ESTEE LAUDER COMPANIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories. The following table is a comparative summary of operating results for the three and six months ended December 31, 2022 and 2021, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented. Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category. Three Months Ended December 31 Six Months Ended December 31 (In millions) 2022 2021 2022 2021 NET SALES By Product Category: Skin Care $ 2,382 $ 3,159 $ 4,486 $ 5,608 Makeup 1,268 1,386 2,320 2,560 Fragrance 775 799 1,382 1,408 Hair Care 182 180 340 328 Other 14 16 28 29 4,621 5,540 8,556 9,933 Returns associated with restructuring and other activities (1) (1) (6) (2) Net sales $ 4,620 $ 5,539 $ 8,550 $ 9,931 By Region (1) : The Americas $ 1,235 $ 1,300 $ 2,358 $ 2,494 Europe, the Middle East & Africa 1,816 2,338 3,498 4,211 Asia/Pacific 1,570 1,902 2,700 3,228 4,621 5,540 8,556 9,933 Returns associated with restructuring and other activities (1) (1) (6) (2) Net sales $ 4,620 $ 5,539 $ 8,550 $ 9,931 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 421 $ 1,082 $ 951 $ 1,799 Makeup (37) 130 (21) 221 Fragrance 177 210 310 341 Hair Care 5 8 (7) 10 Other (1) 3 (1) 3 565 1,433 1,232 2,374 Charges associated with restructuring and other activities (9) (15) (15) (21) Operating income $ 556 $ 1,418 $ 1,217 $ 2,353 By Region (1) : The Americas $ (85) $ 382 $ 40 $ 636 Europe, the Middle East & Africa 409 620 743 1,085 Asia/Pacific 241 431 449 653 565 1,433 1,232 2,374 Charges associated with restructuring and other activities (9) (15) (15) (21) Operating income $ 556 $ 1,418 $ 1,217 $ 2,353 (1) The net sales from the Company's travel retail business are included in the Europe, the Middle East & Africa region, with the exception of net sales of Dr.Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region. Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas. 35 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table presents certain consolidated earnings data as a percentage of net sales: Three Months Ended December 31 Six Months Ended December 31 2022 2021 2022 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 26.4 22.1 26.2 23.0 Gross profit 73.6 77.9 73.8 77.0 Operating expenses: Selling, general and administrative 56.9 52.0 57.0 53.1 Restructuring and other charges 0.2 0.3 0.1 0.2 Impairment of other intangible assets 4.5 — 2.4 — Total operating expenses 61.6 52.3 59.5 53.3 Operating income 12.0 25.6 14.2 23.7 Interest expense 1.1 0.8 1.1 0.8 Interest income and investment income, net 0.6 0.2 0.5 0.1 Other components of net periodic benefit cost — — (0.1) — Other income — — — — Earnings before income taxes 11.5 25.1 13.6 23.0 Provision for income taxes (2.9) (5.4) (3.3) (5.0) Net earnings 8.6 19.7 10.4 18.0 Net earnings attributable to noncontrolling interests — (0.1) — (0.1) Net loss (earnings) attributable to redeemable noncontrolling interest (0.1) — — — Net earnings attributable to The Estée Lauder Companies Inc. 8.5 % 19.6 % 10.3 % 17.9 % Not adjusted for differences caused by rounding Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in mix and those due to strategic pricing actions, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation. The net sales impact from pricing consists of changes in list prices, due to strategic pricing actions, and mix shifts within and among product categories, geographic regions and distribution channels. The prices at which we sell our products vary by brand, distribution channel (e.g., wholesale or direct-to-consumer) and may also vary by country. Our brands and products cover a broad array of pricing tiers. Prices of skin care and fragrance products are typically higher than makeup and hair care products. New product innovation includes the introduction of new products, as well as changes related to existing products or where they are sold, including reformulations, regional expansion, repackaging and sets. A product is considered "new innovation" for the twelve-month period following the initial shipment date. Our innovation is launched at different price points than existing products and value derived from innovation may vary from year to year. We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives. The economics of developing, producing, launching, supporting and discontinuing products impact our sales and operating performance each period. The introduction of new products often has some cannibalizing effect on sales of existing products, which we take into account in our business planning. The impact of new product introductions, including timing compared to introductions in prior periods, also affects our results. 36 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Non-GAAP Financial Measures We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period helps investors and others compare operating performance between periods. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. See Reconciliations of Non-GAAP Financial Measures beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. We operate on a global basis, with the majority of our net sales generated outside the United States. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, we present certain net sales, operating results and diluted net earnings per common share information excluding the effect of foreign currency rate fluctuations to provide a framework for assessing the performance of our underlying business outside the United States. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current-period results using monthly average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities. Overview Business Update We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with high quality products and services. Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. This diversification allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities. These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described in the Overview on pages 30-32 of our Annual Report on Form 10-K for the year ended June 30, 2022, as well as below. The COVID-19 pandemic continued to disrupt our operating environment through the first half of fiscal 2023, including the evolution of the COVID-19 environment, including restrictions in mainland China and the rising number of COVID cases (collectively "COVID-related impacts") affecting Asia travel retail, particularly Hainan, and retail traffic in mainland China. In Asia travel retail, these challenges led to prolonged store closures as well as the curtailment of travel and caused the tightening of inventory by certain of our retailers who had previously placed orders in anticipation of the return of travel that was since delayed. During the first half of fiscal 2023, our business was also negatively impacted by the strong U.S. dollar, along with inflationary pressures and recession concerns that caused certain of our retailers in the United States to tighten inventory. While our monthly retail trends improved sequentially during the fiscal 2023 second quarter in the United States, the pace was slower than anticipated resulting in lower replenishment orders compared to the prior-year period. During the second quarter of fiscal 2023, net sales decreased 17%, reflecting the impacts of the challenges noted above. • Our skin care net sales declined 25%, including the unfavorable impact of foreign currency translation of 5%. The category continues to be pressured by the COVID-related impacts affecting Asia travel retail, including the tightening of inventory by certain of our retailers, retail traffic in mainland China and the Dr.Jart+ travel retail business in Korea. Lower replenishment orders in the United States also negatively impacted the category's growth. Despite these pressures, net sales benefited from higher net sales from The Ordinary and Bobbi Brown. • Our makeup net sales declined 9%, including the unfavorable impact of foreign currency translation of 6%. The decline in makeup net sales reflects the COVID-related impacts affecting Asia travel retail and retail traffic in mainland China, partially offset by the continued progression towards recovery in parts of Asia/Pacific and Europe, Middle East & Africa. • Our fragrance net sales decreased 3%, primarily due to the impact of the license terminations related to certain of our designer fragrances of 9% and the unfavorable impact of foreign currency translation of 6%. Overall the category benefited from increases in Estée Lauder and Clinique due to strong holiday performance, as well as the shift in consumer demand toward our luxury and artisanal offerings, including Le Labo and Tom Ford Beauty. • Our hair care net sales remained virtually flat, benefiting from the fiscal 2022 third quarter launch of The Ordinary’s hair care products, offset by lower net sales from Aveda, driven by the unfavorable impact of foreign currency translation. 37 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive. Our regional organizations, and the expertise of our people there, enable our brands to be more locally and culturally relevant in both product assortment and communications. We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories. We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity. We continuously strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets. • Net sales in The Americas decreased 5%, primarily reflecting the license terminations related to certain of our designer fragrances, and the unfavorable impacts of lower replenishment orders in the United States. Offsetting the net sales decrease in The Americas was continued growth in Latin America, primarily led by our makeup category and successful performance during holiday and key shopping moments. • Net sales in Europe, the Middle East & Africa decreased 22%, including the unfavorable impact of foreign currency translation of 4%, primarily due to continued COVID-related impacts affecting Asia travel retail. Partially offsetting this decrease was an increase in net sales in Turkey, driven by growth in our makeup category, and India, driven by growth in our skin care category. Net sales in Russia declined period-over-period, and, during the fiscal 2023 second quarter, we sold a limited selection of products to a reduced number of authorized retailers and completed the closure of all of our freestanding stores. Net sales in the United Kingdom declined period-over-period, driven by the unfavorable impact of foreign currency translation, partially offset by the continued recovery in the makeup product category. • The continued COVID-related impacts affected our business in Greater China and the Dr.Jart+ travel retail business in Korea drove the net sales decline in Asia/Pacific of 17%, including the unfavorable impact of foreign currency translation of 9%. Net sales in Asia/Pacific benefited from growth in southeast Asia, led by the Philippines, Malaysia, and Vietnam, driven by our makeup and fragrance product categories. Outlook The COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business. There have been, and are likely to continue to be, intermittent store closures and supply chain challenges. We are mindful that these trends may continue to impact the pace of recovery. We are seeing a continued and prolonged curtailment in international travel which is also affecting our travel retail business, particularly in Asia, which historically has been one of our fastest growth areas. The rising number of COVID cases that started in December continues to negatively impact the pace of recovery. In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets (i.e. potentially resulting in impairments). We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; increasing inflationary pressures; supply chain challenges; social and political issues; regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. For example, the strengthening of the U.S. dollar could negatively impact results within Europe, the Middle East & Africa due to pricing pressures on our retail customers and consumers in key international travel retail locations. Additionally, we continue to monitor the geopolitical tensions between the United States and China, which could have a material adverse effect on our business. We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As the invasion of Ukraine continues and international sanctions evolve, our business and ability to operate in Russia and Ukraine continue to be negatively impacted. As we responsibly scale-down our operations, we expect to sell a limited selection of products to authorized retailers in Russia. We will continue to monitor the risks and evolving situation that may further affect our business and will adjust our plans accordingly. In fiscal 2022, our operations in Ukraine and Russia accounted for approximately 1% of consolidated net sales. There are uncertainties related to the future impacts on our business, including possible new sanctions that are difficult to predict due to the high level of geopolitical volatility. On a broader perspective, there could be additional negative impacts to our net sales, earnings, assets and cash flows from such uncertainties. We also note that worsening conditions could exacerbate economic challenges in other countries such as inflationary pressures, energy shortages, recessions or other consequences. Please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022, for a more complete discussion of the risks we encounter in our business and industry. The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business in China and the other macro challenges we are facing, will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility, including continuing to execute upon and benefit from efficiencies attributable to previously approved initiatives under the Post-COVID Business Acceleration Program. As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business. Post-COVID Business Acceleration Program Information about our restructuring initiative, the Post-COVID Business Acceleration Program, is described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 33 of our Annual Report on Form 10-K for the year ended June 30, 2022. Other Intangible Asset Impairments During the fiscal 2023 second quarter, given the lower-than-expected results in the overall business, we made revisions to the internal forecasts relating to our Smashbox reporting unit. We concluded that the changes in circumstances in the reporting unit triggered the need for an interim impairment review of its trademark intangible asset. The remaining carrying value of the trademark intangible asset was not recoverable and we recorded an impairment charge of $21 million reducing the carrying value to zero. During the fiscal 2023 second quarter, the Dr.Jart+ reporting unit experienced lower-than-expected growth within key geographic regions and channels that continue to be impacted by the spread of COVID-19 variants, resurgence in cases, and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the reporting unit. In addition, due to macro-economic factors, Dr.Jart+ has experienced lower-than-expected growth within key geographic regions. The Too Faced reporting unit experienced lower-than-expected results in key geographic regions and channels coupled with delays in future international expansion to areas that continue to be impacted by COVID-19. As a result, we made revisions to the internal forecasts relating to our Dr.Jart+ and Too Faced reporting units. Additionally, there were increases in the weighted average cost of capital for both reporting units as compared to the prior year annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2022. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. We concluded that the changes in circumstances in the reporting units, along with increases in the weighted average cost of capital, triggered the need for interim impairment reviews of their trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+’s and Too Faced’s long-lived assets, including customer lists, may not be recoverable. Accordingly, we performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as of November 30, 2022. We concluded that the carrying value of the trademark intangible assets exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows and recorded an impairment charge of $100 million for Dr.Jart+ and $86 million for Too Faced. We concluded that the carrying amounts of the long-lived assets were recoverable. After adjusting the carrying values of the trademarks, we completed interim quantitative impairment tests for goodwill. As the estimated fair value of the Dr.Jart+ and Too Faced reporting units were in excess of their carrying values, we concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units. The fair values of these reporting units were based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting units. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks. The most significant unobservable input used to estimate the fair values of the Dr.Jart+ and Too Faced trademark intangible assets was the weighted-average cost of capital, which was 11% and 13%, respectively. A summary of the impairment charges for the three and six months ended December 31, 2022 and the remaining trademark and goodwill carrying values as of December 31, 2022, for each reporting unit, are as follows: Impairment Charge Carrying Value (In millions) Three and Six Months Ended December 31, 2022 As of December 31, 2022 Reporting Unit: Geographic Region Trademarks Goodwill Trademarks Goodwill Smashbox The Americas $ 21 $ — $ — $ — Dr. Jart+ Asia/Pacific 100 — 339 318 Too Faced The Americas 86 — 186 13 Total $ 207 $ — $ 525 $ 331 The impairment charges for the three and six months ended December 31, 2022 were reflected in the skin care product category for Dr.Jart+ and the makeup product category for Smashbox and Too Faced. The fair value of the Dr.Jart+ and Too Faced trademarks were equal to their carrying values subsequent to the impairment charges taken as of December 31, 2022. Additionally, the estimated fair value of the Dr.Jart+ and Too Faced reporting units exceeded their carrying value by 7% and 10%, respectively. For the Dr.Jart+ and Too faced reporting units, if all other assumptions are held constant, a decrease of 10% in the estimated future cash flows, inclusive of the terminal value, or an increase of 100 basis points in the weighted average cost of capital, would have caused the carrying value of these reporting units to approximate their fair value. The key assumptions used to determine the estimated fair value of the reporting units and their respective trademarks are primarily predicated on the estimated future impacts of COVID-19, the success of future new product launches, the achievement of distribution expansion plans, and the realization of cost reduction and other efficiency efforts. If such plans do not materialize, or if there are further challenges in the business environments in which the reporting unit operates, resulting changes in the key assumptions could have negative impacts on the estimated fair value of the reporting units, and their respective trademarks, and it is possible we could recognize additional impairment charges in the future. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NET SALES Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 4,620 $ 5,539 $ 8,550 $ 9,931 $ Change from prior-year period (919) (1,381) % Change from prior-year period (17) % (14) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency adjusting for returns associated with restructuring and other activities (11) % (9) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased for the three and six months ended December 31, 2022, driven by lower net sales from the skin care, makeup and fragrance product categories and from all geographic regions. In both periods, the net sales decrease is primarily due to the COVID-related impacts, affecting Asia travel retail, mainland China, and the Dr.Jart+ travel retail business in Korea, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022. Skin care net sales declined for the three and six months ended December 31, 2022, primarily driven by Estée Lauder, La Mer, Dr.Jart+ and Clinique, partially offset by higher net sales from The Ordinary and Bobbi Brown. Makeup net sales decreased in both periods due to lower net sales from Estée Lauder and Tom Ford Beauty, partially offset by an increase in net sales from M·A·C driven by the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take back program during the fiscal 2023 second quarter. Fragrance net sales declined in both periods primarily due to the impact of the license terminations related to the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines ("certain of our designer fragrances") effective June 30, 2022 and lower net sales from Jo Malone London, partially offset by higher net sales from Estée Lauder, Le Labo, Tom Ford Beauty and Clinique. Net sales in Europe, the Middle East & Africa declined for the three and six months ended December 31, 2022, primarily driven by the COVID-related impacts affecting Asia travel retail, as well as lower net sales from Russia, and the United Kingdom, driven by the unfavorable impact of foreign currency translation. Net sales decreased in Asia/Pacific in both periods, primarily due to the COVID-related impacts affecting Greater China and the Dr.Jart+ travel retail business in Korea, partially offset by higher net sales from southeast Asia, led by the Philippines, Malaysia, and Vietnam. Net sales in The Americas decreased in both periods, driven by the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022, and the impact in the United States from the tightening of inventory from certain of our retailers and lower replenishment orders in the fiscal 2023 second quarter. Partially offsetting the decrease in net sales in The Americas for the three and six months ended December 31, 2022 was an increase in net sales in Latin America. The total net sales decrease was impacted by approximately $282 million and $458 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures. Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the impact of returns associated with restructuring and other activities for the three and six months ended December 31, 2022 of $1 million and $6 million, respectively, and for the three and six months ended December 31, 2021 of $1 million and $2 million, respectively. Reported net sales decreased 17% for the three months ended December 31, 2022, driven by the decrease from volume of 11%, the unfavorable impact from foreign currency translation of 5%, and the impact from the license terminations of certain of our designer fragrances of 1%. The impact from pricing was virtually flat period-over-period, due to the favorable impact from strategic pricing actions offset by changes in mix. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales decreased 14% for the six months ended December 31, 2022, driven by the decrease from volume of 10%, the unfavorable impact from foreign currency translation of 5%, and the impact from the license terminations of certain of our designer fragrances of 1%. Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 2,382 $ 3,159 $ 4,486 $ 5,608 $ Change from prior-year period (777) (1,122) % Change from prior-year period (25) % (20) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (20) % (16) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care net sales decreased for the three and six months ended December 31, 2022, reflecting lower net sales from Estée Lauder, La Mer, Clinique and Dr.Jart+, combined, of approximately $762 million and $1,068 million, respectively, primarily driven by the COVID-related impacts affecting Asia travel retail, including the tightening of inventory by certain of our retailers, retail traffic in mainland China and the Dr.Jart+ travel retail business in Korea. Also contributing to the decrease in net sales from Estée Lauder for the three and six months ended December 31, 2022 in the United States was the tightening of inventory from certain of our retailers and lower replenishment orders in the fiscal 2023 second quarter. Partially offsetting these decreases in skin care net sales for the three and six months ended December 31, 2022 were higher net sales from The Ordinary and Bobbi Brown, combined, of approximately $34 million and $38 million, respectively. The increase in net sales from The Ordinary in both periods was driven by success of hero products, new product launches and expanded distribution. In both periods, the increase in net sales from Bobbi Brown reflected the continued success of hero products. The skin care net sales decrease was impacted by approximately $152 million and $237 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Reported skin care net sales decreased 25% for the three months ended December 31, 2022, driven by the decrease from volume of 18%, the unfavorable impact from foreign currency translation of 5%, and a decrease from pricing of 2%, due to the unfavorable impact from changes in mix, partially offset from strategic pricing actions. Reported skin care net sales decreased 20% for the six months ended December 31, 2022, driven by the decrease from volume of 16% and the unfavorable impact from foreign currency translation of 4%. The impact from pricing was virtually flat period-over-period, due to the favorable impact from strategic pricing actions offset by changes in mix. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,268 $ 1,386 $ 2,320 $ 2,560 $ Change from prior-year period (118) (240) % Change from prior-year period (9) % (9) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (3) % (5) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup net sales decreased for the three and six months ended December 31, 2022, reflecting lower net sales from Estée Lauder and Tom Ford Beauty, combined, of approximately $119 million and $233 million, respectively, primarily driven by COVID-related impacts, affecting Asia travel retail and retail traffic in mainland China. Partially offsetting these decreases in net sales for the three and six months ended December 31, 2022 was an increase in net sales from M·A·C in both periods, driven by the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take back program during the fiscal 2023 second quarter. The makeup net sales decrease was impacted by approximately $73 million and $123 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Reported makeup net sales decreased 9% for the three months ended December 31, 2022, driven by the decrease from volume of 9% and the unfavorable impact from foreign currency translation of 5%. Partially offsetting these decreases was the increase from pricing of 5% due to the favorable impact from strategic pricing actions. Reported makeup net sales decreased 9% for the six months ended December 31, 2022, driven by the decrease from volume of 6% and the unfavorable impact from foreign currency translation of 5%. Partially offsetting these decrease was an increase from pricing of 2% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 775 $ 799 $ 1,382 $ 1,408 $ Change from prior-year period (24) (26) % Change from prior-year period (3) % (2) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 3 % 4 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported fragrance net sales decreased for the three and six months ended December 31, 2022, primarily reflecting the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022 and lower net sales from Jo Malone London, combined, of approximately $102 million and $163 million, respectively. The decrease in net sales from Jo Malone London for the three and six months ended December 31, 2022 primarily reflected COVID-related impacts affecting Asia travel retail and retail traffic in mainland China. Also contributing to the net sales decline for the three months ended December 31, 2022 for Jo Malone London was an unfavorable impact relating to the timing of holiday shipments compared to the prior-year period. Partially offsetting the decrease in fragrance net sales for the three and six months ended December 31, 2022 were higher net sales from Estée Lauder, Le Labo, Tom Ford Beauty, and Clinique, combined, of approximately $74 million and $135 million, respectively. Net sales from Estée Lauder increased in both periods, primarily reflecting successful performance during holiday and key shopping moments driven by continued success from the Beautiful franchise line of products. Also contributing to the increase in net sales from Estée Lauder for the three months ended December 31, 2022 was a favorable impact due to timing of holiday shipments compared to the prior-year period. Net sales from Le Labo increased in both periods, reflecting the continued success of hero product franchises, successful performance during holiday and targeted expanded consumer reach. The increase in net sales from Tom Ford Beauty in both periods reflected the continued success of Private Blend and Signature fragrances, new product launches and successful performance during holiday and key shopping moments. Net sales from Clinique increased in both periods, primarily reflecting growth in the Clinique Happy franchise line of products. The fragrance net sales decrease was impacted by approximately $49 million and $84 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Reported fragrance net sales decreased 3% for the three months ended December 31, 2022, driven by the impact from the license terminations of certain of our designer fragrances of 9% and the unfavorable impact from foreign currency translation of 6%. Partially offsetting these decreases was the increase from volume of 9% and the increase from pricing of 3%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Reported fragrance net sales decreased 2% for the six months ended December 31, 2022, driven by the impact from the license terminations of certain of our designer fragrances of 10% and the unfavorable impact from foreign currency translation of 6%. Partially offsetting these decreases was the increase from volume of 10% and the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 182 $ 180 $ 340 $ 328 $ Change from prior-year period 2 12 % Change from prior-year period 1 % 4 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 4 % 7 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported hair care net sales increased for the three and six months ended December 31, 2022, led by The Ordinary, benefiting from the fiscal 2022 third quarter launch of hair care products, partially offset by a decrease in net sales from Aveda. The decrease in net sales from Aveda in both periods reflects an unfavorable impact of foreign currency translation, partially offset by the fiscal 2023 first quarter distribution expansion into mainland China and successful performance during holiday and key shopping moments. The hair care net sales increase was impacted by approximately $6 million and $12 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported hair care net sales increased 1% for the three months ended December 31, 2022, driven by the increase from pricing of 7%, due to the favorable impact from strategic pricing actions. Partially offsetting this increase was the decrease from volume of 3%, partially offset by new product innovation, and the unfavorable impact from foreign currency translation of 3%. Reported hair care net sales increased 4% for the six months ended December 31, 2022, driven by the increase from pricing of 10%, due to the favorable impact from strategic pricing actions and changes in mix. Partially offsetting this increase was the decrease from volume of 2%, partially offset by new product innovation, and the unfavorable impact from foreign currency translation of 4%. Geographic Regions We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,235 $ 1,300 $ 2,358 $ 2,494 $ Change from prior-year period (65) (136) % Change from prior-year period (5) % (5) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (6) % (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales in The Americas decreased for the three and six months ended December 31, 2022, reflecting the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022 of 2% and 3%, respectively. In the United States, net sales decreased $66 million and $138 million for the three and six months ended December 31, 2022, respectively, driven by the tightening of inventory from certain of our retailers, lower shipments of replenishment orders in the fiscal 2023 second quarter and the aforementioned impact of the license terminations related to certain of our designer fragrances. Partially offsetting the decrease in The Americas for the three and six months ended December 31, 2022 was an increase in net sales in Latin America of approximately $7 million and $20 million, respectively, reflecting continued recovery in makeup. Net sales in The Americas were impacted by approximately $7 million and $14 million of favorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Reported net sales in The Americas decreased 5% for the three months ended December 31, 2022, driven by the decrease from volume of 8% and the impact from the license terminations related to certain of our designer fragrances of 2%. Partially offsetting this decrease was the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact from foreign currency translation of 1%. Reported net sales in The Americas decreased 5% for the six months ended December 31, 2022, driven by the decrease from volume of 8% and the impact from the license terminations related to certain of our designer fragrances of 3%. Partially offsetting this decrease was the increase from pricing of 5%, due to the favorable impact from strategic pricing actions, and the favorable impact from foreign currency translation of 1%. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,816 $ 2,338 $ 3,498 $ 4,211 $ Change from prior-year period (522) (713) % Change from prior-year period (22) % (17) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (18) % (13) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Europe, the Middle East & Africa for the three and six months ended December 31, 2022, primarily driven by lower net sales from our travel retail business, Russia and the United Kingdom, combined, of approximately $529 million and $703 million, respectively. The decrease in net sales from our travel retail business for the three and six months ended December 31, 2022 reflects the COVID-related impacts affecting Asia travel retail, including the tightening of inventory from certain of our retailers. Net sales from Russia decreased for the three and six months ended December 31, 2022, as we sold a limited selection of products to a reduced number of authorized retailers and completed the closure of all of our freestanding stores. The decrease in net sales from the United Kingdom for the three and six months ended December 31, 2022 is driven by the unfavorable impact of foreign currency translation, partially offset by the continued recovery in the makeup product category. Partially offsetting the decreases in net sales in Europe, the Middle East & Africa for the three and six months ended December 31, 2022 were increases in net sales from Turkey and India, combined, of approximately $17 million and $31 million. The net sales increase in Turkey in both periods was driven by growth in makeup. Net sales in India increased for the three and six months ended December 31, 2022 led by growth in skin care and makeup, respectively. Net sales in Europe, the Middle East & Africa were impacted by approximately $102 million and $185 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Reported net sales in Europe, the Middle East & Africa decreased 22% for the three months ended December 31, 2022, driven by the decrease from volume of 16%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%, and a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by strategic pricing actions. Reported net sales in Europe, the Middle East & Africa decreased 17% for the six months ended December 31, 2022, driven by the decrease from volume of 12%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%. The impact from pricing was virtually flat period-over-period, due to the favorable impact from strategic pricing actions offset by changes in mix. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Net sales $ 1,570 $ 1,902 $ 2,700 $ 3,228 $ Change from prior-year period (332) (528) % Change from prior-year period (17) % (16) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (8) % (7) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Asia/Pacific for the three and six months ended December 31, 2022, primarily driven by a decrease in net sales in Greater China and Korea, led by the Dr.Jart+ travel retail business in Korea, combined, of approximately $321 million and $538 million, respectively, due to the COVID-related impacts. Partially offsetting the net sales decrease for the three and six months ended December 31, 2022 were increases across southeast Asia, led by increases in net sales from the Philippines, Malaysia and Vietnam, combined, of approximately $5 million and $30 million, respectively, driven by growth in our makeup and fragrance product categories. Net sales in Asia/Pacific were impacted by approximately $187 million and $287 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively. Reported net sales in Asia/Pacific decreased 17% for the three months ended December 31, 2022, driven by the decrease from the unfavorable impact from foreign currency translation of 10% and the decrease from volume of 8%. Partially offsetting these decreases was the increase from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Reported net sales in Asia/Pacific decreased 16% for the six months ended December 31, 2022, driven by the unfavorable impact from foreign currency translation of 9% and the decrease from volume of 8%. Partially offsetting these decreases was the increase from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. GROSS MARGIN Gross margin decreased to 73.6% and 73.8% for the three and six months ended December 31, 2022, respectively, as compared with 77.9% and 77.0% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2022 Three Months Ended Six Months Ended Mix of business (300) (220) Obsolescence charges (55) (25) Manufacturing costs and other (85) (80) Foreign exchange transactions 10 5 Total (430) (320) 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The decrease in gross margin for the three and six months ended December 31, 2022 reflected unfavorable impacts from our mix of business and higher manufacturing costs due to continued inflationary pressures. The unfavorable impact from our mix of business in both periods is primarily due to the change in geographic region and category mix, driven by the decrease in skin care net sales and higher costs associated with promotional items. OPERATING EXPENSES Operating expenses as a percentage of net sales was 61.6% and 59.5% for the three and six months ended December 31, 2022, respectively, as compared with 52.3% and 53.3% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2022 Three Months Ended Six Months Ended General and administrative expenses (50) (20) Advertising, merchandising, sampling and product development (150) (150) Selling (110) (70) Stock-based compensation (40) — Store operating costs (90) (80) Shipping (60) (70) Subtotal (500) (390) Charges associated with restructuring and other activities 10 10 Other intangible asset impairments (450) (240) Changes in fair value of acquisition-related stock options 10 — Total (930) (620) The unfavorable change in operating expense margin for the three and six months ended December 31, 2022, was primarily due to the decrease in net sales and the fiscal 2023 second quarter impact of other intangible asset impairments of $207 million. The unfavorable impact of store operating costs in both periods was due to the brick-and-mortar recovery, including more stores being open compared to the prior-year period. Partially mitigating the unfavorable impact in both periods was disciplined expense management. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING RESULTS Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 556 $ 1,418 $ 1,217 $ 2,353 $ Change from prior-year period (862) (1,136) % Change from prior-year period (61) % (48) % Operating margin 12.0 % 25.6 % 14.2 % 23.7 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, other intangible asset impairments and the change in fair value of acquisition-related stock options (46) % (40) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The decrease in reported operating margin for the three and six months ended December 31, 2022 was primarily driven by a decrease in net sales, decrease in gross margin and the decrease in operating expense margin, discussed above. Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 421 $ 1,082 $ 951 $ 1,799 $ Change from prior-year period (661) (848) % Change from prior-year period (61) % (47) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options (52) % (42) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported skin care operating income decreased for the three and six months ended December 31, 2022, reflecting lower operating results from Estée Lauder and La Mer, combined, of approximately $476 million and $641 million, respectively, primarily driven by decreases in net sales, as well as the fiscal 2023 second quarter other intangible asset impairment related to Dr.Jart+ of $100 million. Partially offsetting the decrease in skin care operating income for the three and six months ended December 31, 2022 was higher operating results from The Ordinary, primarily driven by an increase in net sales. Also benefiting skin care operating income in both periods was disciplined expense management. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income (loss) $ (37) $ 130 $ (21) $ 221 $ Change from prior-year period (167) (242) % Change from prior-year period (100+)% (100+)% Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments (46) % (61) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup operating income decreased for the three and six months ended December 31, 2022, reflecting the fiscal 2023 second quarter other intangible asset impairments related to Too Faced and Smashbox of $107 million, combined, and lower results from Estée Lauder and Tom Ford Beauty, combined, of approximately $103 million and $231 million, respectively. In both periods, the decrease in operating income from Estée Lauder and Tom Ford Beauty is driven by decreases in net sales. Also contributing to the decrease in operating results from Estée Lauder in both periods were higher cost of sales due to impacts associated with inflationary pressures, partially offset by a decrease in advertising and promotional activities. Partially offsetting the decrease in makeup operating income for the three and six months ended December 31, 2022 were higher results from M·A·C, primarily driven by the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take back program during the fiscal 2023 second quarter and disciplined advertising and promotional expense management. Also benefiting makeup operating income in both periods was lower general and administrative expenses. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 177 $ 210 $ 310 $ 341 $ Change from prior-year period (33) (31) % Change from prior-year period (16) % (9) % Reported fragrance operating income decreased for the three and six months ended December 31, 2022, reflecting lower results from Jo Malone London and the impact of license terminations related to certain of our designer fragrances effective June 30, 2022, combined, of approximately $61 million and $93 million, respectively. Operating income from Jo Malone London decreased in both periods, primarily driven by a decrease in net sales, higher advertising and promotional activities to support holiday and key shopping moments, and higher selling expenses due to increased staffing costs compared to the prior-year period. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Partially offsetting the decrease in fragrance operating income for the three and six months ended December 31, 2022, were higher results from Estée Lauder, driven by an increase in net sales. Also benefiting fragrance operating income for the six months ended December 31, 2022, were higher results from Tom Ford Beauty, reflecting an increase in net sales, partially offset by higher selling expenses due to increased staffing costs compared to the prior-year period, and higher advertising and promotional activities to support hero franchises and holiday and key shopping moments. Also benefiting fragrance operating income in both periods was lower general and administrative expenses. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income (loss) $ 5 $ 8 $ (7) $ 10 $ Change from prior-year period (3) (17) % Change from prior-year period (38) % (100+)% Reported hair care operating results decreased for the three and six months ended December 31, 2022, primarily driven by lower results from Aveda and Bumble and bumble, combined, of approximately $9 million and $34 million, respectively. In both periods, the lower results from Aveda were primarily driven by a decrease in net sales, higher advertising and promotional activities to support the brand's expansion into mainland China during fiscal 2023 and holiday and key shopping moments and higher cost of sales. Operating results from Bumble and bumble decreased for the three and six months ended December 31, 2022, primarily driven by higher cost of sales. Partially offsetting the decrease in hair care operating income for the three and six months ended December 31, 2022 was lower general and administrative expenses. Geographic Regions The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income (loss) $ (85) $ 382 $ 40 $ 636 $ Change from prior-year period (467) (596) % Change from prior-year period (100+)% (94) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments and change in fair value of acquisition-related stock options (95) % (77) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating results decreased in The Americas for the three and six months ended December 31, 2022, primarily reflecting lower operating results from North America of approximately $468 million and $602 million, respectively. The decrease in operating results in North America is driven by the United States, primarily due to lower intercompany royalty income driven by a decrease in net sales in our travel retail business, fiscal 2023 second quarter other intangible asset impairments relating to Too Faced and Smashbox of $107 million and a decrease in net sales. Also contributing to the decrease in operating results in the United States for the six months ended December 31, 2022 was an increase in selling expenses due to higher staffing costs compared to the prior-year period. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 409 $ 620 $ 743 $ 1,085 $ Change from prior-year period (211) (342) % Change from prior-year period (34) % (32) % Reported operating income decreased in Europe, the Middle East & Africa for the three and six months ended December 31, 2022, primarily driven by lower results from our travel retail business of approximately $236 million and $384 million, respectively. In both periods, operating income decreased in our travel retail business reflecting the decrease in net sales and higher advertising and promotional activity primarily to support investments in key markets and increased digital media campaigns. Also contributing to the decrease in operating income in our travel retail business was an increase in cost of sales reflecting higher costs due to inflationary pressures. Partially offsetting the decrease in operating income in our travel retail business in both periods was a decrease in intercompany royalty expense to The Americas due to the net sales decrease. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2022 2021 2022 2021 As Reported: Operating income $ 241 $ 431 $ 449 $ 653 $ Change from prior-year period (190) (204) % Change from prior-year period (44) % (31) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments (21) % (16) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating income decreased in Asia/Pacific for the three and six months ended December 31, 2022, primarily reflecting the fiscal 2023 second quarter other intangible asset impairment relating to Dr. Jart+ of $100 million and a decrease in operating results in Greater China of approximately $76 million and $106 million, respectively. The decrease in operating results in Greater China in both periods was driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management. Partially offsetting the decrease in operating income in Asia/Pacific for the three and six months ended December 31, 2022 were higher results from southeast Asia, led by Singapore, Malaysia, and the Philippines, combined, of approximately $2 million and $23 million, respectively, primarily driven by an increase in net sales. INTEREST AND INVESTMENT INCOME Three Months Ended December 31 Six Months Ended December 31 (In millions) 2022 2021 2022 2021 Interest expense $ 52 $ 42 $ 98 $ 84 Interest income and investment income, net $ 26 $ 10 $ 41 $ 14 Interest expense and interest income and investment income, net, increased primarily reflecting higher interest rates compared to the prior-year period. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. PROVISION FOR INCOME TAXES The provision for income taxes represents U.S. federal, foreign, state and local income taxes. The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations. Our effective tax rate will change from quarter-to-quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, the interaction of various global tax strategies and the impact from certain acquisitions. In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change. Three Months Ended December 31 Six Months Ended December 31 2022 2021 2022 2021 Effective rate for income taxes 25.4 % 21.5 % 23.9 % 21.9 % Basis-point change from the prior-year period 390 200 For the three and six months ended December 31, 2022, the increase in the effective tax rate was primarily attributable to a decrease in excess tax benefits associated with stock-based compensation arrangements and a higher effective tax rate on the our foreign operations, partially offset by a reduction in income tax reserve adjustments. NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended December 31 Six Months Ended December 31 ($ in millions, except per share data) 2022 2021 2022 2021 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 394 $ 1,088 $ 883 $ 1,780 $ Change from prior-year period (694) (897) % Change from prior-year period (64) % (50) % Diluted net earnings per common share $ 1.09 $ 2.97 $ 2.45 $ 4.85 % Change from prior-year period (63) % (50) % Non-GAAP Financial Measure (1) : % Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, other intangible asset impairments and the change in fair value of acquisition-related stock options (49) % (41) % (1) See “ Reconciliations of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES We use certain non-GAAP financial measures, among other financial measures, to evaluate our operating performance, which represent the manner in which we conduct and view our business. Management believes that excluding certain items that are not comparable from period to period, or do not reflect the Company’s underlying ongoing business, provides transparency for such items and helps investors and others compare and analyze our operating performance from period to period. In the future, we expect to incur charges or adjustments similar in nature to those presented below; however, the impact to the Company’s results in a given period may be highly variable and difficult to predict. Our non-GAAP financial measures may not be comparable to similarly titled measures used by, or determined in a manner consistent with, other companies. While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S. GAAP. The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities; the change in fair value of acquisition-related stock options; other intangible asset impairments; and the effects of foreign currency translation. The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S. GAAP measures. ($ in millions, except per share data) Three Months Ended December 31 Variance % Change % Change in constant currency 2022 2021 Net sales, as reported $ 4,620 $ 5,539 $ (919) (17) % (12) % Returns associated with restructuring and other activities 1 1 — Net sales, as adjusted $ 4,621 $ 5,540 $ (919) (17) % (11) % Operating income, as reported $ 556 $ 1,418 $ (862) (61) % (57) % Charges associated with restructuring and other activities 9 15 (6) Other intangible asset impairments 207 — 207 Change in fair value of acquisition-related stock options (4) 2 (6) Operating income, as adjusted $ 768 $ 1,435 $ (667) (46) % (42) % Diluted net earnings per common share, as reported $ 1.09 $ 2.97 $ (1.88) (63) % (59) % Charges associated with restructuring and other activities .02 .03 (.01) Other intangible asset impairments .44 — .44 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.01) .01 (.02) Diluted net earnings per common share, as adjusted $ 1.54 $ 3.01 $ (1.47) (49) % (44) % 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. ($ in millions, except per share data) Six Months Ended December 31 Variance % Change % Change in constant currency 2022 2021 Net sales, as reported $ 8,550 $ 9,931 $ (1,381) (14) % (9) % Returns associated with restructuring and other activities 6 2 4 Net sales, as adjusted $ 8,556 $ 9,933 $ (1,377) (14) % (9) % Operating income, as reported $ 1,217 $ 2,353 $ (1,136) (48) % (44) % Charges associated with restructuring and other activities 15 21 (6) Other intangible asset impairments 207 — 207 Change in fair value of acquisition-related stock options (3) 2 (5) Operating income, as adjusted $ 1,436 $ 2,376 $ (940) (40) % (35) % Diluted net earnings per common share, as reported $ 2.45 $ 4.85 $ (2.40) (50) % (46) % Charges associated with restructuring and other activities .03 .05 (.02) Other intangible asset impairments .44 — .44 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.01) — (.01) Diluted net earnings per common share, as adjusted $ 2.91 $ 4.90 $ (1.99) (41) % (36) % As diluted net earnings per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items. 55 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following tables reconcile the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation: As Reported Impact of foreign currency translation Variance, in constant currency % Change, as reported % Change, in constant currency Three Months Ended December 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 2,382 $ 3,159 $ (777) $ 152 $ (625) (25) % (20) % Makeup 1,268 1,386 (118) 73 (45) (9) (3) Fragrance 775 799 (24) 49 25 (3) 3 Hair Care 182 180 2 6 8 1 4 Other 14 16 (2) 2 — (13) — 4,621 5,540 (919) 282 (637) (17) (11) Returns associated with restructuring and other activities (1) (1) — — — Total $ 4,620 $ 5,539 $ (919) $ 282 $ (637) (17) % (12) % By Region: The Americas $ 1,235 $ 1,300 $ (65) $ (7) $ (72) (5) % (6) % Europe, the Middle East & Africa 1,816 2,338 (522) 102 (420) (22) (18) Asia/Pacific 1,570 1,902 (332) 187 (145) (17) (8) 4,621 5,540 (919) 282 (637) (17) (11) Returns associated with restructuring and other activities (1) (1) — — — Total $ 4,620 $ 5,539 $ (919) $ 282 $ (637) (17) % (12) % 56 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As Reported Impact of foreign currency translation Variance, in constant currency % Change, as reported % Change, in constant currency Six Months Ended December 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 4,486 $ 5,608 $ (1,122) $ 237 $ (885) (20) % (16) % Makeup 2,320 2,560 (240) 123 (117) (9) (5) Fragrance 1,382 1,408 (26) 84 58 (2) 4 Hair Care 340 328 12 12 24 4 7 Other 28 29 (1) 2 1 (3) 3 8,556 9,933 (1,377) 458 (919) (14) (9) Returns associated with restructuring and other activities (6) (2) (4) — (4) Total $ 8,550 $ 9,931 $ (1,381) $ 458 $ (923) (14) % (9) % By Region: The Americas $ 2,358 $ 2,494 $ (136) $ (14) $ (150) (5) % (6) % Europe, the Middle East & Africa 3,498 4,211 (713) 185 (528) (17) (13) Asia/Pacific 2,700 3,228 (528) 287 (241) (16) (7) 8,556 9,933 (1,377) 458 (919) (14) (9) Returns associated with restructuring and other activities (6) (2) (4) — (4) Total $ 8,550 $ 9,931 $ (1,381) $ 458 $ (923) (14) % (9) % 57 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following tables reconcile the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options: As Reported Add: Changes in Other intangible asset impairments Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Three Months Ended December 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 421 $ 1,082 $ (661) $ 100 $ (6) $ (567) (61) % (52) % Makeup (37) 130 (167) 107 — (60) (100+) (46) Fragrance 177 210 (33) — — (33) (16) (16) Hair Care 5 8 (3) — — (3) (38) (38) Other (1) 3 (4) — — (4) (100+) (100+) 565 1,433 (868) $ 207 $ (6) $ (667) (61) % (46) % Charges associated with restructuring and other activities (9) (15) 6 Total $ 556 $ 1,418 $ (862) By Region: The Americas $ (85) $ 382 $ (467) $ 107 $ (6) $ (366) (100+)% (95) % Europe, the Middle East & Africa 409 620 (211) — — (211) (34) (34) Asia/Pacific 241 431 (190) 100 — (90) (44) (21) 565 1,433 (868) $ 207 $ (6) $ (667) (61) % (46) % Charges associated with restructuring and other activities (9) (15) 6 Total $ 556 $ 1,418 $ (862) 58 Table of Contents THE ESTÉE LAUDER COMPANIES INC. As Reported Add: Changes in Other intangible asset impairments Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Six Months Ended December 31 ($ in millions) 2022 2021 Variance By Product Category: Skin Care $ 951 $ 1,799 $ (848) $ 100 $ (5) $ (753) (47) % (42) % Makeup (21) 221 (242) 107 — (135) (100+) (61) Fragrance 310 341 (31) — — (31) (9) (9) Hair Care (7) 10 (17) — — (17) (100+) (100+) Other (1) 3 (4) — — (4) (100+) (100+) 1,232 2,374 (1,142) $ 207 $ (5) $ (940) (48) % (40) % Charges associated with restructuring and other activities (15) (21) 6 Total $ 1,217 $ 2,353 $ (1,136) By Region: The Americas $ 40 $ 636 $ (596) $ 107 $ (5) $ (494) (94) % (77) % Europe, the Middle East & Africa 743 1,085 (342) — — (342) (32) (32) Asia/Pacific 449 653 (204) 100 — (104) (31) (16) 1,232 2,374 (1,142) $ 207 $ (5) $ (940) (48) % (40) % Charges associated with restructuring and other activities (15) (21) 6 Total $ 1,217 $ 2,353 $ (1,136) FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Overview Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad. At December 31, 2022, we had cash and cash equivalents of $3,725 million compared with $3,957 million at June 30, 2022. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. The Tax Cuts and Jobs Act (“TCJA ” ) resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S. federal income tax. As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations. If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions. The effects of inflation have not been significant to our overall operating results in recent years, however we are mindful of increasing inflationary pressures. Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases. 59 Table of Contents THE ESTÉE LAUDER COMPANIES INC. In November 2022, we signed an agreement to acquire the TOM FORD brand. The amount to be paid for the acquisition is approximately $2,300 million, net of a $250 million payment to be received at closing from Marcolin S.p.A. and expects to close in the second half of fiscal 2023. We expect to fund this transaction through a combination of cash, debt and $300 million in deferred payments to the sellers that become due beginning in July 2025. In addition, the acquisition will result in the elimination of the existing license royalty payments on our beauty business upon closing. Credit Ratings Changes in our credit ratings will likely result in changes in our borrowing costs. Our credit ratings also impact the cost of our revolving credit facility. Downgrades in our credit ratings may reduce our ability to issue commercial paper and/or long-term debt and would likely increase the relative costs of borrowing. A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating. As of January 26, 2023, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s. Debt At December 31, 2022, our outstanding borrowings were as follows: ($ in millions) Long-term Debt Current Debt Total Debt 3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (1), (12) $ 636 $ — $ 636 4.15% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (2), (12) 494 — 494 4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (3), (12) 455 — 455 3.70% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (4), (12) 247 — 247 6.00% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (5), (12) 295 — 295 5.75% Senior Notes, due October 15, 2033 (“2033 Senior Notes”) (6) 197 — 197 1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (7), (12) 549 — 549 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (8), (12) 589 — 589 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (9), (12) 643 — 643 3.15% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (10), (12) 499 — 499 2.00% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (11), (12) 498 — 498 Commercial paper — 249 249 Other long-term borrowings 9 — 9 Other current borrowings — 11 11 $ 5,111 $ 260 $ 5,371 (1) Consists of $650 million principal, unamortized debt discount of $8 million and debt issuance costs of $6 million. (2) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million. (3) Consists of $450 million principal, net unamortized debt premium of $9 million and debt issuance costs of $4 million. (4) Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million. (5) Consists of $300 million principal, unamortized debt discount of $3 million and debt issuance costs of $2 million. (6) Consists of $200 million principal, unamortized debt discount of $2 million and debt issuance costs of $1 million. (7) Consists of $600 million, principal, unamortized debt discount of $3 million, debt issuance costs of $4 million and a $44 million loss to reflect the fair value of interest rate swaps. (8) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $4 million and a $106 million loss to reflect the fair value of interest rate swaps. (9) Consists of $650 million principal, unamortized debt discount of $4 million and debt issuance costs of $3 million. (10) Consists of $500 million principal and debt issuance costs of $1 million. (11) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $1 million. (12) The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens. Total debt as a percent of total capitalization was 48% and 49% at December 31, 2022 and June 30, 2022, respectively. 60 Table of Contents THE ESTÉE LAUDER COMPANIES INC. In January 2023, we entered into a $2,000 million senior unsecured revolving credit facility that expires on January 2, 2024 (the “New Facility”) for liquidity support for our commercial paper program and general corporate purposes, of which the entire amount is currently undrawn and available. Interest rates on borrowings under the New Facility will be based on prevailing market interest rates in accordance with the agreement. In January 2023, we increased our commercial paper program under which we may issue commercial paper in the United States from $2,500 million to $4,500 million. Cash Flows Six Months Ended December 31 (In millions) 2022 2021 Net cash flows provided by operating activities $ 751 $ 1,846 Net cash flows used for investing activities $ (285) $ (414) Net cash flows used for financing activities $ (685) $ (1,775) The change in net cash flows provided by operating activities primarily reflected lower earnings before tax, excluding non-cash items, and the unfavorable change in working capital, reflecting lower other accrued liabilities, which includes the settlement of net investment hedges, lower accounts payable due to timing of payments, partially offset by a favorable change in accounts receivable. The change in net cash flows used for investing activities primarily reflected a favorable impact from the settlement of net investment hedges, which is offset by the unfavorable change in other accrued liabilities as discussed above, and a decrease in capital expenditures compared to the prior-year period. The change in net cash flows used for financing activities primarily reflected a decrease relating to lower treasury stock repurchases compared to the prior-year period. Dividends For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the six months ended December 31, 2022, see Notes to Consolidated Financial Statements, Note 11 – Equity and Redeemable Noncontrolling Interest . Pension and Post-retirement Plan Funding There have been no significant changes to our pension and post-retirement funding as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Commitments, Contractual Obligations and Contingencies There have been no other significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, except as disclosed in Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies. For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies . Derivative Financial Instruments and Hedging Activities For a discussion of our derivative financial instruments and hedging activities, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments . Foreign Exchange Risk Management For a discussion of foreign exchange risk management, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk) . 61 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Market Risk We address certain financial exposures through a controlled program of market risk management that includes the use of foreign currency forward contracts to reduce the effects of fluctuating foreign currency exchange rates and to mitigate the change in fair value of specific assets and liabilities on the balance sheet. To perform a sensitivity analysis of our foreign currency forward contracts, we assess the change in fair values from the impact of hypothetical changes in foreign currency exchange rates. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $267 million and $259 million as of December 31, 2022 and June 30, 2022, respectively. This potential change does not consider our underlying foreign currency exposures. In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances. Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately $33 million and $41 million as of December 31, 2022 and June 30, 2022, respectively. Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in our portfolio of derivative financial instruments during the year. We believe, however, that any such loss incurred would be offset by the effects of market rate movements on the respective underlying transactions for which the derivative financial instrument was intended. OFF-BALANCE SHEET ARRANGEMENTS We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. CRITICAL ACCOUNTING POLICIES As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies relate to goodwill, other intangible assets and long-lived assets - impairment assessment and income taxes. Since June 30, 2022, there have been no significant changes to the assumptions and estimates related to our critical accounting policies, except as disclosed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 39-40. RECENTLY ISSUED ACCOUNTING STANDARDS For a discussion regarding the impact of accounting standards that were recently issued but not yet effective, on the Company’s consolidated financial statements, see Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies . 62 Table of Contents THE ESTÉE LAUDER COMPANIES INC. CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION We and our representatives from time to time make written or oral forward-looking statements, including in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders, which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may address our expectations regarding sales, earnings or other future financial performance and liquidity, other performance measures, product introductions, entry into new geographic regions, information technology initiatives, new methods of sale, our long-term strategy, restructuring and other charges and resulting cost savings, and future operations or operating results. These statements may contain words like “expect,” “will,” “will likely result,” “would,” “believe,” “estimate,” “planned,” “plans,” “intends,” “may,” “should,” “could,” “anticipate,” “estimate,” “project,” “projected,” “forecast,” and “forecasted” or similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, actual results may differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation: (1) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses; (2) our ability to develop, produce and market new products on which future operating results may depend and to successfully address challenges in our business; (3) consolidations, restructurings, bankruptcies and reorganizations in the retail industry causing a decrease in the number of stores that sell our products, an increase in the ownership concentration within the retail industry, ownership of retailers by our competitors or ownership of competitors by our customers that are retailers and our inability to collect receivables; (4) destocking and tighter working capital management by retailers; (5) the success, or changes in timing or scope, of new product launches and the success, or changes in timing or scope, of advertising, sampling and merchandising programs; (6) shifts in the preferences of consumers as to where and how they shop; (7) social, political and economic risks to our foreign or domestic manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States; (8) changes in the laws, regulations and policies (including the interpretations and enforcement thereof) that affect, or will affect, our business, including those relating to our products or distribution networks, changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result; (9) foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we and our foreign competitors sell products in the same markets and our operating and manufacturing costs outside of the United States; (10) changes in global or local conditions, including those due to volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates; (11) impacts attributable to the COVID-19 pandemic, including disruptions to our global business; (12) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings; 63 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (13) real estate rates and availability, which may affect our ability to increase or maintain the number of retail locations at which we sell our products and the costs associated with our other facilities; (14) changes in product mix to products which are less profitable; (15) our ability to acquire, develop or implement new information and distribution technologies and initiatives on a timely basis and within our cost estimates and our ability to maintain continuous operations of such systems and the security of data and other information that may be stored in such systems or other systems or media; (16) our ability to capitalize on opportunities for improved efficiency, such as publicly-announced strategies and restructuring and cost-savings initiatives, and to integrate acquired businesses and realize value therefrom; (17) consequences attributable to local or international conflicts around the world, as well as from any terrorist action, retaliation and the threat of further action or retaliation; (18) the timing and impact of acquisitions, investments and divestitures; and (19) additional factors as described in our filings with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2022. We assume no responsibility to update forward-looking statements made herein or otherwise. Item 3. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is set forth in Item 2 of this Quarterly Report on Form 10-Q under the caption Liquidity and Capital Resources - Market Risk and is incorporated herein by reference.