sure some of you have access to Circana, was very strong. The market was strong, and we were even stronger. And the one data point that I would remind everybody we've guided is outside of China and Travel Retail, we say the rest of the world will have sequential improvement and end up in positive low single-digit growth by the end of the fiscal year. And from there, we continue to just like build on strength.

Yes. Perfect. Okay. Amber, I wanted to go back to one of the 5 pillars is reimagining the way we work. Could you talk a little bit or just give some examples of how the new organization structure in the Americas makes the business more agile?

Yes. I'll use the Amazon example as a sort of fresh one. The way that we were structured before was lots of different brands that were sort of siloed and making independent decisions. And when you launch a platform like Amazon, it becomes really hard to look at how the platform is operating and not inherently compete with yourself across different brands because you might have one brand bidding on the search term and another at the same and blindly not knowing that they're sort of bidding or bringing cost per clicks up. And so when we built the team, we were very intentional about saying we still very much hold to our core brand-led, is a core part of who we are.

But we have to look channel agnostic as well to make sure that we are leaning into the strengths of how we do that and then also creating agility and speed and empowering the team that's running that business. to not have to trip over each individual brand to get decisions. And so I would say, one, the way that we built that team was a key difference. It's the only team in our organization that is sort of channel vertically necessarily than brand.

And second, the amount of pass off taxes that we have gotten rid of with just the elimination of the coordination, I think it's really refreshing. And we were saying in another meeting before, there's obviously a hard part of the layoffs that have been very real on a human level. But I think the momentum the team is feeling of just the like I'm empowered to make decisions and the speed in which they've then been able to do that has been really, really great.

Another silly example is Taylor clearly announced a new album and she's in her orange era and many of our brands wanted to respond. And before, we would have had to get creative and approval and who is posting what, and it would have taken us weeks. And within a matter of days, brands had post up on social media on the Clinique Happy brand, a cute little thing on our Orange era. And so there's just -- that's a real example that in the last 2 weeks, we've been able to really just say, no, like the North America region is going to respond to cultural moments. And having the team agility and structure has really allowed us to do that.

I think, Lauren, one thing to not underestimate the change that we've made by the beginning of this fiscal year of the accountability of where the P&L is in the organization has made tremendous changes. And moving the P&L responsibility from the brand, we were a brand-led organization, now we're consumer-centric and moving the P&L closer to where the business where it is happening, allows Amber and entire North America or the rest of the commercial leader to be able to flex and to move resources, frankly, at the speed of what the consumer is asking for.

Before I was always joking like it's not fair to ask the Estée Lauder brand to be able to just decide how to allocate the fund in India from New York City. It's just impossible today. Now the more you put the resources closer to the consumer, the more agility and efficiency you create. And at the same time, you re-center the brand to create the best innovation, the best commercial activation and so on and to pass it on to the just region to execute with excellence.

M&A. So Stephane, sorry. I'm just curious...

Probably...

And they got -- we got to move it. But just curious to hear your perspective. On the fourth quarter call, you did talk about engaging external advisers to review the portfolio. Just a little clarity, are we looking at culling products? Are we thinking about getting into new categories? Are we thinking about divesting brands? But maybe to frame a little bit for us what this is about.

So to your question, I think I just want to clarify a little bit when we said like external advisers, they are bankers that we've hired to just help us to just look at our portfolio. And I've been very clear even in February in my first call that we are in every year in a cycle where we are looking at the strategy of the brand. Will this given brand fit with the new Beauty Reimagined strategy? Is this brand in the right channel? Do they have the right innovation, the right investment and so on and so forth.

And I'm really committed to continue to invest in the highest return for the company on the get-go. And I think we need to recognize that portfolio has to evolve within the brand, the portfolio of product needs to evolve. But that I think we've been very good over time, and we've demonstrated with the improvement in gross margin and the systematic reduction of inventory has also come from the rationalization of product and SKUs where you don't have the profitability or the return, we just cut and we move on and we bring new innovation. But the truth is that we may have to do some evolution. And so once we have more detail, we'll obviously make it public and we'll announce it, but this is like the process where we are at this moment in time.

Okay. Great. Margins and reinvestment. So also on the last call, you were very clear that within the PRGP, G stands for growth. We quoted you in our note. I almost made it the title.

Almost.

Almost, little bit of a debate. But you're going to focus on reinvesting to fuel growth, right, eventually ahead of the market, but that requires investment. So how are you just balancing this -- or how do you achieve the healthy balance between investing to reinvest and reinvigorate top line, but at the same time, to be restoring and building margin?

What we're trying to do at like this moment in time, think about in fiscal '25, we've declined by 8%, 3 years of constant decline and margin erosion. We've guided 0% to 3%. The math are simple. We need this 8-point to 11-point swing into 1 fiscal year. And at the midpoint from an adjusted operating margin, we said we were going to improve by 165 basis points. And that's after absorbing more than $100 million of tariff and mitigating more than half of that before. So there's a lot of things that we're going to do at the same time.

So -- but it was important at the G, it was very clear there was no other path but to invest in just market share gain and putting really our brand at the forefront, frankly, of like the consumer mind. Because when you look at it objectively, from a brand health and brand desirability, most of our brands, if not all of them, are very top rank in many markets around the world. The visibility of some of them because we had mortgaged investment on the top of the funnel or the -- what we call now the demand generation was not sufficient. We were very good in China. We were not good enough in the U.S., not good enough in Europe. So we had to just put the investment.

Now what you're seeing from us with the improvement of gross margin, with the efficiency that we are trying to -- we are building with the PRGP and continue to build throughout this fiscal year, I really believe that we're in a position to start building a lot more leverage.

So while it was a necessary thing to just put more investment, you're going to see us now going more into a mode of creating more efficiency in the investment that we are having rather than necessarily saying we need to just like continue to invest ahead of the sales, which we may have to do in some pockets and in some geographies like the emerging market. I really believe that we need to fuel the market there to just propel our -- the acceleration in this market. But it is important that think about now the P&L of the Estée Lauder Companies this year and going forward is going to be built for a lot more leverage going forward. Once the market resume with a more steady and better growth than what it is today, and we will be in a consistent market share gain.

Okay. Great. So just to wrap up, hopefully, you both come back next year, and we sitting here...

With pleasure should if we're invited.

You'll be invited, trust me. And so after you put this date in your calendar, just what would you say success looks like for you? One or two things that might derail where you stand in the turnaround, but what do you think we'll be talking about a year from now?

I think in a year from now, we'll be able to just like prove more consistently market share gain beyond the U.S. and China. I think with the consolidation of the great work we've done. Obviously, like continuing to gain market share in Japan, even though there's a slowdown in the market. I want to turn around the over mature market, the acceleration of the emerging market. We've talked about it. But I think ultimately, what I'm laser-focused on with the team is to create an operating model that give us the agility, the speed of execution and the maximum potential leverage for growth and to build solid double-digit operating margin for the years to come.

The few things that could derail all of that are more external factors. There's not a day we were just talking about it at the beginning of the conference where there's no new -- the amount of volatility, if I had known that my first position as CEO had to deal with so much volatility in the world, will still have taken the job, but it is just like mind-blowing what is happening from different geographic consumers and et cetera. And we are facing that with determination. But frankly, like today, yesterday, the tariff was not a thing, then it became a thing, then now they may be challenged again.

So just managing all of that is actually the only thing that takes your ball off just driving the business, and we are conscious about it, but we are operating in this new environment, which I think is the new norm. So we just have to just get used to it and just like move forward. And I think Beauty Reimagined, I have all the confidence this is the right strategy to just put back the company in the rightful place that it deserves, which is at the top.

Okay. Great. Perfect place to end. Thank you so much for joining us. Please join me in thanking Estée.

Good day, everyone, and welcome to the Estée 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.

Hello. On today's webcast are Stéphane de la Faverie, 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 noncomparable 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 our retailers' websites. Throughout our discussion, our profit recovery and growth plan will be referred to as our PRGP. During the Q&A session that we ask that you please limit yourself to 1 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 Stéphane.

Thank you, Rainey, and hello to everyone. Before we discuss our results for fiscal '25 and '26 ambition, let me begin with a moment of remembrance of our [ Bill ] of Chairman Emeritus, Leonard 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 share. We were profoundly moved by the outpouring of combustion for employees, consumers, peers, retailers, suppliers, media, analysts and investors. Your condolences celebrated a life beautifully lift and a legacy deeply felt, recognizing our Leonard uniquely shaped and revolutionize not just our company, but also the Beauty industry.

Leonard was a mentor to me and as he was to so many others. I 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 Vice Champion.

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 earnings 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 prolonged week 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 points from fiscal '24 and 14% age points below its fiscal '21 peak reached during the pandemic, making it more similar to the China 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% on the 220 basis points, driven by sales declines and increased consumer-facing investments. Diluted EPS decreased 40%.

Since I became CEO, we have acted with urgency to operationalize our strategic vision of Beauty Reimagined, making strong initial progress across all 5 action plan priorities from January through June. In the second half of fiscal '25, we gained prestige beauty share in China, Japan and the U.S. demonstrated not only our ability to return quickly to share gain by building on our brand's high desirability but also early wins for new consumer coverage and uptake of enticing innovation. Globally, Le Labo 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 Power Japan. In the U.S., the [indiscernible] Clinique and Estée Lauder drove share gain while Estée Lauder new double were considered ranked #1 product launch in prestige makeup by [indiscernible] for 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 U.S. Amazon premium beauty store in the third quarter, Origin and Aveda launched in the fourth quarter while Estée Lauder and Aveda opened in the Amazon Prime Beauty store in Canada. We now have even brand store front in the U.S. and 3 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 Tmall and Douyin. As a result, online organic sales growth accelerated from low single digit in the first half to 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 entering the pharma channel in Latin America with Clinique responding to rising demand for their 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 innovation portfolio to deliver gross margin accretive product clearer and better capture faster growing industry trend in skin care with a night, longevity under as well as in makeup and the still in demand Luxury Brands segment as well as Hair Care.

Let me share a few highlights from the fourth quarter, beginning with skin care. La Mer [indiscernible] 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 for 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 [indiscernible] our dermatologists recommended DDML. For the ordinary its new UV filter SPF-45 serum offered consumers suncare 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 30x greater than 4 years ago, demonstrating our ability to leverage social media virality to further fuel demand and attract younger consumers. MAC's bond famous commercial innovation, paired with the new Lipglass Air contributed to strong share gain in the U.S. 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 increased 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 launched 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 close 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 seal Experience Center, while Jo Malone London had an in-store navigation and experience to meet evolving consumer needs.

Next, let me share an update on our portfolio review. We recently engaged external adviser as we consider evolving the [indiscernible] to best align with the strategic vision of Beauty Reimagined and focus on our highest return opportunities over the medium to long term. We will share a bit in due course.

Let me now turn to our fiscal '26 outlook. With 3 fiscal years 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 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 strong gross margin despite the headwind of incremental tariffs and expand our operating margin by 165 basis points at the midpoint. Akhil will describe the drivers are in detail, but let me share a few overarching themes.

For sales, we intend to significantly reduce these costs. We made good progress in this -- in fiscal '25 and believe there is much more that we can achieve. Our sales growth also unbased 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 department stores. Finally, we are putting greater emphasis on accelerating in high-growth energy markets, given our still untapped potential as emerging markets only represent 10% of reported sales. For operating margin, the organization has embraced PRGP and its momentum is very encouraging. We achieved much more PRGP than we expected in fiscal '25 which gives us confidence that we can deliver meaningful cost savings 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-develop with Tmall. And we are exciting to be expanding on Amazon Premium Beauty store success beyond the U.S. and Canada, starting with The Ordinary in Amazon U.K., 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 with Duty Free Americas. This builds on progress in EMEA to expand the presence of our luxury fragrance brand in airports.

Moving to our second action plan priority, create transformative innovation. We have identified our external hire for the new leader of R&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 the year. Here are a few fiscal '26 innovation already in the hands of consumers.

In skin care, reflecting our imperative to innovate from the entry pricing through luxury tiers, The Ordinary launch of for 10% powder to cream concentrate, a break-through formula. Further up the prestige tier is still on the advanced and repair franchise introduced a new high cream, while Re-Nutriv launched a watery lotion powered by longevity science. In makeup, we are rebuilding on our gain in lip with MAC Lipglazer Glossy Liner and Bobbi Brown's Cashmere Luxe Matte Lipstick. And following TOM FORD's recent success with Cushion Foundation, the brand launched architecture Radiant hydrating Foundation. In France, the category poised to lead prestige beauty industry globally in fiscal '26. Jo Malone London's Raspberry Ripple, this year's seasonal limited edition color is outperforming last year's limited edition runaway success.

TOM FORD extended their halo of its Oud collection with Oud Voyager and expanded to its popular Black Orchid franchise with Black Orchid reserve. We are also proud to mark the exciting relaunch of the [indiscernible] brand within [ Trition ] and new funds fronted by global ambassador NBA Hall of Famer, Dwyane Wade. For our third action plan priority, boost consumer face investment, we are deploying a new media model that puts greater focus on demand generation through broader media analytics. 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, media optimization to agile go-to-market execution AI has driven a 31% increase in ROI from our North American media campaigns, enabling faster decision-making and stronger 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 June 1, brands own global strategy, innovation and long-range planning, while region have full responsibility for the P&L, allowing for greater local agility and consumer focus. We introduced a new ways of working playbook aligned to the structure to drive brand region collaboration, and we are very encouraged by the elevated engagement so far.

In closing, we are energized as we are transforming our company through Beauty Reimagined. To our employees, thank you for bringing Beauty Reimagined to life in 6 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.

Thank you, Stéphane. Hello, everyone, and thank you for joining us today. Before discussing 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. And encouragingly, we are seeing positive results with share gains in some key markets, notably in Mainland China and Japan. In the U.S., 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 a 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 nonconsumer-facing costs in the fourth quarter, ending the year with a 6 percentage reduction. In the fourth quarter, we also recorded $425 million of impairment charges relating to Dr.Jart+ and Too Faced. This reflects challenges in Mainland China and Korea for Dr.Jart+ and continued underperformance in geographies and channels from Too Faced.

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 fund 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 the PRGP restructuring program. As of June 30, 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 noncash 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 reduction liked 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 valuation 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 our 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 impact and better position us to adapt quickly to address the evolving trade policies.

Based on what we know today and end 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 U.S. 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 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 impact of actions 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 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 our 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 nonconsumer-facing expenses as we enhance overall productivity and rightsize 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 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 our PRGP to 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 legislations that may expire in fiscal '26, which if not extended, could increase our 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 $1 billion 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 our focus and determination to optimize CapEx overall and target the investments in consumer-facing areas to fuel growth.

In closing, we remain confident in Beauty Reimagined, 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 down 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 our 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 our prepared remarks. I'll now turn it over to the operator to begin the Q&A session.

[Operator Instructions] Our first question today comes from Dara Mohsenian with Morgan Stanley.

So clearly, a lot of hard work occurring under Beauty Reimagined significant plans in place in the 5 key action areas you mentioned. I wanted to touch specifically on simplifying the organizational structure 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 is 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 is moving so far? And how do you think this change is being ceded culturally?

Yes. Thank you, Dara, for your question. I think it's obviously at the heart of all the changes that we are implementing and obviously delivering on the vision of Beauty Reimagined, like you said, on the 5 key action priorities. I think from an organization standpoint, you've heard me say in the prepared remarks that we are going to announce in the next coming weeks, the head of R&D, which will actually complete the new leadership team in place. And we've done that in a very short 6 months since we've announced the new organization.

Also, if you remember, we've announced the collapse of the 7 region into 4. So today and Akhil mentioned in his prepared remarks also like the new geographical structure on which we are going to report on, which is obviously the Americas, U.K., Asia and travel retail and China as a stand-alone 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 is really committed on the challenges that we are doing. We have had relentless communication throughout the organization. Personally, I've had like 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 challenges 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 Reimagined, 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 been 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 earnings call, we said that we were moving the responsibility of the P&L from the brand to the region, and I reiterated that also like today. As of July 1, 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 dividend. I think many of the progress that we've highlighted of the last 6 months since we've announced Beauty Reimagined are coming through all these changes that we are making from the share gain that we have in China, that we have in the U.S., that we have in Japan, the acceleration that we're seeing in the emerging markets, even though not yet satisfying to all of us. I think many of the challenges 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 it's changing, but we are really pushing on ambition and accountability throughout every I would say, pillars of brands and regions and functions of the organization. And I think this is only the beginning of the momentum that we are just going to see going forward.

The next question is from Steve Powers with Deutsche Bank.

This is a question perhaps more for Akhil, although, Stéphane, I 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, Steve. So I would say if you look at the big picture from where we closed fiscal '24 to where we closed fiscal '25, when you look at our largest markets, travel retail, China and U.S. 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, where -- while we have reduced inventory, we still -- because of the retail environment, we are just watchful of what -- 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 1 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 Stéphane and I had said, very [indiscernible] retail, shipped 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'll be very transparent in communicating that.

Now in some of the markets like North America, where we are, as part of Beauty Reimagined, changing our 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 value creating channels. 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. [indiscernible].

Yes. 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 of 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 in 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 exited 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.

The next question is from Lauren Lieberman with Barclays.

Just wanted to hone in a bit on North America and Stéphane or Akhil's comment that markets with significant department store exposure, which will remain more challenged. And so you've made great progress to North America pass on Amazon, et cetera, market share gains in various periods. But how should -- 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 fill that weight of department stores? And I guess 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?

Thank you, Lauren. I'll start and Akhil will just like 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 month of July is strong and we're strong. In our prepared remarks, we said that we've been gaining market share for the first -- the last 6 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 Reimagined, 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. Clinique continues to be very, very strong, which tells us that we've been able to just attract new consumers but also reengage 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 it's also the majority of the beauty search that is happening in the market. So we have been seeing a lot of positive momentum in retailers like Ulta, where we are very, very strong. Obviously, our online business, our own online business, online com is also like 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 to make sure that we're 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 results that we are getting in July are extremely encouraging. We are July, again, we are in market share gain. And we are not only market share gain on brands like Origin, The Ordinary but we are also across Lauder, Clinique and MAC, which gives us a lot of confidence that 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.

Yes. I would add a few things to what Stéphane said. So I think overall, we are very pleased with where the channel mix is evolving in North America. As Stéphane said, we now have a much more balanced view of what e-channels bring. I mean department stores are probably less than 1/3 of our business, not probably, they are 1/3, less than 1/3 of our 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, but in 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 underlying e-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 Stéphane said, wherever the consumer is, we are going there, of course, in a value-creating way.

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

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 trouble retail organic revenue growth wise. And whilst I recognize the markets, not many are I think reporting from global GDP does show a more supportive beauty backdrop in the U.S. and China in Q4 versus Q3. So maybe if you can see an improvement in your organic revenue growth ex travel retail, what do you attribute this to? Is this just the gap between your sell-in and sell-out or something else that's happening now considering we've seen the other players show in trends there.

And then I guess when you think about the '26 guide, can you help us understand when we should be expecting ex travel retail organic revenue growth to turn positive? And I guess the reason I ask this is it does seem that this is the part of your business that you can influence more heavily through product innovation and distribution bus where the travel retail component feels still a little bit more out of your control and impacted by market dynamics.

Yes. So our overall business, excluding Travel Retail, was in the similar range of single digit -- low single-digit decline. Our goal is to clearly improve the business, as we said in the guidance. We look to see -- to get to positive growth in fiscal '26 overall in that low single digit. That's our guidance. And the part of the reason is what we explained, right, net sales in North America, in spite of the positive retail was negative, which we are working to close that gap for the earlier question from Steve as well.

At the same time, what we have seen versus the first half of '25 to back half of '25, we did see slowdown in Europe, which is part of that business. And of course, we are working to accelerate that as part of the -- really, the Beauty Reimagined pillar. And emerging markets, there were more diversified businesses in rest of the world, including the strength you have seen in Japan, et cetera. We believe that we can get to stronger growth outside of travel retail. And the good news is that the China business is starting to pick up. We had back half of fiscal '25, we had mid-single-digit growth in our retail and growing share.

So like you said, clearly, travel retail, we are adjusting to retail. We are focusing on building retail there and shipping accordingly. But in other parts of the business, namely China, positive retail in the U.S., opportunities in emerging markets, we believe that we can gradually as Stéphane said, this will take some time, but we are in the right direction in terms of driving business.

Yes. And Ashley, just to add to what Akhil said, I just want to go back to what we've guided for the year. We have a modest growth for travel retail. And we still have ways to inflate, like we did with the reduction of the inventory last year. It is true that we are starting from a lower base. But we have a new team in place in travel retail, and we are really focused on accelerating retail. We'll be happy to just like show you many of the activities that we are doing in travel retail across Asia, the Americas and Europe, where we are expanding distribution in the Americas and in Europe. So there's still a lot of untapped potential for us in many airports around the world.

And actually, just one data point was interesting. In the month of May, we turned positive in Hainan. Thanks to all the activities that we've put in retail with Estée Lauder, La Mer, Jo Malone and you name it pretty much across the brand. Now the rest of our business is gradually and sequentially getting better with the intent and the ambition that by the end of fiscal '26, we will be in positive in the rest of the business. We are foreseeing that China will be positive in the mid-single digit. China is stabilizing. We are gaining share. The other data point is we have early signal in July that we are also gaining share after a very strong for led by 618, where we had top ranks and very top performance for Estée Lauder, La Mer, Jo Malone and many other brands.

So we are seeing gradual improvement from a net sales standpoint. From the retail, we're already there in North America. We're accelerating in the emerging market, and we intend to be in double-digit growth for the fiscal year in emerging markets. As Akhil said, the challenge that we have to work on us, [indiscernible], but also because of the trend in the market is the big Europe, where we are seeing a decrease in consumer sentiment and obviously, a little bit of a softening of the trend, especially in the key markets like France, Germany and to a lesser extent, in Italy and Spain. But so we are very conscious of that, and we are working with the team, the new team in [indiscernible] to make sure that we are deploying more innovation in this market and adding the right consumer coverage with the right media investment to recruit new consumers to our brands.

The next question is from Rupesh Parikh with Oppenheimer.

So just going back to the operating margin guidance for the full year. I was just hoping to get more color on the interplay between gross margins and SG&A. And as you guys make that progress towards the double-digit operating margin target, where you see more improvement on the gross margin or SG&A line?

Rupesh, I'll start. So overall, in the 9.4% to 9.9% guidance that we gave, we believe that we would have gross margin flat to positive in spite of the significant tariff offset that we made. So in absence of that, we would have expanded gross margin on top of the 230 basis points that we expanded. And of course, as Stéphane said in his prepared remarks, we are looking at more opportunities to offset that through various PRGP and pricing opportunities, which we have not yet implemented.

So as we look forward, which is your question, Rupesh, we do think there is more opportunity in gross margin over a longer period of time. In '26, we believe it's more in SG&A. So a large part of our growth in margin in '26 would come from SG&A, primarily from nonconsumer-facing. So we will make sure that we have the right fuel to drive our brands in the overall Beauty Reimagined strategy. But on everything else outside, which the consumer doesn't see, whether it's G&A, whether it's the shared services, whether it is our employee cost, where we had a significant restructuring amount to rightsize our business, we will be doing that.

Within SG&A, just a double-click is that, as Stéphane said in his prepared remarks, we are looking at end-to-end business model change and driving the outsourcing opportunity, driving procurement opportunity as well where we have a full-on project looking at every single OpEx in the company to look at what -- how we can consolidate, how we can drive better efficiency, how we can procure better, how we can spend better or less. So our growth will come from SG&A in a primary way but also from gross margin. We believe there is opportunity in both primarily SG&A.

Yes. Just one quick addition, Rupesh, on this point. We are laser focused on growth. The PRGP, if you remember the G is growth. So a lot of the savings that are coming from the PRGP, which we are already in completion of the first year, and we still have 1 year to go. And as I said in my prepared remarks, we're very pleased with the progress that we've made. We are reinvesting a large part of this cost saving into consumer facing. And I said it in multiple calls before. We could have taken a very different position to just like drop many more of these savings to just improve quickly or faster the operating margin.

But we strongly believe that with the strength of our brands, with the innovations that are coming and the new media model that we are putting in place, we need to fuel the growth going forward, the consumer acquisition that we just need to go back to historical algorithm -- growth algorithm and bid market share. When we get there with new operating model that we are putting in place with lower SG&A, a better gross margin than what we have had over the last 2 years. We know that there will be a lot of leverage going forward. But we need to be laser-focused on activating retail. And obviously, as we made in the other question that we tighten the retail to net, and this is just going to create a lot of leverage going forward.

Next question is from Chris Carey with Wells Fargo Securities.

So I just saw a 2-parter, but just regarding the quarter-to-date developments, specifically in Asia that you highlighted in the press release, I'd love to just get a bit more context on what you're seeing from the category and your own performance? And then regarding Europe, you did mention that you've just seen a bit of slowing in the category. I know there's some new leadership in the market as well, looking to drive accelerated penetration. What's your outlook for Europe specifically as we think about the next 12 months, both the category and your own performance? And what are appropriate benchmarks for success and sequential progress in the market?

Thank you, Chris. So let me just decouple when we talk about [indiscernible] between the trend that we're seeing in China and in the rest of the Asia region because, obviously, we have -- and as we mentioned, we're seeing some very encouraging sign of stabilization in China. And that's the most important thing. Consumer sentiment is getting a little bit better. It's still lower than what it was like a few years ago. But in our case, we have a very, very strong performance. We have growth in all categories and all channels in Q4. And that was very exceptional. It's been a long time for us getting to this position.

We had 10 brands grew in retail including our big brand, but in a much more diversified way. Obviously, Lauder and La Mer continues to just like do some very strong activities, but we've seen tremendous retail acceleration on Jo Malone, on TOM FORD, including TOM FORD makeup and so on and so forth. We have also a very successful launch of the ordinary in China with Sephora that we are expanding as we speak on Tmall. So we're seeing a lot of good momentum in China. Obviously, we are -- there's still some work to do. The market is soft, but more importantly for us, we are gaining market share.

In the rest of Asia, I have to say we are seeing some slowdown. Japan continues to be strong for us. We are gaining market share, but we've seen a sequential reduction of the performance linked to FX and other reason, which is obviously less tourists when obviously, the effect has been swinging in the different direction. Korea has been soft, and we are working with the team to -- we have a new general manager in place in the market and working with the team to really accelerate the market. So I would say, different views on China stabilization, the rest of APAC, some work to do. And Southeast Asia, I have to say, continues to be relatively strong and part of our new emerging market structure.

And like I said, we have, for the moment, 10% of our sales that is coming from emerging markets, but we're seeing a lot more potential with an acceleration in double digit in this year and in the years to come. When it comes to Europe, yes, Europe is actually a bit more concerning from a consumer trend standpoint. There is an erosion, obviously, of the performance with a sequential slowing in prestige beauty across mainly of the main market is the one that is the most challenging followed by Germany. Some actually still positive in Spain and Italy, but we think, generally speaking, a slowdown on the overall performance. But with the team we are expanding consumer coverage. We have a lot of activities, especially in France.

You know that Europe has been for now multiple months driven a lot by the activities on France in the market. And we've demonstrated actually that both with like brand like Jo Malone, with TOM FORD, with Le Labo, we are basically going from strength to strength, and we are continuing to expand strategic of our brand. So we can capture our fair share of the growth that is in the market. We are also strategically investing more into this market to make sure that we ignite growth and bring more consumers.

And I have to say, all the work that we are doing on innovation is benefiting this market. The fact that we're accelerating our innovation that we're bringing to market in less than 12 months, and now we are back to more than 25% of our innovation coming to market is going to help a lot because we're seeing a lot more consumers looking for new innovation also in Europe. So I would say, generally speaking, stabilization of China, strong in North America and some weaknesses in the rest of APAC and Europe. But again, through Beauty Reimagined, we are laser-focused on expanding distribution, adding new innovation and investing in bringing new consumers to the market. So all of that gives us the confidence that by the end of fiscal '26, we will have all 4 new geographic region in a positive territory.

The next question is from Peter Grom with UBS.

So thank you for all the details on fiscal '26, but just listening to you both and reading through the release, there's just a lot going on, a lot of moving pieces. So when we just think about the fiscal '26 guidance, can you just talk about the level of visibility or confidence you have in the outlook at this point in time? And I guess, specifically, have you embedded some cushion if some of these assumptions were to move against you?

Peter. So overall, I would say that, look, when we give this outlook, we, of course, take the best view possible and take the -- of course, a risk assessment on that. What we are seeing, which is positive, which is meaningful for us, is definitely China. China has had market has grown, and we have grown retail mid-single digit. That's one of the largest beauty markets on the planet. That was not the case in the first half of the year. So with 2 back-to-back quarters of single -- mid-single-digit growth for us, growing share that definitely gives us some confidence, barring any geopolitical things that is not in our control. What is controllable is working, we are definitely winning in that market again. So that's good.

Secondly, on travel retail, with the work we have done on the inventory and the difficult choices we made in '25 gives us a base from where we can grow. And retail is still challenged in travel retail, but our shipment base was -- did the hard work in '25 to make those choices. So on travel retail and on China, barring any exogenous factors, we have good visibility now. Thirdly, in North America, we are starting to build retail positive, and we grew share in the back house, right? So that gives us confidence that in North America, we are getting more competitive again with all of the channel changes, et cetera, we have done. So these are the 3 largest businesses.

Other than that, we have a strong presence in emerging markets around the world. We are working to accelerate. That's one of the things Stéphane has made it clear very early on that, that would be a priority. So that is a growth opportunity for us, where we are working to do. Of course, emerging markets come with their own volatility, but they are still a growth opportunity, and we are well positioned there. So when you look at our largest businesses from a sales standpoint, as I covered, we have good data points to support our outlook in a meaningful way. When I look at from a fit standpoint, we did the hard work -- we have done the hard work on PRGP to know what our cost structure would be. What our COGS will be, what tariff would be, what mitigation we can do.

So when we look at the cost work line by line, we, of course, have done the work to give you the margin look we have given. So both from top line margin, gross margin and cash, we believe the outlook we are giving you is the best based on the information we have today, of course, with which you would always expect from us.

And I would say, Peter, just one quick thing. Obviously, we've said it, and you see it yourself, there is enormous amount of volatility out there in any geographies around the world. So we have ranges to give us rooms basically to deliver like Akhil said, the outlook. And I think you should see that from this team that we've overdelivered PRGP to our expectation. We will continue -- we have 11 months to go into this fiscal year. And there's not a day in the week that we are not looking for new opportunities to cut costs where we need to do to refuel basically our brands everywhere around the world to activate retail. So we have ranges.

Obviously, you would expect from any good managed business to have ranges not only to deliver the outlook but also for us to continue to do meaningful work. You saw the work that we're doing in gross margin throughout fiscal '25. With the enormous amount of volume deleverage, we've been able to just improve gross margin by 230 basis points and even a bit the guide that we gave for Q4 in fiscal '25. So expect us to continue to act with the same determination to cut costs where we need to cut cost to invest to accelerate retail and to deliver on our guide for the year.

The next question is from Andrea Teixeira with JPMorgan.

Just how much your PRGP gross savings? And Stéphane, you really, as you said, you over -- I mean the whole team has over-delivered on this plan. But how much are you including guidance for this margin expansion that you gave out at the midpoint in out of the whole program? And how much investment in client face initiatives you're embedding you're making this year? So how much it kind of flows down to the bottom line?

And just trying to reconcile your comments, and that's just a clarification question. On the 500 basis point gap in retail against shipments, by my math, it probably grew about 2% in the Americas. I think that comment was the 500 basis points was in particular to the U.S. So my clarification questions are, one, can you comment on how much the exit rate was in the Americas? And, b, how much would be embedding retail growth standpoint in the U.S. for the fiscal year for the quarter to come? I'm just trying -- I know you said it will be better than that 500 basis points gap but just thinking of the full fiscal year.

And see, how much your -- you mentioned the potential for the price increases and upside to the gross margin outlook, I was just hoping to see if you can clarify if there is any price increases in the low single-digit outlook for local currency growth? Or if that's an upside?

I'll start with the PRGP. So overall, when we first went -- announced PRGP, we had said $1.1 billion to $1.4 billion. That was the first time and then Stéphane and I expanded it. When we expanded it, we also said to you hold us accountable to margin instead of giving you a dollar tracking of PRGP figures because the business was significantly deleveraging. So that was definitely -- and since that promise, our mission has been to grow margin, which we grew in gross margin. we are growing gross -- we are going overall margin in '26 that are forecast. And then, of course, we are committed to getting to strong double-digit margin.

But within that, let me give you some more clarity. So out of the $1.1 billion, $1.4 billion we had originally intended, we had said we'll do more than 50% in '25. And what Stéphane referred to is that we significantly exceeded that more than 50% number in '25. Then to your second question, how much you are adding in '26. '25 and '26 are both fiscal years with large amount of PRGP savings that we are embedding. The way you could read that is really through a restructuring. We said that restructuring, we have spent closer to $700 million. Our total announced restructuring was $1.6 billion, $1.2 billion to $1.6 billion. So there's still room for us to do the outsourcing project that we talked about and other opportunities that Stéphane has talked about in terms of streamlining the cost structure.

So our forecast definitely takes into account a significant amount of PRGP saving. What is not counted here in '26 is really the outsourcing work. That still will be in outer years. And also procurement work, which we are working on, which should be another big lever. So that is our mission. Overall, we said 5,800 to 7,000 employee head count. We already communicated that we have done about 3,000 plus. There is still -- we, of course, will balance. We're not trying to reach a number, but we are definitely trying to reach a margin in a way that we can execute the business, fuel the brands and then, of course, deliver the margin. So that's overall on PRGP.

And maybe on pricing, just like one thing, Andrea, on pricing, obviously, as we always do, we have pricing power, and we embed low single digit like increase in pricing. But I just want to make sure that we're very clear about our strategy this year on pricing and potentially going forward. We will continue to build on pricing power. That's why we're investing and we have a very strong brand. But we are making sure also that we are bringing to market new innovation at the right price point.

I made it very clear in my prepared remarks that we are playing with the different price tier of prestige from the entry with The Ordinary and Clinique all the way to Re-Nutriv and Estée Lauder, I think like La Mer and Jo Malone. We have a lot of like pricing power between our brands, but we are very careful of understanding where the growth is happening by price band, meaning like is the price -- is the growth happening between $10 to $15? Is it happening between $20 to $25 or beyond and really tailoring our innovation to where the growth is. And in addition, I want to make it also very clear, and we said it, we have taken some strategic price reduction on some of our products to reignite growth on some historical products. Not only we've reduced discount, but we've adjusted prices.

Now on the total, obviously, we are still pricing power, and we're increasing client. And that's the way that our guide is also built for fiscal '26.

And your last one other question you had was on North America, the 5-point gap. So clearly, I mean, we -- as quarter 1, we expect this gap to be to be high. But for the full year, we expect this gap to definitely compress from the 5 points that you saw in the full fiscal of '25. And of course, we'll continue to give you visibility into this every quarter. And so account on that.

This concludes today's question-and-answer session. If you were unable to join from the entire webcast, a playback will be available at 1:00 p.m. Eastern Time today through September 3. Please visit the Investors section of the company's website to review a replay of the webcast. That concludes today's Estée Lauder's conference call. I would like to thank you all for your participation and wish you a good day.

Good morning, and welcome, everybody. Thanks for joining us. Today, I am thrilled to welcome the Estée Lauder Companies back to the conference, but with new faces. Stéphane de la Faverie, President and Chief Executive Officer. Welcome. And with us also is Roberto Canevari, Executive Vice President of Global Supply Chain.

Thank you both for joining us.

Thank you for having us.

Before we engage in some Q&A, Estée Lauder has prepared for us a little video. So let's roll that tape.

[Presentation]

Great. Thank you. That was uplifting, energizing.

[ Good thing to start with today ].

So Stefan, let's maybe start with you and your perspective over the last several months since you assumed the CEO position, not quite 6 months ago.

Not even.

It's been a busy, busy start to '25, calendar '25. I guess how would you sort of summarize the experience and your key learnings? And how has it informed the Beauty Reimagined strategy and your key priorities going forward?

Absolutely. Thank you, first of all. Steve, thank you for having me today and Roberto. We are very excited to be here. Yes, indeed, it's been like a bit more than 100 days since January 1. It's been like not touching ground. Flying pretty much everywhere around the world and being with our teams like on the ground, our partners, retailers, suppliers and et cetera.

I have to say one thing, is I'm convinced more than ever, and Roberto will say to you the same thing, that the fundamentals of the company are strong. We have very strong brands. We have amazing teams around the world. Now that being said, we need to just move with a lot more agility and speed than we've ever done before.

And I think this is somehow what has informed the strategy of Beauty Reimagined and what we're going to discuss this morning. I think the fundamental of the company, we are going to turn 80 years old as a company next year. We've been 80 years old strong, and we have to adapt. We have to adapt faster because the consumers, retailers are moving faster than ever. And I think in a way, Beauty Reimagined is here to address some of the challenges that we faced over the last few years.

And Beauty Reimagined, in a way, has like 5 pillars. And you saw some of it, a glimpse of it, in the videos. And each of them are here to just address the agility, the speed to be able for us to become the best consumer-centric beauty prestige company in the world, but also to make sure that we reignite growth and rebuild solid double-digit operating margin in the next few years.

And if you allow me like a few minutes for the team and for everybody here on the 5 pillars of Beauty Reimagined. The first one and certainly one that is going to redefine who we are as a company is the consumer coverage. Consumers are moving faster than ever. And I think in the post-COVID era, we've never seen consumers, regardless if you are like in the U.S., if you're in Europe, if you are in the emerging market in China, moving to new channel of distribution.

And I think we, as a team, realized that we were not moving fast enough to new channels. And we made a conscious decision that wherever a prestige consumer moves, we move. There is no more debate as an organization going forward. But it has to be where the prestige consumer is, because we've remained a prestige beauty company as such, so we are moving to channels such as Amazon.

In the U.S., you saw the move that we did now about a year ago. And now as of like last week, we have 12 brands on Amazon U.S., and it has allowed us to just reignite market share growth for the first time in many, many years in the U.S.

And I could take more example in Shopee in Southeast Asia. TikTok Shop that we have signed a global agreement with globally, which allows us to expand our brands in the U.S., in the U.K., in Europe, in Southeast Asia, you name it. Now we have a global platform that allows us to just deploy our brands at the speed of light in a way that has never been done before.

The second pillar is that when you have the right distribution, the risk is a bit of a fragmented distribution around the world when you think about it. So you need to tailor your innovation to what the distribution is. And so a much better understanding of what distribution is about. Is it trial? Is it replenishment? Or is it experience? That's the way you would define the 3 type of distribution that are at our tip of finger.

I think when -- as a team, when we looked at Beauty Reimagined, what I know we were very good at is making the product that consumers love about us stronger. You think about the Advanced Night Repair of Estée Lauder, the Crème de La Mer from La Mer, or Moisture Surge from Clinique. We made these products stronger than ever.

But Steve, you know it's -- this industry, there's anywhere between 20% to 30% of the sales in any given year that are coming from innovation. And I think we were a little bit on the lower side as a company. So one of the things that I'm absolutely committed with the team is to accelerate innovation. We've committed to triple innovation that comes to market in less than 12 months in the market across every single category, that is makeup, skin care, hair or perfume.

So once you have the right distribution and once you have the right innovation, the right innovation, you need also to make sure it's at the right price point. I'm sure we'll talk about consumer sentiment in this moment in time. Having the right innovation at the right price point in the right channel is more critical than ever, and we've developed a lot of capabilities and insights and data that allow us to meet the consumers where they are.

The third thing, when you have the right distribution and the right innovation, you need to make sure you boost your investment. In a subdued consumer economy these days, again, I'm sure we'll talk about it, the cost of acquisition is going up. And a lot of the work that we are doing is how every dollar we spend is becoming much more efficient.

We need to just make sure we're not focused only on the top of the marketing funnel, about the retention of the consumer, which obviously we need to make sure that we become the best company at retaining consumer because this is what gives the future profitability, but at the same time, you need to make sure that we bring a wide range of consumers from every age, every [ new ] cities around the world.

Now you would say, how do you do that at the moment where you need to rebuild margin for the Estée Lauder company? And that's the fourth pillar of Beauty Reimagined, which is how we create bold efficiency in the organization.

And we've announced in November 2023, the PRGP, the Profit Recovery and Growth Plan. At the end of -- at the beginning, it was not even -- the G was not there, and we added the G, if you remember, about like really focusing on growth. And it is, in a way for everybody to understand a simple way is how we're flipping the P&L on its head to have way less fixed cost and more variable costs. More variable cost to be able to invest in the business, but also more variable cost to go through volatility that seems to be the norm these days in the world.

So -- and we'll talk about it because the first year of the PRGP, which we are in today, it's a 2-year program, our fiscal '25 and fiscal '26. The first year was really about rebuilding our gross margin and making sure that we are starting to just like delayer the organization.

From a gross margin, we've made massive progress. Every quarter for the last 3 quarters, we've improved by 300 basis points our gross margin. And we've committed to at least 73.5% gross margin and on our way to continuous improvement, but also delayering the organization for more agility and more speed.

We've reduced the middle management by 20% already since the beginning of the fiscal year. And even my executive team, which is now 73% new in their position, has been reduced by 30%. So much more agile, and we are seeing, obviously, the benefit of that faster decision, much more agility and speed of decision.

And the last part, certainly that I'm somehow -- I'm excited about every pillar of Beauty Reimagined, but the last one is how do we reinvent the ways of working for us internally. And I've heard it from many of you that I've met over the last -- even before I was officially in the position in the months of October, November, December, I spent a lot of time with everybody, saying, we need to clarify who does what within the Estée Lauder organization.

And I think, today, we are very clear between the brand, the region/ the affiliate and the function, who does what. Let me make it very simple and very blunt, is the brands are focusing on the long-range vision, creating the best innovation. Once this is done, the regions are taking over and really are executing and scaling with the affiliate and executing with excellence. And the functions are here to really enable the vision.

That's why at the last earnings call at the beginning of April, I announced that we were moving officially the responsibility of the P&L into the region. So there was like no misunderstanding of who takes the decision. And that was one of the reasons. But also the second reason, if you want to move with speed, you need to be close to the consumer. The P&L needs to be much closer to the consumer.

So somehow, that's what the last 100-plus days has informed. And we are moving really fast. If you remember the Beauty Reimagined, we announced it, we have like -- maybe I was 35 days in the job officially working with the team and spent countless hours cascading that through the organization. And very confident that we are starting to see the beginning of some green shoots with market share gain in the U.S., in China, in Japan and some emerging markets.

Our way to recovery and to growth is not a linear one because of the environment that we are in, but I'm really confident today with the team that we are going to rebuild growth and profitability.

Great. One quick follow-up on the affiliate versus the brand. How much leeway do the individual affiliates or individual geographies have in sculpting the brand message for the locality versus the global brand kind of framework? And where does that decision? How is that made?

That's a very good question, Steve. And I think there's a lot more leeway these days, because I think AI allows you also to be and to tailor the communication. One thing as a company that I believe we are very strong is our ability to have a local relevant message, depending if you are in India, if you are in China, if you are in France, if you are in the U.S.

I think the global brands define what you would call the top of the funnel, what is the desirability, what is the global message. Regardless of what capital of the world or city you sit in, there's a consistent message. But the way you would talk about skin care, take an example with a Chinese consumer, an American consumer or an Indian consumer, is very different. And the ability through insights and data, the consumer can and our affiliate can do it.

Just to give you an example, a few weeks ago, we've announced a partnership with Microsoft. And we've created 2 proprietary tools, one that is called ConsumerIQ and the other one is called Trend Studio. Trend Studio in a way, allows us to sense any type of trends and conversation in real time happening around the world. That's a proprietary tool that we've developed.

Now once you have the sensing, you would say, okay, many people can do that. But the beauty of it is you marry it with a consumer tool, which is ConsumerIQ, which is mining all the data of the Estée Lauder company over the last 79 years. And marrying the trend with our internal information allows us in real time to deploy new messages, and AI is going to be here to allow, frankly, the tailoring of messages, communication on the ground in a much faster fashion going forward.

Great. And then we've got to supply the product. Now you have to -- yes, please.

That's the beauty of AI and now we are working very closely on all those things. But what Stéphane is saying, we're working on an AI application, which is an automatic deployment of stock.

So what happens? When we have those trends, the AI version that we're working on is looking at what is happening around the world and where it's better, depending on where we anticipate the trend, to position the inventory to follow the trend at real time, constantly and actually learning from itself. So the more we do it, the more it will become accurate. So it's all -- basically the demand side and the supply side and those actions are very, very connected. Just wanted to add.

All our factories have digital twins now. So we're able to just modelize in real time, depending on this trend, how we need to service inventory around the world. And then once we agree on what it is, it can be just deployed in real time for production and deployment.

Okay. I want to geek out in the supply chain a bit. But before I do -- so building these 5 pillars and unlocking the value of them, I think, would be, in some ways, easier if there was robust demand kind of at your back, which I don't think is the case right now. It's very dynamic and choppy.

So I guess what is your sense of the current environment? What do you -- what are the key dynamics you're monitoring as you wrap up fiscal '25 and plan fiscal '26? But then stepping back, as you think longer term, what are the -- how are you positioning the company? What are the key drivers of demand as you think longer term? And how do you balance those 2 requirements?

I think it's on everybody's mind, so where the market is today and where is the market going. I have to say I've been blessed to be 25 years in the beauty industry, I've never seen so much volatility. But at same time, so much opportunity. And I think you need to differentiate the cyclical and the structural trends that are happening in the market.

And obviously, the cyclical one in the short term are affecting consumer confidence. I think it is -- everybody knows it, like consumer confidence in China has been subdued now for more than 2 years because of the real estate situation and everything that has happened post COVID.

The U.S. has been the surprise low consumer confidence because we all went into the calendar year thinking the U.S. was going to be the driver of the economy in so many consumer goods product, including beauty. And Europe has been also a little bit subdued for some time.

But I think that is linked clearly to some macroeconomic and political instability or like volatility that happened. It can be like still fairly high interest rates, inflation that has been like ramping up for many years. But I think that, on the short term, I think shows that clearly, the market is in the low single-digit growth around the world.

And I think it's rebalanced by the fact that China has [ anniversarized ] the worst. And I think China now is back into low positive territory, but still it helps mathematically to just maintain the world to this low single-digit growth.

Now when you look at the more mid to long term, I think the structural changes that are happening are really positive for the industry. And I think we are going to see industry resume with what is more mid- to high single-digit growth in the mid to long term. And I just want to make sure that I'm not defining what mid to long term is because of the amount of volatility.

But 2026 is going to be a very defining year for many reasons because you have political changes, you have midterm in the U.S. You have the next 15-year plan of China that will be announced in March 2026. So there's a lot of defining moments that could accelerate consumer confidence or just like anchor it into a little bit longer what it is.

But on the structural changes, I see like a few things that are happening in positive. The first one is the emerging of -- the emergence of emerging middle class around the world. And I think we call it like well over 500 million consumers that will enter the middle class between now and 2030.

Now when you think about beauty, prestige beauty, we're still fairly accessible luxury. So middle-class consumers is definitely the pool of consumers that we're going to. So well over 500 million new consumers, of which some are coming well over 100 million from China and then you have like India, and you have a lot also of emerging consumers in the U.S. and in Continental Europe that we are tapping into, I think, gives a lot of great new opportunity. And obviously, we need to adapt to these consumers.

The second thing is -- and surprisingly, the maturing of China make China more predictable in the future. I think we went through, obviously, a downtrend post-COVID, but the maturing of China. Now part of the maturing of China is also the rise of the local brands.

But there's still a balance between local and international that stays true. We've seen that in Japan. We've seen that in Korea. We've seen it in many markets. We are seeing it in India now. And we are adapting as a company to also being able to just win in this market. We have a new innovation center that we inaugurated at the beginning of 2023 that is ramping up fast.

Now with like new innovation, we launched an innovation on Clinique, Clinique CX, that is on the post procedure that was 100% developed, but we have many others. And we also launched, in February, our 17 brand in China, The Ordinary, that is perfectly positioned from a price point to really compete with the local brands. So I think the maturing of the market and the more predictability of the market and the 17 brands that we have in the portfolio give us that we have a lot more to tap into.

After, there is also many trends from the consumers that are very interesting, that are going to develop new opportunity. Think about the wellness in the post-COVID world, a lot of people are looking at wellness and we are all going to live younger longer. That's what we aim to.

There's this amazing stat that I was looking at the other day that 50% of the kids below 5 years old in the U.S. will live over 100 years old. And that's actually true in Europe and in many other markets. So how obviously, beauty plays a role in wellness, in longevity and et cetera. The male consumer, also now because of the rise of social media and platform like Amazon, makes the accessibility of beauty much greater than it has been before.

For the last 25 years, I've been hearing every year, it's the year of men. I'm like -- and it's not been until, obviously, platform like Amazon, TikTok Shop makes it more easy for this consumer to access beauty. And we are seeing already a fast acceleration. With Jo Malone, for instance, we've launched Cypress & Grapevine with the actor Tom Hardy, like the British brand and the actor. And we've seen tremendous growth in triple digit in some of the markets, being able to capture new consumer to the brand.

So I would say from a consumer standpoint, from a channel standpoint, there's a big evolution. Channels, as I said that was the first pillar of Beauty Reimagined, allows us to just communicate with the consumers in a greater way than ever before.

And from a communication standpoint also, more platform, there's more retailer networks that you can tap into, which makes with AI, every dollar you spend much more efficient and much more tailored to every single person that is in this room and around the world. So the ability to connect with your consumer in a deeper way now is much greater than what it was, and will only get better in the years to come.

So I think when you look at all of that, I think in the midterm, it is true that the industry is under a lot of pressure before because of the consumer confidence. But I'm really confident because of the structural change that we are seeing and monitoring, and we are adapting every single of our brands and our ways of working to this new structural change to be able to just capture our fair share of the future growth.

Great. Okay. Great. So Roberto, the -- I'm very glad you're here because I think the supply chain at Estée Lauder has not got enough attention over the course of time. And I think it's very important to the future execution of everything that Stéphane just articulated. So maybe you can just ground us a bit on where the supply chain has come from and where it is today, and how you see it fit for need given the Beauty Reimagined strategy going forward?

Yes. First of all, thanks a lot for having us on stage. I'm very happy to be here and talk about supply chain.

So a few things. Where we come from, first, you're saying. Well, we come from a place of growth where actually the company was building, investing and building capabilities and capacity ahead of anticipated growth. That's where we were. And now we are really focusing on leveraging what we have and optimizing, strongly optimizing those capabilities. That's where we are today. That's what we have done. That's where we are today.

So 3 or 4 things that I can mention on what we have -- the step change achievement we have done so far. I cannot start talking supply chain without mentioning, I think, what is the foundation of every supply chain program, which is the IBP, the integrated business planning. Why that? Well, essentially is we work on understanding the demand. So we demand plan.

And then with the IBP, which is people, process, technology, basically, what we are trying to do, understanding the demand is synchronizing all the supply chain, all the ecosystem with our sites, our suppliers, all the ecosystem of our supply chain to better fulfill this demand. That has been a significant focus in the few years because without this, it's very difficult to optimize all the other capabilities in our supply chain.

We have done this -- again, people process technology, but we've also built capabilities using this on scenario planning. Because as Stéphane was saying, the volatility is such that we can do a lot of effort to try to understand better the demand and then how do we synchronize. But we need scenarios because, it's such a volatility that it's very difficult to anticipate everything.

So we are preparing -- we have prepared a lot of scenarios so that we can pivot quickly from one to the other when it's the case. So that's the IBP. How -- what have we really achieved with this? Well, we've improved quite a lot, almost 10 points, actually 10 points our forecast accuracy, which has led to keeping the service or actually improving our service to our customers to the consistently mid-90s, which is a solid performance.

But we have done that while we have strongly impacted our inventory level. Actually, when we started, we were well above the 200 days of cover, significantly above the 200 days of cover, and we have taken out in excess of 80 days. So it has been a massive, of course, improvement in that cash opportunity. That's something that we have done.

And as a base, this has also resulted into an opportunity to drive the gross margin journey that you have seen and that Stéphane was mentioning. Because with that, we've actually been able to bring the gross margin where it is today and we can see the journey of continuous improvement.

A few other things in the gross margin that we have been working on in leveraging the capabilities, one, starts with a zero waste mindset. We had wastes and excess and obsoletes in our business. Well, we are closing the year cutting by half the amount of excess and obsolete. In the last 12 months, we actually reduced by 50% that part, which is, of course, a big contribution to the gross margin.

The second big contribution has been our procurement activities. We're buying ingredients and materials and components for our products. It's not only a procurement strategy, which we've been working quite a lot with spend area management, all the technicalities that we have in procurement, that is all done, but it's a lot also from a value chain standpoint, creating platform to ensure that we have multiple components for same brands.

Whatever is not consumer-facing can be leveraged, can be standardized so that we have -- we can scale up and, of course, leverage the volume in a different place. This has been -- this has allowed us to move from a low single-digit saving year-on-year on our procurement activities to more than 5%. So we're targeting a high single-digit savings. So it's really -- I mean, of course, a significant impact. That's the second part of the gross margin.

And the third part, which personally I'm very proud of, is we've been working on a couple of programs in our manufacturing performance, manufacturing activities that have dramatically, I think, improved our manufacturing efficiencies. Actually, a large part of the -- a majority of the PRGP that we are delivering so far comes from the gross margin, so it comes from those contribution.

And if I can, looking at the time, summarize what we have done is essentially 2 major program in manufacturing. One, really targeted at accelerating the performance improvement. So it's really a significant push on performance. But the other one in manufacturing, you need to make things sustainable. Otherwise, there is a risk that with the distributed network that we have that you accelerate, you improve, but 6 months after, if you are not sustaining it, it goes away.

We have another program that is actually sustaining the performance that we achieved and strongly working on continuous improvement. So the journey is there to continuous improvement. So that's what we have done.

Last that I like a lot to mention, even though quality has always been a significant attribute of the company, we have been focusing in leveraging capabilities there as well. And we actually improved 80% the in-market quality issue. Our consumer complaints are being -- are reducing 20% year-on-year. Last year it was 25%. So a significant contribution, even in an area where the company has always been very strong.

And lastly, how are we prepared, as you're saying, to cope with the current business need? I mean we will never stop the continuous improvement. There is a lot ahead of us. AI is bringing a lot of opportunities. But I personally feel we're in a very solid place.

Actually, everything that I just said, we have achieved in a volume deleveraged environment. So we have increased the gross margin to the level that Stéphane was mentioning in a volume deleveraged environment. We're very ready for volume leverage.

By the way, we will not need any CapEx, any investment. Stéphane is insisting on we need to do consumer-facing. We need to free up. We will. We are freeing -- actually, we are now freeing up CapEx because we don't need investment for capacity and capabilities, we have them. We can actually focus on making sure that we do consumer-facing investment. And the volume leverage opportunity ahead of us, I think it will...

That's true. That's a very important point, what Roberto is saying, is like we are shifting from a company where we built -- we used a lot of CapEx in terms of building capabilities, to really now shifting CapEx into consumer-facing, which is going to be one of the areas which allow us to grow.

Also one of the benefit of all of it -- and it's well known in the prestige industry. Because in different areas of beauty, people are used to have different manufacturing network around the world. But in prestige, usually, it's very concentrated in one location. The Estée company has 9 sites around the world, 5 in North America, 3 in Europe and 1 in Japan. That allows us with now all, what Roberto say in terms of agility, to move production in different places around the world. And we've been able to mitigate a lot of the tariff impact on finished goods.

Today, you look at Europe, where we are today, 75% of what we sell on a given day in Europe will come from Europe or outside of the U.S. 75%-plus of what we sell in the U.S. comes from the U.S. or Canada and are protected under the USMCA agreement. And we have a line of sight that less than 10% of what we'll sell in China will come from the U.S. That has basically been made possible because of this very agile and diverse manufacturing network that we have around the world.

Yes. And just one question, because it was an issue during COVID, was the lack of robustness in terms of distribution centers. Is that remedied?

It's totally different. We have actually -- one of the investments in the past the company have done is also in the distribution center. Galgenen was one of the main investment in a distribution center for travel retail. We've been doing this.

But we've also been working, aligned with what Stéphane was saying, on variable costs. We have opened, actually replaced, all most of the places where we were having our distribution centers, especially in Asia Pacific with third-party distribution centers. So we are completely covered.

We have been investing in China. China was having only one distribution center, and that was one of the challenge in terms of resilience that we had when the Shanghai lockdown started. We were only in Shanghai. Now we are actually multiplying multiple distribution centers in China as well. It's already today live with the second one and the third one. So we are in a very different place. I personally believe that the fulfillment -- the multichannel fulfillment capability is absolutely there, 100% globally.

It's both agility and business continuity. So...

Absolutely. And that's what you need today in today's environment, because you need to just be agile to just move between one geography to the other.

And I mentioned multichannel because, as Stéphane was saying and as Beauty Reimagined, we're going where the customer -- where the consumer is. And we can shift to a different channel, we are actually having a multichannel fulfillment capabilities for that one. So wherever we go, I think the capability is there to fulfill, not [indiscernible] at all.

I know one thing investors then ask about, okay, the strategy is great. We believe in the execution. Here we go. Is the brand portfolio fit for purpose today? So what's your assessment, Stéphane, of the current brands you have, the ability to meet current needs, future needs? And how do you think about portfolio evolution, brand incubation, brand acquisition, even brand divestments?

I think it's -- obviously, the question is on everybody's mind. And one of the things we do and I've said it publicly, every brand goes through a very thorough strategy review every year. And this year, we've done it a little bit more in depth than usual, obviously, being new in the position with the new executive team. And we have -- there's some -- because of Beauty Reimagined, there's a possibility for us to just be able to reposition some of our brands where we have areas of improvement into new channels.

But like I said it at the beginning, I really believe that the portfolio of brands that we have that allows us from all the way to La Mer, Le Labo in terms of luxury, all the way down to Clinique and The Ordinary, be able to tap into a very wide range of consumers. And one of the things that I've said to the brand and asked the brand is really to just make sure that they have the right innovation for the right channel and the right consumer.

Let me just like, very simply -- because you think about from the Estée Lauder brand all the way to like smaller brand, the Estée Lauder brand this year, with a very fast turnaround, has been able to just like launch a new consider under the very famous Double Wear franchise, which is #1 foundation in the world, and has now been the #1 makeup launch in the U.S. in 2025.

Then you take Clinique has launched the Glow Moisture Surge at $45, EUR 39 in Europe, and it's been the #1 launch in serums around the world. Then you take Too Faced, one of our makeup brands, have launched what we call the Ribbon Lash mascara that has been -- the entire campaign has been developed in less than 6 weeks through AI and has allowed us to tap into new consumers.

And Bumble and bumble has been our most well-overplanned brand on Amazon. If you know like on Amazon, hair is one of the largest category. So now all of a sudden, you can look at these brands and saying, how am I going to position them in the new channels and making sure that they have the right innovation at the right price point, launched at the right speed. So we are always looking and reevaluating our brands.

But I think today, the focus is about reevaluating our brand to just make sure that they have the right innovation, right price point, right channel, right communication. Because it's also one thing in the third pillar of Beauty Reimagined, we are reinventing our ways of communicating to make sure that we are flipping also the funnel of communication on its head and just getting more efficiency behind each of our brands.

And the last thing I would say, we have internally an incubator. When we purchased DECIEM, of which The Ordinary was part like in 2023, where we became finally the full owner of like DECIEM, DECIEM was created as an incubator. That was the original idea. Today, beside The Ordinary, we have 3 other brands. We have NIOD. We have Avestan.

And we just launched a new brand in bath and body, LOoPHA, that we've launched on like TikTok and some other brands and our brand.com, which allows us to test in rapid fashion brands that we can develop in less than a year, and there's going to be more to come. So there is the organic, but there's also the inorganic growth that we can create from internally.

Great. When we -- I think when investors look back, especially at the last 5, 6, 7 years, China was so central to Estée Lauder's growth for that period of time. I think as we listen to you today, as we turn the page, look forward, the future is much more balanced. How do you think about the balance of growth and making sure that you are not just in the right channel, but the right geography and you -- both from a brand and product but also a supply perspective?

Yes. And I think the best way to put it is I think about the world as the world, as one geography, one consumer. And I think the company has built tremendous strength with the Chinese consumer. And I want to be very clear, the future of China is still very strong because of the emerging middle class that will continue to come. And I think we have a position of strength in this market. We have 2 of the top 3 brands in the market, and we intend to just build on 30-plus years of investment in China.

But the very strong thing for us is the rebalancing of the growth. And I would say the first thing is North America. And we're very excited to -- in the last quarter to announce that after many, many years, we were returning in growth. We have 10 brands that have maintained or grown market share in the last quarter, which was very strong. And we had growth in 3 of the 4 categories, mainly skin care, makeup and hair, where we had some growth.

So a big focus on investment and obviously, Amazon, TikTok Shop, but also our historical partners in specialty-multi, like Ulta and Sephora. And the department stores obviously is -- obviously on everybody's mind, is reducing dramatically in terms of penetration to the total. And there is a natural attrition because of numbers of stores and more investment in the top department stores where there's a lot of traffic.

The second area is emerging markets. As part of my new organization, I've announced the creation of the emerging market regions. We didn't have one. It was separated within different geography. And now the responsibility of Nadine Graf, who is now the Head of [ EUKEM. EUKEM ] is Europe, U.K. and all emerging markets, that span from Turkey to India to Southeast Asia, Middle East and so on, we have a real clear focus of acceleration.

I'm not happy yet on the result that we're having in emerging markets. We believe that there's a much stronger potential and often brands like M·A·C or The Ordinary are perfectly positioned in terms of price point to be able to win in this market.

And then I don't want to forget like in a market like the U.K. and Korea. Korea, we are the leader in this market. We've had some a little bit market share gain over the past few years, but we're not there yet. So we have new leadership in both of this market in the U.K. and in Korea, and we are really deploying Beauty Reimagined to just make sure that once we can consolidate our leadership position and start regaining market share.

But -- so you saw in the results, we have like the U.S., we have China, we have Japan. We still have a lot of work to do in other markets, but I think it's just a matter of like deploying Beauty Reimagined and, again, putting the right leaders in the right places.

And what is on everybody's mind is also travel retail. Travel retail has been a big source of growth for the Estée Lauder company for many years. We've reduced significantly the dependency on travel retail. And I've announced it at the last call where we went from the mid-20s to like mid-teens now in terms of penetration to the total business, which reduced the volatility to the channel.

Now like travel retail has still a very strategic role to play. Many of you are traveling through the world. Airports are more beautiful places where you can express your brand in a way that is quite unique, and consumers are often buying for the first time product in travel retail.

But the volatility linked to the channel is here to stay, frankly, but -- and also for us just to bring it back to a level that is more reasonable and having a much balanced growth around the world. So we don't depend on one geography or one consumer, the way that we've had it in the past.

Great. We are out of time. So I will respect the conference and not add another question.

Okay.

Thank you very much.

Thank you so much, Steve. Appreciate it.

Thank you.

Thank you.