Estée Lauder Companies Stock

Next up this morning, we are pleased to welcome back Estee Lauder's President and CEO, Stephane de la Faverie; and Executive Vice President and CFO, Akhil Shrivastava. Stephane is going to first take you through a short presentation, and then we'll do Q&A, and Stephane and Akhil will both join me for that. Thank you.

Okay. Good morning, and thank you very much, Lauren. Akhil and I are very grateful to Barclays for hosting us again like 12 months after and to be back on stage and having the opportunity to share some of the updates as we are kicking off our fiscal '27 fiscal year. Many of you know The Estee Lauder Companies, hopefully, maybe some of you are new to the story. So I'll just take a few minutes to highlight a little bit where we are in our turnaround and the momentum that we are seeing. I need to do -- remind me to just do that. So the team remind me, I have to say that kindly note that the information on this slide regarding forward-looking statements and non-GAAP disclosure, which applies to this presentation as well as Q&A with Lauren. So I have to say it. It's not the most glamorous things to do, but now it's done.

Okay. So it's been really an exciting and busy 12 months since we were on stage here like last year. And last year, when we were discussing it with Lauren, we were moving with urgency to deploy the 5 action priorities of Beauty Reimagined. And really today, what I'm really happy is to say how different of a company we are 12 months later. And this is true Beauty Reimagined. We made our amazing brand portfolio even stronger. Jo Malone London and Tom Ford joined an amazing portfolio of brand of Clinique, Estee Lauder, La Mer and Mac into the $1 billion club. This is actually unprecedented into the prestige industry and beauty industry. Now we have 6 brands in the $1 billion club. And as you may have listened during the earnings calls, we have one The Ordinary that is coming very close to that for the near future. 5 of the 6 delivered sequentially improved organic sales performance in fiscal '26, and with their scale -- sorry, premier brand desirability, breakthrough innovation and consumer reach, these brands are poised to just continuous acceleration in the near future.

We also radically transform our company. One other thing I'm extremely proud of what we've done is through our One ELC, which is our new model, our new operating model. We are now better positioned to compete in prestige beauty, accelerating our speed at which we are driving the pace of the demand of the consumers, but also the competition of the indie brands today. And as we move further, we won't just match the speed of the indie brand. Our intention is to push past their speed. So really like speed of innovation for us is really absolutely key, and I'm sure we'll talk about it with Lauren in more detail. So we are a simpler organization today, much more agile as one team.

We have fewer layers and silos and greater accountability as we are exiting the PRGP 2-year restructuring program, as you know, that we've just concluded on June 30. We're also a nimbler organization with refined ownership between who does what in the organization between brand, between region and between the operation within the company. That has really helped us to strengthen our brand building between brand and around the world and also to be much more strategic on how and where we are spending our consumer-facing investments.

We are a much bolder organization, more united and transformative oriented organization through all the beauty commitment that we've deployed that now have been cascaded to all the retail organization around the world. And finally, we are a more efficient organization, having evolved how, and how we intend to work between us, but also with our partners. And it's not always the most glamorous thing when we talk about our enterprise business services. But today, I have to say like the deployment and the work that we've done with our partners has helped us to consolidate dramatically the number of partners that we are working with, and we are already seeing a lot more agility, simplification and speed with the ability to scale. So in a certain way, think about like a lot of the back of house that is not visible to our consumers are becoming increasingly efficient, so we can deploy more resources towards investment into consumer-facing.

Now also, I'm really proud, frankly, of what we've achieved in fiscal '26. Many, many things have been achieved with great momentum. You're seeing here on the screen, reported sales rose 5% and organic like 3% with positive sales performance in every single quarter. Gross margin expanded 150 basis points, primarily driven by the benefit of the PRGP, our profit recovery and growth plan. Operating margin expanded 320 basis points as operating leverage enhanced the gross margin expansion. Diluted EPS grew 66%. We also increased our consumer-facing investment by 7%. And this is something that was very clear last year, and we'll continue to just accelerate our consumer-facing. And cash flow from the operation increased 39%, and that's despite much higher restructuring costs, obviously, due to the PRGP.

So I think, frankly, it shows that the -- our strategy, Beauty Reimagine is really in motion. And obviously, the PRGP has given us the benefit that we were looking for to just reinvest into the business. And as we are exiting fiscal '26, we're exiting with like strong momentum into fiscal '27. So we have an amazing portfolio of brands today. We have an exceptional portfolio of like 25-plus brands that spans across entry Prestige with The Ordinary to Prestige, with Estee Lauder to name a few, and obviously, luxury with brands like La Mer, Le Labo and many others that we have in the portfolio. But I just wanted to highlight 3 examples that are very important. Take MAC as the long-standing #1 makeup brand in the world. MAC had strong brand love, always had very strong brand love, but the sales has been declined for many years, especially in fiscal '25.

So here, we've deployed every single pillar of Beauty Reimagined that is, one, making sure that we have the right distribution, especially in the U.S. with like the deployment of MAC at Sephora, but also in the Middle East, accelerating Sephora's deployment on TikTok Shop with the U.S., the U.K. and Germany, but also really, frankly, accelerating innovation in makeup that is highly demanded by the consumer.

All of that, we've seen actually MAC organic sales growth improved from a high single-digit decline in fiscal '25 to mid-single-digit increase in fiscal 2026, but also going back to market share gain and the #1 position in Q4 in the U.S. And that's really like the proof that, again, when we apply Beauty Reimagined to all our brands, it's basically working. The second one, KILIAN PARIS, while a much smaller brand in our portfolio is another great case study of how powerful Beauty Reimagined is. During the course of '26, we've really deployed the brand in more channels, like more retailers around the world. We've invested in innovation. And today, we are proud to say that we have a 19 percentage point acceleration in organic sales growth from fiscal '25 to fiscal '26. So again, from a large brand to a smaller brand, the model is working.

And last but not least, The Ordinary, certainly the biggest of the indie brand that we have in the portfolio of The Estee Lauder Companies, it shows really the power of Beauty Reimagined, as it really works as an indie brand. We are accelerating best-in-class consumer coverage. We are continuing to just like deploy more innovation. And as a result, The Ordinary has been 1 of the 3 fastest-growing brands in the company alongside KILIAN and Le Labo. Now I just wanted to highlight all of that because it's very important for us, even the last 2 brands, KILIAN and The Ordinary are 2 examples that the brand has created an alternative model to be able to accelerate indie brand within the portfolio of The Estee Lauder Companies. That's new from the model that we had in the past and mainly operationalized by Beauty Reimagined, so we can create the next big brand for the future that will add more building block of growth for the company in the future.

So we think that we really have a winning playbook. We expect to accelerate growth sales in fiscal '27 from 3% to 5%. And this is what we said at the earnings call, and we confirm today again that the range of 3% to 5% on organic sales growth is what we are working towards. We are looking at operating margin expansion of 150 to 230 basis points on top of the great improvement that we've done in '26 and diluted EPS to increase 24% to 34% over the prior year. So again, great expectation, great ambition that we have for fiscal '27. And I could go on a lot on the outlook, but then there will be nothing for Lauren to ask me. So I'll just leave it at that. And just -- I'll conclude soon. I just wanted before we start the discussion and Lauren grills me and Akhil on stage, just wanted to give a few other things on innovation because I think it's very important that part of the second pillar of Beauty Reimagined was this acceleration on innovation.

And across basically all category, we are accelerating it, and we are seeing actually really good momentum at the beginning of the fiscal year. To give you a few examples, like obviously, the PDRN innovation that we have both on Clinique and The Ordinary. You know that the industry is moving to longevity at the speed of light, and this is actually also showing the speed at which we are adapting and bringing the right innovation to market. But also in night with like Lauder and luxury, Bobbi Brown, you name it. We have like innovation in skin care, very, very strong throughout fiscal '27. When you look at the next categories, we have great innovation coming in MAC, which is fueling the momentum that we are seeing like today.

In fragrances, we have many, many innovation that is coming from luxury fragrances from Tom Ford to KILIAN with cocktail or even Jo Malone, but also -- and we were very clear, the acceleration in Prestige fragrances, especially with brands like Estee Lauder Glimmer that is off to a very strong start or the continuation of the push that we are making with Tom Ford that has been one of the highlights for us in '26, and we're expecting it to just continue.

And Balmain in Prestige Beauty that is off to a very, very strong start. So we are really continuing to build strong momentum throughout our brands. What you are seeing here on screen in the room and sorry, on the webcast, you won't be able to see like the videos is also for us, for these launches and all our hero product, we are really capitalizing on the new unified global media model that we've deployed with WPP. And this is -- if you remember, as of April 1, we've moved to a global agency, and we are already seeing positive momentum, which allows us to buy at scale through centralized and AI-enabled system, and we have like media agents that are allowing us to optimize always in real time. We have real-time analytics that allows us to just like pivot all the time and to adapt our campaign to just be much more efficient. And again, as I said, we are already seeing the strong benefit of that.

And building on this exciting work with WPP, we've also created momentum with Shopify, setting the stage for agentic commerce, which is like very important. Again, another thing that is disrupting and changing the industry to be much more targeted for the consumers. And that allows us in our direct-to-consumer business that is increasingly important for us to be much more targeted. And we're seeing today, we've done it when we were at the earnings calls, we've announced the deployment of mac.com on Shopify in the U.S.

Since then, we've already also deployed it in the brick-and-mortar stores of MAC, especially in our freestanding stores and cliniquusabrand.com is launching soon. We are seeing actually the benefit with much higher conversion already, which is going to make our direct-to-consumer even stronger. So when you all put it together, the transformation is very clear. I want you to -- if there's one thing or 2 things that I want you to retain. We are a very different company at the moment where we're addressing yourself today, and we have like a momentum as we're exiting fiscal '26 into '27. And now I'll be very happy to take some questions with Akhil from Lauren. Thank you.

Great. Thanks so much for that. So last year, when we were sitting here, I'd asked you what success would look like a year later. And you mentioned being able to prove more consistent market share gains beyond the U.S. and China. In the fourth quarter, you started to see much more diversified growth and market share gains in Korea, Japan and the U.K. So how would you assess progress on the breadth and what breadth should look like another year from now?

Yes. First of all, thank you, Lauren. I think, look, like I said earlier, I'm very proud of the momentum and the improvement that we've done throughout fiscal '26, and we have many proof today, and it was very important that we have, as we discussed last year, throughout the year that we can prove ourselves and prove the world that we are capable of growing in multiple geographies around the world. China has been a highlight for us, obviously 9% like sales growth in net sales last year, but more importantly, 6th consecutive quarter of market share gain in the market. And I just come back from China 2 weeks ago, I was in Beijing and I was in Shanghai. And frankly, we have strong momentum, great presence of our brand, and we are continuing to do so. Korea, you mentioned it. I was also in Korea after China. Now we are in market share growth. We have actually in Korea, 11 brands in growth, of which 9 are in double-digit growth in the last quarter. So it's been absolutely phenomenal. Japan is also in market share growth.

So throughout Asia, I think we are very well diversified. And just one thing in China, it's no longer just a story of La Mer and Lauder. We have a very diversified growth across many of our brands where we have 6 brands in double-digit growth and many more brands in positive. Now when you just like move to the West, we see great momentum in Europe now starting especially at the beginning of the fiscal year. I'm happy to report that we have, I would say, great momentum in many of the European markets, mainly Italy, Spain, France and Germany, which has been challenged, but we are actually seeing like great momentum.

And in the U.S., the most important one, and I'm sure we'll deep dive more into this one. We're seeing continuous improvement in our results. And it's true that July was a little bit -- the market was a little bit tempered because of like the move of Prime Day, Amazon Prime Day from July to June, but the market is back to single-digit growth in August, and we are seeing continuous momentum for us in the market. So I think it is very broad-based, and we intend to just like continue this momentum throughout the year because the problem is behind Beauty Reimagined, it is really a balanced growth between East and West and frankly, also like North-South depending on the region and what we're looking at.

Lauren, if I could add one thing to what Stephane said. So when we started on this journey, we talked about long-term value creation focus. And of course, we have famously kept repeating growth margin and cash. Stephane talked about the breadth of sales growth and the acceleration of sales growth. We are also very much driving the breadth of profit pools and pillars in the company. You know that skin care, Asia and China are very strong profit-wise. We are committed to driving significant acceleration also on other geographic segments, and from a category perspective, makeup and fragrance. In our margin guide of 12.7% to 13.5%, this is included, but this is not only for this year. This is something we should see sequential progress in years to come.

Okay. Great. So let's talk more about North America. You said clearly you have made progress moving from decline into stabilization in fiscal '26. Volume shares are growing. But what needs to happen to realize value share growth and to the gap between retail sales and organic sales to narrow in North America? I know Amazon and platform, as they become a bigger part of the mix, some of this gap may remain, but what does it take to get into value share growth?

Yes. So I think, first of all, the first part of the question is really the value share growth. And don't get me wrong. We are not there yet, and we are just like working towards it. I mean there's still some work to do. And I'm happy to see the acceleration and the momentum that we are seeing. I would say simply, we need to continue to deploy the playbook of Beauty Reimagined. The first thing we are accelerating innovation. The U.S. is actually a very interesting market in the sense it's very well balanced between the 3 main categories between skin care, makeup and fragrances. And in the past, while we have very strong position in skin care and makeup, we have a relatively smaller position, especially when you look at Circana because many of our sales in fragrances is not reported, especially brands like Le Labo that are more direct to consumer. But we are accelerating actually the deployment of our Prestige fragrances, Balmain, the new launch of Estee Lauder Glimmer, but also all the collection of the signature collection from Tom Ford.

And I'm happy to report that everywhere, we're seeing strong momentum on this new innovation. So this is definitely going to help us. The second thing is we need to continue to deploy our brands into the fast-growing channels. When I talked about MAC, we're not done with the full rollout at Sephora into the U.S. We have a plan working with our partner to just continue to roll out. So we'll certainly continue to see great momentum. But we have more opportunity with TikTok Shop. We are just at the beginning of the journey. And today, we have clear indication that TikTok Shop may well be the first point where consumer shop or discover the brand and the entire ecosystem. Today, we know that, for instance, when we do great activation on Clinique, we have repurchased on Amazon. When we do great activation on Mac, we see great repurchase at Sephora on our freestanding stores. So we have a real indication of the consumer journey through the ecosystem. So it was almost like we were looking at a puzzle, and we were missing a few pieces.

And today, we have all the pieces in place for us to just accelerate. And the one thing that is less visible from the external, we just completed a complete revamp and realignment of the sales force in North America. We had a few misalignment on where we could support the brick-and-mortar. As you know, our online business is doing really well, and we continue to accelerate. But our brick-and-mortar is where we needed to just like make some changes. And this realignment of the sales force that is now in place as of September 1 is allowing us to be closer to our partner, closer to the retailers and to accelerate what I call the retail payment on top of like great conversion that we're having online, especially with partners like Shopify.

Okay. Okay. So that revamped sales force, you should think about seeing the impact in department stores.

Department stores, Ulta, Sephora, pretty much the entire brick-and-mortar network, including our freestanding stores. Now we are rationalizing some of our freestanding stores also as we are accelerating distribution in specialty malls, especially for MAC. But on the opposite, we are accelerating the deployment of freestanding stores in the U.S. with brands like Le Labo or KILIAN, Frederic Malle, et cetera, because we're seeing great potential to be able to enhance the retail experience in this category.

Okay. Great. Let's switch and talk about China and the broader China ecosystem. So you've already had a meaningful improvement in China. You've emphasized the growth is now more balanced across brands, channels and categories. What are you doing differently in China today that gives you confidence that the share gains can continue?

Okay. Just like I said, I just came back from a few days in Beijing and Shanghai. First of all, I think our team is doing a fantastic work there and to be able to be consistently gaining market share for 6 quarters in a row is really fantastic in such a competitive market. I think what is interesting is many of what we are doing for Beauty Reimagined around the world, we tested it early on in China. We were the first to move to Tmall. We were within the first one to just move to Jelly, one of the first one to move like to Douyin. We're also now accelerating freestanding store that is a preferred brick-and-mortar model. We were the first market where we unified our media with WPP also before we did it in the rest of the world. So many of the element of Beauty Reimagined are visible.

The one thing that is actually announcing our growth today is the efficiency of the R&D center that we've opened in Shanghai. So if you remember, we inaugurated the R&D center in March 2023. Obviously, at the beginning, we had to just like set the operation. Today, 30% of the innovation for the world is coming from China. And 2 of the top 10 biggest innovation that we have in the world came from China. We have one on Lauder, on the treatment lotion and also an emulsion for La Mer that are going to be extremely successful and have been helping to drive momentum there. So now we are putting more brand into -- also in our innovation center.

It's not only Lauder, La Mer, but we have a plan to deploy more innovation for our brands in makeup and in skin care, in innovation for China, for China. And I really believe many of this innovation that we're going to do in China or doing will have benefit for the rest of the region and frankly, for the world and will help like travel retail. So I would say we are in a really good position. Consumer confidence is slightly bouncing back in China. So it's still not to the pre-COVID number, don't get me wrong, but at least it's best since the Shanghai lockdown. And we are seeing consumers, especially younger consumer coming back to the category and our strong position, both in distribution, in consumer-facing and now innovation is helping us to really accelerate the market share gain in the market.

Great. So let's switch to Travel Retail and Chinese travelers. So travel has now moved from being a source of major volatility at the total company level. It's reset to a more manageable size. How should we think about the role that travel retail plays within the business from here?

Yes. When you say it's more manageable, I think it's perfectly manageable at 15%. And we've clearly -- we've reset the business to be 15%, which is in line with industry trend. I think it's important to see that travel retail is no longer just a story of the Chinese consumer. And same as we are trying to rebalance growth between geographies, between brands and so on, we are doing the same thing in Travel Retail. The fast deployment of especially our perfume brands in the West, in the Americas, in Europe, is helping us in this moment in time to just continue to just do the rebalance. But what I find very encouraging in the China ecosystem or the overall East ecosystem of Travel Retail is, one, Hainan is back to be very, very strong. If you remember, we were -- I think even last year, foot traffic was high, but conversion was low.

Now conversion is picking up. And we have double-digit growth and gaining market share in Hainan. Very happy to see also that it is broad-based between our brands. But the Chinese consumers are trying to travel within the region again, prime destinations are Korea, Hong Kong and Thailand. And we are seeing the direct impact. And we've always been ready to welcome the Chinese consumer within the ecosystem. So it's a much more balanced model now that is not only within the China ecosystem. And I think there is a clear stabilization because of -- if you remember, all the transfer of operators, Shanghai, Beijing, the operation -- the apps, all of that now is set and is really set for acceleration, but we're seeing Korea, Thailand, Hong Kong and then the West being up to a strong start.

And I want to be very clear on Travel Retail, as I said it, we are shipping to the demand, but we are really pushing experiential retail in a massive way. So Travel Retail is more than ever becoming a window for our brands. And we are investing, but we are investing behind, obviously, a strong foot traffic and retail demand in the channels.

Lauren, if I may add to what Stephane said, that's an important point there he made about shipping to retail demand. So travel retail is super critical for the industry and for us because of discoverability of the brands and consumer acquisition. The other aspect that we have done specifically, the 3 things we have instituted is really strong discipline and operating controls, which Stephane alluded to. Secondly, it's really the accountability, and I'll double-click on that in one moment and then oversight. So this was critical as we came through on Beauty Reimagined, this is what we promised. And what we have done here is what Stephane announced a brand-new team for Travel Retail. So that's a total new team, and it's really performing well. It's reflected in our results.

Secondly, this team works very closely with Mainland China team so that we have a 360 view of the traveling Chinese consumer, and we really build our activations in a close coordination. And we're doing that in every place Chinese travelers are traveling or other traveling cohorts. Thirdly, we are shipping to forecasted retail. And then we have corrective mechanisms to see -- to test this constantly. And every time we feel there is a variance, we are making the correction. So we made significant progress not only on the business, but also on the operating discipline that was necessary to drive value in this channel.

Okay. Great. I'm going to ask you a quick question on pillar, I know it's 2 or 3 of Beauty Reimagined, which was on innovation.

2.

2. Thank you. One thing that we've noticed was R&D was down in fiscal '26, both in dollars and as a percentage of sales. How should we interpret this? Is it a function of better use of external resources, but it was something that stuck out to us in the 10-K?

Thanks, Lauren. And so research and innovation, along with creativity and brand building is heart of the company, as Stephane showed earlier, and this is the lifeblood. So we will continue to invest here. You're definitely referring to the changes and the reductions we did, which were very much planned as part of PRGP restructuring. What this does is this sets up a very effective and efficient R&D platform for us to help us be the best consumer-centric company. Within that, the percentage of funds going against the consumer and growth orientation within innovation is also happening.

As we look to '27, we definitely see clear investments going into R&D on that much stronger and efficient base, area of cutting-edge consumer insights, area of ingredients, area of formula, area of platforming. And also what we intend to do is that, look, as we said in the earnings call already, we have a very strong slate of innovation, especially in the front half. So some of this is already starting to reflect when Stephane gave the call out of faster innovation and larger innovation in key categories. So we are starting to see that. And you will see us invest in a very disciplined, but in a very methodical way to drive because this is a growth driver for the company.

Remember also one thing we haven't mentioned the word AI for now so far. But AI is allowing us also to be much more efficient in R&D. I think one of the things that we're seeing is like the ability to just predict better what is going to be the outcome of the testing, which allows us to cut time and to just reduce failures or like redoing formulation if need be. So that also just makes us much more efficient. And I think the other thing is also we are today mining all this data in a much faster way to just be able to just create new ingredients, new complex, new ideas like for the future. And one thing I've been very clear, while I believe in the strength of the R&D that we built as The Estee Lauder Companies, and we'll continue to do it, we are also partnering with like outside partners like biotech firm that is in China, in the U.S. or frankly, like our historical partners in the perfume houses that are mainly like European based.

So it's a very broad stroke of how we are using internal and external that makes us much more efficient. But today, when you think the main R&D center based in New York outside of New York, then Shanghai. We also have [indiscernible] for hair care. And then we have the [L'Atelier] in Paris for France that you visited like last year. I think now we are really set really for acceleration of innovation, but in a very efficient way.

Okay. Great. Where do you think you stand -- this is pillar 3, on consumer-facing investments. Do you think you have the right level of spending now as you focus on recruiting new consumers into the portfolio? Or are there areas where you really want to step up spend?

Look, I think like we said in the numbers, we increased by 7% the consumer-facing last year, and it's been very clear. We intend to continue to use some of the benefit of the PRGP and frankly, also the growth to continue to invest in consumer-facing. And we're seeing the proof that it's working in many places around the world, many geography, brands and categories, we're seeing acceleration. I'm not going to in the essence of time that is in China, in the U.S., Korea, Japan, Europe, even Latin America, where we're seeing like great momentum, it is because -- so do we have the right level of investment? I think what we are working with partners like WPP is making sure that we have a lot more efficiency for every dollar we spend, how we can target more consumers than ever before.

So not only we are increasing the amount of dollars that we are putting towards consumer-facing, but we are also making sure that it's much more efficient. So we are going in the right direction. And I think we have the tools, we have the partners, we have the creativity and the -- because it's not only about high performance, it's also about the emotional values and cues that we are communicating through our brands just like to continue the momentum.

Okay. Great. I do want to talk about the P&L and margin recovery versus sales growth. So when you announced Beauty Reimagined, you talked about getting back to solid double-digit operating margin. And we've been of the view that mid-teens is sort of a good run rate to anchor our models towards made fast progress, right, targeting 13.5% at the high end this year while still increasing consumer-facing investments. So investors are again wondering if high teens is on the table. So I wanted to get your response to that.

Thank you, Lauren. So we have -- as we said, Stephane and I, we have significant runway on margins. We, of course, a couple of things we said right from the get-go. We said, look, margin progression would be a marathon, not a sprint. And we also said that while we grow margins, we will fuel our brands. Those are things we will not compromise. The great news, as you said, is that, look, in last '26 and '27, we would have grown margin by 500 basis points. So I think we are sprinting the first part of the marathon, which we are proud of. However, we are also investing in the business, which is what is all the share progress that Stephane talked about. As we look at '27, the key reminder of the key components were PRGP drives growth. We have leverage on nonconsumer-facing and gross margin will drive modest progress.

However, the PRGP programs, we were very clear that as the run rate builds through the year, the full year annualized benefit then also flows through to '28. So '28 will have that benefit. It will also have the benefit of what Stephane and I have constantly talked about reducing a fixed cost. So with a certain amount of sales growth, we will have more leverage now than in the past. So that's also there. Then in addition, we have said that, look, we will improve segment profitability, which I know you have asked this question as well. And then we haven't yet scratched the surface on driving efficiency on consumer-facing investments, which we are right now driving as we are getting the whole value chain -- value creation story going. So with all of that, we believe we have good confidence in driving consistent growth, diverse growth and significant operating leverage ahead of us. And I think what we are proving is every time we are coming to those guidance points, we are hopefully giving great and strong visibility.

Think about it like I think not much to add to what Akhil said. We started this journey, it was the PRP, was profit recovery plan. Then we went to PRGP. We've added the growth. Now we are in growth mode. With the type of gross margin that we're having and even we've guided to a modest improvement of the gross margin, we continue to just like work on some ideas to just like continue to make future innovation accretive to gross margin and so on and so forth. So you'll see progress. We are flipping the P&L on its head with less fixed cost and a much more variable cost. That allows us to really fuel the top line. And with this type of gross margin, obviously, there will be a lot of flow-through from the profitability.

Okay. Great. All right. We're going to wrap it there. So please join me in thanking The Estee Lauder for being here at the conference.

Thank you, Lauren.

Thank you.

Good day, everyone, and welcome to the Estee Lauder Company's Fiscal 20266 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 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, 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. Retail sales performance discussed is based on information available as of August 14, 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, 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 1 question so we can respond to as many participants as possible within the time scheduled for this webcast. And now we have a brand portfolio video before Stephane begins.

[Presentation]

Thank you, Rainey, and hello to everyone. I am incredibly proud of our fiscal '26 results. We reignited growth with organic sales rising 3%, driven by the breadth of growth across brands and expanded operating margin significantly. When we introduced Beauty Reimagined in February 2025, we committed to the biggest organizational leadership and cultural transformation in our company's history to become faster and more agile with greater discipline. Our ambition was clear, become the best consumer-centric prestige beauty company with more diversified, balanced and sustainable growth drivers.

Before getting into our fiscal '26 results, which reflects the early success of this ambition, I want to share why I'm more optimistic for the company's future today. 18 months into my tenure as CEO, and address some of the questions that have arisen in recent months. First, can we accelerate growth? Yes, we just did and we will again. The PRGP's approvals are done. And now all our energy can be focused on accelerating growth. As we continue to deploy our One ELC operating model, we are enabling the entire organization to do what we do best. This means depending investment in the desirability of our brands, leveraging superior AI-enabled consumer-driven insights to drive breakthrough innovation and executing with excellence.

Second, the elephant in the room, M&A, our focus has been and will remain growing our core business. We will continue to pursue minority and single brand deals that enhance our portfolio and can benefit from our ability to create scale and deliver attractive ROIC. We have done this with KILIAN PARIS, La Labo and the ordinary, our 3 fastest-growing brand in fiscal '26. We have no doubt we will do it again with Forest Essentials, which we have announced we are adding to our portfolio. To be clear, for the foreseeable future, we are not entertaining transformational deals that will divert us from our winning strategy.

Third, I have heard the question about whether the transformation has left us without the right talent in place. Nothing could be further from the truth. I can say definitely we are now stronger having invested in the retail organization and brought in great new talent across the company, including in creative marketing, research and innovation and technology. Even more powerful is what is harder for outsider to see the ways that the team is working more efficiently, significantly less layers, fewer silos, clarity of roles and greater accountability, a truly empowered organization. This is why I am confident we will accelerate our growth and continue to rebuild profitability.

Now let's turn to our strong fiscal '26 results. Reported sales rose 5% and organic sales grew 3%, with positive sales performance every quarter. Looking at profitability, we significantly exceeded our initial outlook from last August. Benefits for the PRGP were more robust and achieved more quickly than anticipated, which is a tribute to the extraordinary contribution of our employees around the world and our strengthening cultures around speed of execution. Gross margin expanded 150 basis points. Operating margin expanded 320 basis points and diluted EPS grew 66%.

Impressively, Jo Malone London and TOM FORD joined our billion-dollar club. Our portfolio of billion-dollar brand is unparalleled in Prestige Beauty with these 2 brands joining Clinique, Estee Lauder, La Mer and M.A.C. With their scale, premier brand desirability, break-through innovation and consumer reach. These brands are positioned to be a powerful contributor to growth. In fiscal '26, 5 of the 6 deliver sequentially improved organic sales performance. And the Ordinary is quickly ascending towards this milestone, fueled by another year of double-digit organic sales growth in fiscal '26.

Looking at categories. Skin Care delivered 4% organic sales growth. We drove growth across the price spectrum with the ordinary vibrant in the entry price tier, Estee Lauder thriving in the out of Prestige and La Mer exceptional in the luxury price tier. For France, our results are amongst the best in the industry with organic sales growth of 10%. This reflects our continued investment to develop and capture growing demand. Hero sent and newness from Le Labo, TOM FORD, KILIAN PARIS and Jo Malone London prospered. We also successfully launched Balmain Beauty into the prestige price tier, and we have more to come as we end fiscal '27.

Looking at makeup, we stabilized performance and improved organic sales trend by 500 basis points, led by M.A.C and TOM FORD, [indiscernible] MAC renaissance while TOM FORD for innovation in face and is powered is growth. We have much more to do in Mecca, but we are making encouraging progress as we better position our brands in high-growth channels like social commerce and specialty multi and speed up launch cycles.

For haircare, while not yet back to organic sales growth, we are seeing evidence of Aveda's turnaround in the U.S., its biggest market, given share expansion in track salon data. The ordinaries, serum for air density remain a viral sensation delivering strong growth in both organic and retail sales.

Now for the regions. Each improved in fiscal '26 versus fiscal '25, from negative to positive organic sales growth across the board. Mainland China led with broad-based 9% organic sales growth as skincare rose high single digit. Makeup rose mid-single digit, and fragrance was double digit. We outperformed the market every quarter of fiscal '266 to gain prestige beauty share for the year led by La Mer, Le Labo and TOM FORD. Within Asia Pacific, Global Travel Retail returned to growth, fueled in part by our investment in experiential retail across Mainland China and Korea. Travel Retail represented approximately 15% of reported sales in fiscal '26, similar to the China's global practice share.

Our priority emerging market excelled with organic sales growth accelerating from mid-single digits in fiscal '25 to high single digit in fiscal '26 despite the disruption in the Middle East. For the U.S., the U.K. and Ireland and Korea, we improved organic sales trends throughout fiscal '26. In the U.S., we returned to organic sales growth in the fourth quarter, with retail sales again rising mid-single digit amid continuous prestige beauty volume share gain. For fiscal '26, we gained volume share with every category contributing. In the U.K. and Ireland, we delivered 3 consecutive quarters of organic sales growth, including the fourth quarter when we also gained Prestige Beauty share in the U.K. This is especially meaningful, given Prestige Beauty strength in the U.K. and following many years of share loss.

Our performance in Korea was similarly encouraging with 3 consecutive quarter of organic sales growth through the fourth quarter, retail sales growth accelerated from high single digit in the third quarter to double digits in the fourth quarter, driving a return to Prestige Beauty share gain to end the year. Looking at Channels. Online performance was outstanding, with organic sales rising double digits, driving strong Prestige Beauty share gain for the channel across many markets including China and the U.S. Impressively, online reached 34% of reported sales for fiscal '26, up 3 percentage points from fiscal '25 to an all-time record.

Finally, when we ensure Beauty Reimagined, we committed to creating transformative innovation as we restore sales growth. During fiscal '26, we accelerated speed to market, launching breakthrough on trend and commercial innovation across every category with 23% of sales from innovation. With this fiscal '26 results, we delivered on all aspects of Beauty Reimagined as promised accelerating best-in-class consumer coverage, bringing innovation to market faster increasing consumer-facing investment, streamlining our fixed cost base and revitalizing our entrepreneurial spirit.

Looking ahead to fiscal '27, we are doubling down on our strengths to further diversify growth across product categories and geographies, including accelerating growth in North America. This means expanding more brand into high-growth channel across more markets, launching a bigger and bolder innovation pipeline, continuing to increase consumer-facing investment including more into our priority emerging market and increasingly benefiting from One ELC, our new operating model.

We kicked off fiscal '27 with a robust slate of newness. For the fiscal year, innovation as a percentage of sales is set to increase 200 to 250 basis points led by skin care, already out in skin care, clinic and the ordinary tapped into emerging ingredient trend with PDRM innovation, while Estee Lauder introduced a breakthrough in longevity as well Newness for Knight. La Mer and Bobbi Brown created next-generation edition of beloved hero product, and Clinique introduced a new franchise for sensitive skin spanning skin care and makeup.

Building on this in makeup, M.A.C launched exciting innovation in a signature Le franchise, including an all-new Lipstein, which was a blockbuster success in its early launch in Korea during fiscal '26. For France, the category we expect to lead Prestige Beauty growth again in fiscal '27. Our first quarter innovation are extensive from Balmain Beauty along with the new prestige line from KILIAN PARIS

and Estee Lauder, Jo Malone London and TOM FORD in the luxury price year. We ensured this distinctive sense to drive new consumer acquisition across demographics and regional preference.

For One ELC operating ecosystem, we are advancing with speed across our 3 biggest initiatives. We launched Macusbrand.com on Shopify last week, the first of many deployment online and in-store across brands around the world in fiscal '27 as we modernize capabilities in our direct-to-consumer business to drive growth. For enterprise business services, we are on track to have transitioned about 80% of the expected roles by September, while also standardizing select processes and standing up key AI-enabled technologies to fascinate service delivery and productivity.

For our new unified global media model, most of our markets have transitioned to WPP, already lighting up over 1,500 campaigns and harnessing AI for real-time personalization for many of our performance campaigns. And we expanded our collaboration with Meta leveraging the AI power tool build for advertising, conversational commerce and agentic messaging across our brand portfolio to reflect the new consumer behavior of where they are interacting with brands.

Now let me close where I began. I am proud of our fiscal '26 results. In Beauty Imagine, we have a winning playbook and I am confident we will deliver another strong year in fiscal '27. We have the right brands the right team, a clear 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. We are proud of the progress we made in fiscal '26 and how our teams executed with excellence against Beauty Reimagined with speed, focus and discipline. We had promised a focus on growth margin cash to drive sustainable growth and long-term value creation. Our return to organic sales growth of 3%, operating margin improvement of 320 basis points, diluted EPS growth of 66% and net cash flows from operations of $1.8 billion reflect our strong delivery against that commitment. This was driven by the strategic and disciplined actions we have taken to focus on restoring growth, transforming our operating model, improving our cost structure and creating operating leverage.

Before discussing our fiscal '27 outlook, I'll briefly highlight our fourth quarter and full year results and progress across key areas of the business. For more information on our full year and fourth quarter performance, please refer to a press release issued this morning. Starting with organic net sales, we saw broad-based growth in the fourth quarter across all product categories and geographic regions with the exception of haircare. Our 5% organic sales growth was the strongest quarterly performance of the year. with sequential improvement from the third quarter across every region, except [ UCM ] where business disruptions from the conflict in the Middle East reduced growth by 2%.

We are encouraged by North America's sequential improvement in retail sales growth, along with its return to organic sales growth in the fourth quarter even without the onetime benefit discussed in our press release. These results reflect the progress we are making through our consumer-facing investments to drive growth. Now looking at margins. Fourth quarter and full year gross margin reached 75.5%, expanding 360 basis points and 150 basis points, respectively, compared to last year. This represents nearly 400 basis points of improvement in gross margin compared to fiscal 2024 when we first announced the PRGP. These results reflect the structural improvements we have made and our ability to execute with speed, enhancing operational efficiency reducing access and bringing gross margin back to near historical levels.

Turning to operating margin. We delivered nearly 300 basis points or more of expansion in every quarter this year, including 330 basis points in the fourth quarter, contributing to a full year operating margin of 11.2%, up 320 basis points from last year. Through our PRGP initiatives, we delivered net benefits that funded additional consumer-facing investments throughout the year. Our investments increased 7% for the full year or 4% excluding FX. We reduced nonconsumer-facing expenses in every quarter this year, except the fourth quarter, which included higher employee incentive costs tied to a better-than-expected full year performance. This reflects our continuous focus on streamlining our fixed cost base to create greater flexibility and our disciplined allocation of investments toward the highest return areas. In terms of our PRGP restructuring program, we concluded approvals as of June 30 and recorded $823 million of total cumulative charges in fiscal '26, primarily in employee-related costs.

Although the approval phase is behind us, our unrelenting focus on everyday efficiency is not. It is embedded in how we operate, enabling ongoing investments in growth opportunities. Our adjusted effective tax rate for the full year improved to 35.7%, a decrease from 38.8% last year. Diluted EPS increased to $0.39 in the fourth quarter from $0.09 last year and increased 66% for the full year to $2.51.

Moving to our next strategic priority, cash flow, cash generation was very strong this year, with cash flow from operating activities of $1.8 billion, up from $1.3 billion last year despite higher restructuring payments. This reflects higher earnings and disciplined working capital management, which improved cash productivity across the business. We spent $457 million in CapEx this year, compared to $602 million last year, reflecting disciplined capital allocation and prioritizing consumer-facing investments to support growth. These actions supported improved free cash flow, and we ended the year with $3.5 billion in cash on hand.

The significant progress we made in fiscal '26 through our disciplined execution of Beauty Reimagined including our PRGP has transformed our operating model, strengthening our company as we enter fiscal '27. With our momentum, I'm excited about our outlook for fiscal '27 and even more confident in our ability to deliver long-term sustainable value creation. For fiscal '27, we expect to accelerate organic sales growth and deliver stronger adjusted operating profitability.

Turning to top line. For fiscal '27, we expect organic net sales growth in the range of 3% to 5%, reflecting more diversified growth across product categories and geographic regions. We expect organic net sales growth in the first half of the year to be stronger than in the second half, reflecting a slate of innovation earlier in the year and stronger travel retail shipments, giving improving retail trends and a lower base of shipment in the prior year. Looking at UCM, we expect stronger sales growth in the second half of the year as we lap the business disruptions related to the conflict in the Middle East that affected the second half of fiscal '26. While the situation remains dynamic, based on what we know today, we do not expect the impacts from the conflict in the Middle East to be material to our fiscal '27 results.

Turning now to profitability. We are raising our preliminary outlook and now expect operating margin to range between 12.7% and 13.5%. This reflects, in part, our strong fiscal '26 results continued operating leverage in nonconsumer-facing expenses and a modest expansion in gross margin. We expect an effective tax rate in the range of approximately 33% to 34% building upon the progress we made in fiscal '26. Diluted EPS is expected to range between $3.10 and $3.35 assuming a weighted average share count of approximately 368 million shares.

Moving now to cash generation. In fiscal '27, we expect to generate net cash flows from operating activities between $1.3 billion and $1.4 billion. This decrease from last year reflects higher restructuring payments as well as increased working capital needs to support growth compared to strong working capital improvements in fiscal '26. After the restructuring payments expected in fiscal '27, the vast majority of the cash payments associated with the program will be behind us. We expect capital expenditures for the full year to be approximately 4% of sales as we continue to prioritize consumer-facing investments.

The fuel growth, including upgrades to a brick-and-mortar and online distribution channels, as well as targeted expanded consumer reach. Before we close, I would like to highlight another example of the more streamlined processes and stronger execution discipline we have built into the organization. Beginning with fiscal '27, we are accelerating our year-end reporting time line and plan to report our fiscal '27 results on August 4. In closing, we enter fiscal '27 as a different company, more focused, more agile and better positioned to execute with speed and excellence.

We remain confident in Beauty Reimagined and our ability to deliver sustainable growth and long-term value creation. I want to thank our employees around the world for leading our transformation and for your unwavering commitment to our company and our success.

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 comes from Steve Powers with Deutsche Bank.

Great. Very good. Thank you. Can you hear me? .

Steve, we can hear you. .

Okay. Perfect. Great. I guess if we could start on profitability, just a little bit more detail, if you could, on what has improved since May that's allowed you to upgrade the fiscal '27 margin outlook. And within that, if I could, in the quarter, we're seeing growth appear increasingly diversified, but profitability still seems very concentrated. So as we think about the year ahead, the time line for makeup, fragrance, haircare and maybe the Americas to contribute more meaningfully to that profitability improvement. .

Thank you, Steve. So essentially, we had a strong '26 beat. We had a strong '26 beat, so we wanted to flow that to the next year. In addition, as we have completed our PRGP work, we see further opportunities for SG&A optimization, which we are flowing through, and that has been a consistent message on nonconsumer-facing investment optimization all through the year, and that is included in the improved outlook. What is also included in the improved outlook is continued investments to fuel growth because that is ultimately the way to continue driving better leverage, better value creation. And then, of course, we are also looking at executing the savings we have on PRGP ramp up through the year.

So frankly, this then goes to the full run rate will even be reflected in '28. So we'll exit with a stronger '27 with most of the savings coming through, but the full run rate will come through on '28 as well. Now related to your point on the diversity or the concentration of a profit, agree we have strong profitability on skin care. We have strong profitability in Asia. And we are improving profitability in all our segments. However, you are right that we have opportunity to further improve profitability on categories like makeup, haircare, and fragrance as well and which is a clear part of our plan to improve profitability as we go towards further from the 13.5%, which is the top end we have given.

So over the next coming years, you should continue to see clear sequential improvement in all segments, both geographic and category.

Your next question comes from Lauren Lieberman of Barclays.

Great. I thought there was very big news today in the earlier August reporting. So thank you for that. I want to acknowledge that. And also all of the great transparency throughout the presentation was really helpful. My question is the risk of being a bit nitpicky. Organic sales guide for '27, a 3% to 5% growth versus the comment that expectation to accelerate organic sales growth. Because obviously, at the low end, that would not be an acceleration. So just wanted to understand that low end.

And then more specifically, it does feel like there's a degree of organic sales growth that is still very tied to timing and dynamics around travel retail shipments. So it feels that areas of the business, particularly high and retail has really stabilized, and I guess that inventory levels there have as well, given the visibility you seem to have into first half shipments. But just some commentary on, I guess, overall sort of stability in inventory levels on particularly Asia TR and the degree to which that influences the organic sales outlook.

Yes. Thanks, Laura, and thank you for your comment. Really appreciate it. Very proud of what the team has achieved throughout like fiscal '26. When it looks at the -- talk about the outlook. Obviously, as the Beauty Reimagined strategy lays it out very clearly, we want a much more diversified growth across geography, across categories, across channel going forward. So you're going to see us continuing to build on the strengths, obviously, of China and the Asia Pacific, including travel retail geographies. But we also clearly laying out an acceleration on the West, especially with North America, where we are laser focused on pushing like retail and you saw obviously, in the quarter 4, some very strong result in the mid-single-digit growth.

So obviously, this is really balanced in the way we do it and to complement like what Akhil was saying, we are obviously going to continue to accelerate like skin care in France. France, like I said in my prepared remarks, we expect France to continue to be a standing performance in fiscal like '27, but obviously, with a clear intent to accelerate the performance on makeup. And the performance of makeup will be broad-based from a geography standpoint, but we have a clear focus also on the West, especially in North America again. So I think you have to see the outlook for us. We're always looking at a 3% to 5%. But as we, in fiscal '26, delivered the top end of the guidance, our goal is to just like look at acceleration over fiscal '26.

If you look at the midpoint, there will be 100 basis point improvement, if you look at the top end of the guidance, will be 200 basis point improvement, that mainly will obviously come like from the West. So that's where I would like look at our overall guidance from a sales standpoint for fiscal '27. Then your second part of your question, when you took -- talk about like TR shipment, I want to be very clear, and I reiterate what I've said like many, many times, we are shipping to demand. So our inventory is in a very good place in Travel Retail. Now I'm very happy to report another good news in Travel Retail for the first time in 3 years, for the month of June and the month of July, we are back into positive territory for Travel Retail Global, led by Hainan that is in double-digit growth in the fourth quarter. That was also there in Q3, but we are seeing great momentum in Korea, in Hong Kong, in Southeast Asia in Travel Retail.

And obviously, like Travel Retail West, the America is strong and is helping to offset some of the headwind that we are getting to the Middle East. So the retail is strong in Travel Retail, and we are managing inventory to the demand. And as I said also, many times, Travel Retail represents about 15% of our business, and we intend to just keep it in line with industry standards. I hope it answers your question, Laura.

Our next question comes from Chris Carey with Wells Fargo Securities.

Great. I wanted to follow up on this from a bit of a different angle. But -- just number one, you talked about faster organic sales growth in the front half of the year. Can you just dimensionalize that? Would you be above your guidance range in the front half or more at the higher end? And then secondly, just on this Travel Retail comment. I mean I think the question is well taken in that Travel Retail shipment is -- are these 2 words that we've come accustomed to representing volatility over recent years.

And clearly, you just said that you're shipping in line with consumption. But can you just give us a sense of how you've evolved the management of the broader Asia ecosystem when you go to market and how you're thinking about managing the Mainland China business versus the Travel Retail business in Asia is such that you can deliver more consistent growth in both areas over the course of the year. So thanks so much for those too.

Thanks, Chris. So let me just take on this question. When it looks at the outlook for fiscal '27 and we said it in our prepared remarks, we have a stronger pipeline of innovation in the first half versus the second half. And it was by design, obviously, because when we laid out Beauty Remargined, we said we were going to just accelerate our innovation -- and obviously, like skin care alongside every other category was a key focus like for us for acceleration. So you're seeing a lot more coming in the first half, which led to believe that obviously, we will be higher in terms of growth in the first half than we would be in the second half, okay? And that will help to guide somehow the construction of how we are looking at the year between first half and second half and deliver the 3% to 5% like in our guidance.

So hopefully, that just gives you a little bit flavor on how to look at it. When it comes to the TR visibility, we have a very clear system in place today. Like you said, on the management, first of all, we had a complete transformation of the leadership team in Travel Retail, with a new leader in Travel Retail, managing like from different places around the world. And we have like 2 key regions, one for the East and one for the West the west being managed out of like London for us and the East managed by from like Singapore, and we have like a new talent.

Like I said in my prepared remarks, also we've really accelerated experiential retail in Travel Retail. So you are going to see us doing a lot more activities in the East and in the West. We've accelerated the deployment of our brand in the West, especially led by the France. You're seeing a lot more visibility on Jo Malone, TOM FORD and KILIAN, Le Labo and many, many airports in the Americas and EMA. And when it comes to the management of the East, we have some system in place that allows a clear coordination of activities between Mainland China and Travel Retail China.

And that is done in conjunction between Joy Fan, who is the leader of China and Matthew Grodan, who is the leader of APAC and Travel Retail, where they meet regularly to coordinate launches, activities, how do we go at Double 11 versus 618 between the Travel Retail and in the local markets. So it's a very sophisticated model that allows us to really making sure that we're managing the total China ecosystem and we are looking at it from Mainland to Travel Retail, alongside also with the Chinese travelers around the world in a very coordinated model that allows us to delight the Chinese consumer wherever they are. And as you say, to continue to shift to the demand wherever it is.

Our next question comes from Filippo Falorni with Citi.

I wanted to ask about the Mainland China business. Clearly, the category has improved and you called out the significant improving market share as well. In terms of brand rankings around the 618, Double 11 and you mentioned even the #1 share position in Prestige Beauty. So I was just wanted to get your perspective of -- what has changed in the market, both at the category level and at your execution that has really transformed this business and putting in a consistent top line growth and what allowed you to kind of consistently gain market share in the market both in terms of like innovation changes, marketing, social media presence, what has been the big change that has allowed this very impressive turnaround in China.

Filippo, fantastic question on China. And the first thing I would say is like I'm really proud of the work that the team in China is doing across all the brands. But the most important thing is understanding the fundamental of the market. And the market is very, very strong. It's in high single-digit growth from the Prestige Beauty. So we're seeing like China growing again. And as thank you for pointing it out, we had some fantastic reserves. We've been gaining market share in every single quarter in every single category. So now we are on to sixth consecutive quarter of market share gain in China. .

And in the last quarter, what is very impressive, we have 11 brands in retail sales growth, of which 6 are in double-digit growth. And that's very important for you to just note because as we committed a diversified growth around the world, we also committed to a more diversified growth within the region and within the channel where we operate. So today, we have obviously continued to have very strong performance on like La Mer, but we have a very diversified growth across now 6 brands in double-digit growth, and we have like a brand Le Labo that are like growing in excess of 50% like during the year, so which is like fantastic.

The other thing to answer your question of why we are winning in the market is like remarkable despite the remarkable execution from the team. We're also accelerating innovation in China, for China. Now 30% of our innovation around the world is coming from China for the China market. Thanks to the ramp-up of all the activities we have from our R&D center in Shanghai. So this is also allowing us to be even more tailored to the need of the Chinese consumer in skin care or in makeup. And then I would say we have -- the last thing I would say is in China, we've always been first movers to new channels. So like today, obviously, we started years ago with the department stores that continues to be strong.

We accelerated our freestanding stores that allows us to accelerate our experience. But obviously, in online, which is now over 50% of the business in China, we are like having great success with Douyin . We have now 11 brand in China on the Douyin platform, and we are performing extremely well there. So overall, the market is strong, our business is even stronger than the market. And the last thing that I would say in China, we are now less promotional. We've really pushed the valorization in the market that have really allowed us to just like recruit new consumers and allowed us to. Thanks to the valorization to continue to sustain strong investment in the market to just like capture the Chinese demand.

Our next question comes from Peter Grom with UBS.

I was hoping to get some perspective on '26 and just kind of taking a step back, and just looking at things where things came in relative to your expectations and kind of just the drivers up to the upside, right? Organic sales came at the high end, operating margin well ahead of the midpoint if we go back to where guidance was a year ago. And I'm curious if you've embedded similar levels of flexibility as it pertains to kind of '27 guidance, particularly as it were seen exiting the year with some really nice momentum on the top line and the majority of the benefits related to PRGP are still to be realized.

Thank you, Peter. Yes, so I'll start and Stephane can add here. essentially, look, it has been what Stephane just said, it has been outstanding execution against our priorities overall on all of the pillars. Of course, we started the year with a guide of [ 9499 ] on margin, and we significantly beat that through the year. That is really the outstanding execution of PRGP, first of all. Secondly, the continued progress we made on reducing, therefore, the nonconsumer-facing. Thirdly, which allowed us to fuel the business, which is seeing as the much more diversified growth in quarter 4. So we are pleased with the fact that North America has come back to positive results this quarter on net sales as well as retail our has been building.

So those have been positive surprises from a cost and top line perspective. And at the same time, China business, consistent share growth quarter-over-quarter in one of the most competitive market and that to by a significant distance as we just said, that has been a positive. And then Travel Retail returning to positive retails as we are exiting the year. So these are all positive surprises. And also on gross margin, we delivered 150 basis points. When we entered the year, the environment was quite uncertain with the tariffs, et cetera, being announced, but we really executed very well against that and mitigated a significant part. And so our beat on gross margin as well has been very strong. As we look to 27, of course, the outlook is 3% to 5% on sales growth, but it's a much more diversified growth, as Stephane just said.

North America should accelerate, makeup should accelerate. While East will lead growth, West will accelerate from its prior trends. We will keep building savings through the year, ramping as we execute, which should also give momentum into '28 and then what -- of course, when we give guidance, we consider various things which are controllable. So what we are demonstrating is execution against controllables is very, very strong, and we typically exceed that. Of course, what we are also keeping in mind is the macro environment, which we don't control, so we keep enough scenario planning to get to our goals into multiple different paths. So that's generally been our posture. And I'll pass it over to Stephane to add .

Yes. No. I think Peter, I just said love to add to what Akhil said, I think what you have to take into consideration is the way we enter fiscal '26 and the way we enter fiscal '27. We're a very different company. The business is really clearly transformed. We are really operating at a very different speed than we've ever done before. And we are back growing. And that's the most important thing because the streamlining of the cost has given us a lot greater flexibility to manage sales volatility.

So to your question, are we building scenario planning for sales volatility? Absolutely, as we did it in fiscal '26. And we are also realizing a lot more sales leverage. And I think when we started the year from 0% to 3%, and we are finishing at the top end of the guidance, that is giving us a lot of leverage. And next year to 3% to 5% let's say, we just delivered a midpoint or the high point of like the guidance. This is going to give us a lot more sales leverage. And that allows us, like continue to accelerate. So the model and the discipline that we've built in fiscal '26 is now pulling in place clearly on a very different company on how we are operating for fiscal '27 and is willing to allow us to replicate and accelerate, frankly, what we've done in '26 -- '27.

Our next question comes from Christian Rios with Bernstein. .

Congratulations on a fantastic quarter. I was hoping, can you break down the 5% organic sales growth in North America in the quarter in to? How much of that was sell-through or consumption? And I think there was mention of timing of shipments. Can you talk a bit more about what that was the magnitude of the impact and how it connects to previous or next quarter growth? Or any other puts and takes that you think we should understand? And as we think about next year, what are you most excited about in terms of channels or retailers or maybe even brands in North America.

Yes. So thank you, Christian. I think North America for us is a key focus. It's been a key '26. And you see -- there was one slide in our prepared remarks that shows the sequential improvement quarter-over-quarter and our performance finishing on a high note in Q4. Now obviously, from a timing of shipment, no, we are like -- this is retail driven. Now obviously, there will -- there's a change on activities like Prime Day from Amazon was in July, the prior is in June in fiscal '26. So there's obviously -- the market has been like growing faster in the last quarter, especially due to the June activity.

But the good news is that as we've been able to accelerate as the market is accelerating at the midpoint, and the one thing that I would say is the most important thing for us and the most important indicator in '26 was to make sure that we could resume with volume share gain because it is an acquisition game. We needed to just make sure that we reignite the recruitment wheel. It's exactly what we've done. And alongside, we are seeing brand like the ordinary continuing to having outstanding performance. M.A.C, thanks to our deployment in new channel like Sephora, not only we've been able to regain the #1 ranking in Q4, but we've been able to gain market share also in Q4, which is quite outstanding and a very quick turnaround that we we will continue to accelerate in fiscal '27.

But I could go on, Bobbi Brown is also in market share gain in makeup. We've had exceptional performance on brands like Le Labo that are not in the track data because it's mostly a direct-to-consumer brand, but also like TOM FORD, Prestige Frances that is doing very strong. Let alone online where we know and we have clear data showing that we are gaining market share. So that is actually showing the outstanding execution that our team are doing in North America, and I really believe that we are going to be able to just continue to do that.

And actually, the early signal of the months of July that we are getting are extremely strong For the Estee Lauder company, led by Clinique and M.A.C, thanks to great activities that we are doing on social commerce and also like obviously, the continuous deployment of M.A.C. into more growth distribution. So I feel very confident. And frankly, there's nobody more impatient than me to just drive the growth in North America and the entire team is really focused in '27 to take on the great momentum that we have had in in Q4. So as far as what we are exciting in North America, in China, we're exciting about all the channels.

We are exciting where the consumer is and our objective is to delight the consumer wherever we can create the experience, that it is online, that is in specialty multi, that is in our own direct-to-consumer as well as in department store where we can create right experience. So I think there is great momentum. We have great innovation behind our brands. We are excited. I mentioned it, a new exciting launch between -- behind the Lauder brand in France called Glimmer that we are signing -- shipping as we speak. We have great, exciting new launches on clinic skin care with a new smart cream serum tapping into like PDRM. So we have a slate of innovation that is really going to allow us to just like maintain if not to accelerate our growth in North America in fiscal '27.

Our next question comes from Rupesh Parikh with Oppenheimer.

Just going back to your commentary that expectations for a return back to growth in the makeup category. Just curious the bigger opportunities you see and then just confidence in being able to get back to growth and makeup. .

Yes. We have some of the leading brands in makeup starting with M.A.C. So we are clearly planning to accelerate that business. On makeup, of course, we play with Clinique, which is the #1 brand in makeup in the U.S. We have M.A.C. We are also addressing the challenges we have had on some of the other brands in the past. So what we are exiting is a stronger performance on makeup, and makeup being our #2 category we continue to believe that it will not only improve on sales trends, it will also improve as was the question was asked earlier on profitability with all of the work we are doing. And that would be a critical part of continuing to build a broader, more diversified sales growth and also profitability in this segment.

Yes. And I think just one addition to what Akhil said, Rupesh is, obviously, we are also and making sure that we are deploying our makeup brand in the fast-growing channel where the makeup consumers are shopping, mainly specialty multi as well as like social commerce, one of the reasons of the strong acceleration that we are seeing in M.A.C. is the entire ecosystem that we've created from social commerce to specialty multi department store and freestanding stores that are now all working in conjunction just to really activate the recruitment wheel and the retention will across the brand.

So I think what was missing as part of our arsenal was to be everywhere where the consumer is from a recruitment and from the retention. Now that we have the right platform from a distribution standpoint. And then we are adding an acceleration on innovation like this outstanding Lipstein that M.A.C. launched has been like a blockbuster in many markets around the world. We believe that now we have the right recipe for us to just like accelerate in makeup. At the moment, frankly, where we see in many markets, the makeup category also starting to just accelerate especially like China, we're seeing like acceleration in the U.S., which has been, as you know, the category pretty flattish for quite some time like since the exit of COVID.

So this is also for us the right moment to accelerate. And the last thing I would say in makeup, we are continuing to also rationalize the distribution where we don't have the right profitability and the right productivity per door. And we've closed a significant amount of freestanding stores in M.A.C. around the world as we are pivoting to more growth and profitable channels.

Today's final question comes from Olivia Tong with Raymond James.

Great. I want to talk about margins because it's an exciting time as margins continue to move in the right direction. So as you think about expanding from about 200 basis points this year, where you see the biggest opportunity there. It seems like there's more opportunity for efficiency gains as well as delayering the organization. And if so, where -- which areas do you see the most opportunity.

And then I also wanted to ask about cash uses, now that you've taken transformational M&A off the table, PRGP is now closed. So how do you think about the deployment of cash from here?

Thank you, Olivia. So look, we are pleased with the 320 basis points of margin we expanded this year, which was coming from 2 big drivers, gross margin and the progress on nonconsumer-facing, which includes, as you pointed out, employee cost reduction, and all of the infrastructure rationalization we have done, including real estate and so on and so forth and the work we have done on procurement.

As we look forward on the guide that we have given of 150 to 230 basis points margin expansion, as we mentioned, that gross margin would be a modest driver, but a large part of the driver here will come, as you pointed out, from all of the SG&A, which includes employee cost and the announcement we made of the total restructuring that continues through '27. So what we do see a large opportunity even after this year's guide, which is what I said earlier that as we complete our execution, we will be exiting the year with full benefits starting to hit in the later part of the year, which will then have the full annualized benefit in '28.

So that flow through in margin should continue to come in '28. Of course, at 13.5% margin, we still believe we have runway to go further driven by that. Consumer facing, we have continued to invest. And as Stephane has talked about all of the work we are doing on media one, from a better placement and better procurement of media, there should be runway there as well. But of course, right now, our focus is to build our brand, drive growth, drive share, but that would be another leg to add down the road. So it started with gross margin, passes to SG&A, but we'll have the full 360 approach to continuing to build margin. So that's what we believe, and this should have at least a good flow-through even in '28.

Now on cash uses, our stated mission has been to deleverage the company beyond any other point on M&A. So we are continuing to use cash to drive down our debt. We have debt coming due later in the year, which we will -- for all practical purposes, we would continue to pay down. Of course, we are making sure that we -- our CapEx is fully funded to drive consumer -- drive consumer CapEx. Secondly, of course, other one is dividend. And then thirdly is deleverage. And at the same time, we will look for any other opportunities to drive a better return on our cash. But first priority right now is to continue to build a stronger balance sheet and we had solid progress this year with the cash performance.

Yes. The only one thing, Olivier, that I would add to Akhil is, obviously, look at it as with the streamlining of our cost and the efficiency that we are building across like the company, it allows us to realize a lot more sales leverage. So as we are accelerating growth you will see the flow-through in profitability and our ability to continue to accelerate. And this is also why to reinforce the earlier question that was asked, why we felt comfortable to raise our preliminary view from a margin standpoint and even go beyond on the top end at 13.5%, which is 50 basis points higher than our preliminary view that we have in the last quarter.

So sales leverage now is at our disposal to be able to continue to invest in the business to fuel growth, but at the same time to continue to just increase in a sustainable way our profitability over time.

Thank you. This concludes our allotted time for Q&A today. If you were unable to join for the entire webcast, a playback will be available at 1:00 p.m. Eastern Time today until October 30. Please visit the Investors section of the company's website to view a replay of the webcast. I would like to thank you all for joining and wish you a good day.

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.