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, 2023 and 2022, 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. During the fiscal 2024 second quarter, we identified and corrected misclassifications of net sales and operating income between certain of our product categories in our Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended December 31, 2023 and 2022. See Note 13 – Segment Data and Related Information for additional details. Three Months Ended December 31 Six Months Ended December 31 (In millions) 2023 2022 2023 2022 NET SALES By Product Category: Skin Care $ 2,173 $ 2,427 $ 3,813 $ 4,539 Makeup 1,167 1,263 2,229 2,320 Fragrance 737 734 1,373 1,330 Hair Care 173 183 321 340 Other 30 14 62 27 4,280 4,621 7,798 8,556 Returns associated with restructuring and other activities (1) (1) (1) (6) Net sales $ 4,279 $ 4,620 $ 7,797 $ 8,550 By Region (1) : The Americas $ 1,242 $ 1,235 $ 2,450 $ 2,358 Europe, the Middle East & Africa 1,589 1,816 2,841 3,498 Asia/Pacific 1,449 1,570 2,507 2,700 4,280 4,621 7,798 8,556 Returns associated with restructuring and other activities (1) (1) (1) (6) Net sales $ 4,279 $ 4,620 $ 7,797 $ 8,550 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 415 $ 433 $ 452 $ 969 Makeup 30 (24) (10) (4) Fragrance 131 153 238 277 Hair Care (3) 4 (25) (8) Other 9 (1) 27 (2) 582 565 682 1,232 Charges associated with restructuring and other activities (8) (9) (10) (15) Operating income $ 574 $ 556 $ 672 $ 1,217 By Region (1) : The Americas $ (55) $ (85) $ (237) $ 40 Europe, the Middle East & Africa 379 409 523 743 Asia/Pacific 258 241 396 449 582 565 682 1,232 Charges associated with restructuring and other activities (8) (9) (10) (15) Operating income $ 574 $ 556 $ 672 $ 1,217 (1) The net sales from the Company's travel retail business are included in the Europe, the Middle East & Africa region, and operating income attributable to these net sales are included in that region and in The Americas. The exception is for net sales and operating income of Dr.Jart+ in the travel retail channel in Korea that are reflected in Korea in the Asia/Pacific region. 36 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 2023 2022 2023 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 27.0 26.4 28.5 26.2 Gross profit 73.0 73.6 71.5 73.8 Operating expenses: Selling, general and administrative 59.5 56.9 62.8 57.0 Restructuring and other charges 0.2 0.2 0.1 0.1 Impairment of other intangible assets — 4.5 — 2.4 Total operating expenses 59.6 61.6 62.9 59.5 Operating income 13.4 12.0 8.6 14.2 Interest expense 2.3 1.1 2.5 1.1 Interest income and investment income, net 0.9 0.6 1.0 0.5 Other components of net periodic benefit cost (0.1) — (0.1) (0.1) Earnings before income taxes 12.1 11.5 7.2 13.6 Provision for income taxes 4.6 2.9 2.6 3.3 Net earnings 7.6 8.6 4.6 10.4 Net earnings attributable to redeemable noncontrolling interest (0.3) (0.1) (0.2) — Net earnings attributable to The Estée Lauder Companies Inc. 7.3 % 8.5 % 4.4 % 10.3 % 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 percentages disclosed for these impacts are calculated on an individual basis. 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, brands 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. 37 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 56 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 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 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 diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point. We also 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, 2023, as well as below. • Our skin care net sales declined 10% for the three months ended December 31, 2023, primarily driven by lower net sales from Estée Lauder and Clinique. The decrease in net sales from Estée Lauder primarily reflected the impacts from the ongoing softness in overall prestige beauty in mainland China. Also contributing to the decrease in net sales from Estée Lauder and primarily driving the decrease in net sales from Clinique, was a decline in our Asia travel retail business, primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the response to changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers. Partially offsetting the decrease in skin care net sales were higher net sales from The Ordinary, reflecting growth in every geographic region. • Our makeup net sales decreased 8% for the three months ended December 31, 2023, primarily driven by lower net sales from M·A·C and Estée Lauder. Net sales from M·A·C decreased, primarily driven by the phasing out of select products in preparation for new product launches and the unfavorable year-over-year impact resulting from 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. Net sales from Estée Lauder decreased, primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels and lower conversion of travelers to consumers. Partially offsetting the makeup net sales decrease were higher net sales from Clinique, primarily driven by new product launches and continued success of hero products. • Our fragrance net sales were flat for the three months ended December 31, 2023, primarily driven by higher net sales from Le Labo and Jo Malone London. Net sales from Le Labo increased, reflecting growth of hero products, new product launches and targeted expanded consumer reach due to the brand's launch in mainland China during the fiscal 2023 fourth quarter. The increase in net sales from Jo Malone London was primarily driven by new product launches. Partially offsetting the increase in fragrance net sales was lower net sales from Estée Lauder and the unfavorable year-over-year impact of residual net sales in fiscal 2023 related to the transition of licenses due to the license terminations related to certain of our designer fragrances effective June 30, 2022. The decrease in net sales from Estée Lauder for the three months ended December 31, 2023 was driven by an unfavorable impact due to timing of holiday shipments compared to the prior-year period. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. • Our hair care net sales declined 5% for the three months ended December 31, 2023, primarily attributable to lower net sales from Aveda, reflecting a decline in North America, in the salon channel and in our online business. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are 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 inclusion and 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 remained virtually flat for the three months ended December 31, 2023, primarily driven by higher net sales in Latin America, led by Brazil and Mexico, primarily driven by growth in makeup and benefiting from the success of holiday and key shopping moments. These increases were partially offset by lower net sales in the United States, primarily driven by the unfavorable year-over-year impact resulting from 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, partially offset by incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of $15 million. • Net sales in Europe, the Middle East & Africa decreased 13% for the three months ended December 31, 2023, primarily driven by our Asia travel retail business. The decline in our Asia travel retail business was primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the response to changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers. • Net sales in Asia/Pacific decreased 8% for the three months ended December 31, 2023, primarily reflecting the impacts from the ongoing softness in overall prestige beauty in mainland China, partially offset by higher net sales in Hong Kong SAR, primarily driven by the resumption of travel from mainland China to Hong Kong SAR due to the lifting of travel restrictions. Outlook We have experienced, and are expecting to continue to experience, challenges within our Asia travel retail business, as well as the ongoing softness in overall prestige beauty in mainland China, as well as further business disruption in Israel and other parts of the Middle East. Net sales from Israel and the Middle East accounted for approximately 2% of consolidated net sales in each of fiscal 2023 and the first quarter of fiscal 2024. These challenges are collectively expected to negatively impact net sales and profitability, including an unfavorable impact to our effective tax rate from changes to our geographical mix of earnings. We have also experienced, and are expecting to continue to experience, under absorption of manufacturing variances due to lower production volumes. As a result of continuing to operate at a reduced capacity, we expect to recognize the impact of reduced manufacturing volumes on our standard cost within cost of sales in the fiscal 2024 third quarter. Additionally, we are continually evaluating our inventory position and actions we may take to reduce the balance, which could result in increased charges in future periods. 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. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; 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. A decline in net sales and profitability may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets, potentially resulting in impairments. Cybersecurity Incident Disclosed in July 2023 As initially disclosed on July 18, 2023, we identified a cybersecurity incident in which an unauthorized third party gained access to some of our systems. Our investigation into the cybersecurity incident is complete. We determined that the unauthorized third party obtained some data from our systems, including consumer and employee data. We continue to take steps to enhance the security of our systems and coordinate with law enforcement authorities. We provided notification to governmental authorities in certain jurisdictions and also notified, and will continue to notify, affected individuals where required by law. The incident did not have a material impact on net sales and was $.01 and $.07 dilutive to earnings per common share for the three and six months ended December 31, 2023, respectively, and based on this information is not expected to have a material impact on net sales and is expected to be dilutive approximately $.07 to earnings per common share for the fiscal 2024 full year. Restructuring Program Component of the Profit Recovery Plan As previously communicated on November 1, 2023, we launched a Profit Recovery Plan to help progressively rebuild our profit margins in fiscal years 2025 and 2026. The Profit Recovery Plan is focused on rebuilding stronger, more sustainable profitability, supporting sales growth acceleration and increasing speed and agility. The plan is designed to improve gross margin, lower the cost base and reduce overhead expenses, while increasing investments in key consumer-facing activities. Upon completion of this plan, we expect to have improved our gross margin and expense base to drive greater operating leverage for the future. As a component of the Profit Recovery Plan, on February 5, 2024, we announced a two-year restructuring program. The restructuring program’s main focus includes the reorganization and rightsizing of certain areas of our business as well as simplification and acceleration of processes. We committed to this course of action on February 1, 2024. In connection with the restructuring program, at this time we estimate a net reduction in the range of approximately 1,800 to 3,000 positions globally, which is about 3-5% of our positions including temporary and part-time employees as of June 30, 2023. This reduction takes into account the elimination of some positions as well as retraining and redeployment of certain employees in select areas. We plan to substantially complete specific initiatives under the restructuring program through fiscal 2026. We expect that the restructuring program will result in restructuring and other charges totaling between $500 million and $700 million, before taxes, consisting of employee-related costs, contract terminations, asset write-offs and other costs associated with implementing these initiatives. Once fully implemented, we expect the restructuring program to yield annual target gross benefits of between $350 million and $500 million, before taxes, a portion of which is expected to be reinvested in consumer-facing activities. The net benefits are in addition to the between $800 million and $1,000 million previously communicated as part of the Profit Recovery Plan. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NET SALES Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 4,279 $ 4,620 $ 7,797 $ 8,550 $ Change from prior-year period (341) (753) % Change from prior-year period (7) % (9) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency adjusting for returns associated with restructuring and other activities (8) % (9) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased during the three and six months ended December 31, 2023, primarily driven by declines in our Asia travel retail business, primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the response to changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers, as well as the impacts from the ongoing softness in overall prestige beauty in mainland China. The total net sales decrease was impacted by approximately $8 million of favorable and $3 million of unfavorable foreign currency translation for the three and six months ended December 31, 2023, 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, 2023 of $1 million, and for the three and six months ended December 31, 2022 of $1 million and $6 million, respectively. Reported net sales decreased 7% for the three months ended December 31, 2023, driven by the decrease from volume of 12%, partially offset by an increase from pricing of 4% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Reported net sales decreased 9% for the six months ended December 31, 2023, driven by the decrease from volume of 13%, partially offset by an increase from pricing of 3% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 2,173 $ 2,427 $ 3,813 $ 4,539 $ Change from prior-year period (254) (726) % Change from prior-year period (10) % (16) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (10) % (16) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 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 months ended December 31, 2023, reflecting lower net sales from Estée Lauder and Clinique, combined, of approximately $261 million. The decrease in net sales from Estée Lauder primarily reflected the impacts from the ongoing softness in overall prestige beauty in mainland China. Also contributing to the decrease in net sales from Estée Lauder and primarily driving the decrease in net sales from Clinique, was a decline in our Asia travel retail business. This decline was primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the response to changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers. Also contributing to the decline in net sales from Clinique was the impacts from the ongoing softness in overall prestige beauty in mainland China. Reported skin care net sales decreased for the six months ended December 31, 2023, reflecting lower net sales from Estée Lauder, La Mer, and Clinique, combined, of approximately $726 million, primarily driven by the declines in our Asia travel retail business, primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the response to changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers, as well as declines in mainland China, reflecting the impacts from the ongoing softness in overall prestige beauty. Partially offsetting these decreases in skin care net sales for the three and six months ended December 31, 2023 were higher net sales from The Ordinary, driven by growth in every geographic region, reflecting continued success of hero products, new product launches and successful performance during holiday and key shopping moments. The skin care net sales decrease was impacted by approximately $1 million and $18 million of unfavorable foreign currency translation for the three and six months ended December 31, 2023, respectively. Reported skin care net sales decreased 10% for the three months ended December 31, 2023, driven by the decrease from volume of 16%, partially offset by an increase from pricing of 6%, due to the favorable impact from strategic pricing actions and changes in mix. Reported skin care net sales decreased 16% for the six months ended December 31, 2023, driven by the decrease from volume of 19%, partially offset by an increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 1,167 $ 1,263 $ 2,229 $ 2,320 $ Change from prior-year period (96) (91) % Change from prior-year period (8) % (4) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (8) % (4) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 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, 2023, reflecting lower net sales from M·A·C and Estée Lauder, combined, of approximately $101 million and $123 million, respectively. In both periods, net sales from M·A·C decreased, primarily due to the phasing out of select products in preparation for new product launches and the unfavorable year-over-year impact resulting from 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. Also contributing to the decrease in net sales from M·A·C and primarily driving the decrease in net sales from Estée Lauder for the three and six months ended December 31, 2023 was a decline in our Asia travel retail business. This decline was primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels and lower conversion of travelers to consumers. The decrease in net sales from M·A·C and Estée Lauder were partially offset in both periods by the success of new product launches. Partially offsetting the makeup net sales decrease for the three and six months ended December 31, 2023 were higher net sales from Clinique, primarily driven by continued success of hero products and new product launches. The makeup net sales decrease was impacted by approximately $6 million and $10 million of favorable foreign currency translation for the three and six months ended December 31, 2023, respectively. Reported makeup net sales decreased 8% for the three months ended December 31, 2023, driven by a decrease from volume of 11%, partially offset by the increase from pricing of 2% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Reported makeup net sales decreased 4% for the six months ended December 31, 2023, driven by a decrease from volume of 7%, partially offset by the increase from pricing of 3% due to the favorable impact from strategic pricing actions, partially offset by changes in mix. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 737 $ 734 $ 1,373 $ 1,330 $ Change from prior-year period 3 43 % Change from prior-year period — % 3 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency — % 3 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 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 were flat for the three months ended December 31, 2023, primarily reflecting higher net sales from Le Labo and Jo Malone London, combined, of approximately $29 million, and increased for the six months ended December 31, 2023, primarily reflecting higher net sales from Le Labo, Jo Malone London and TOM FORD, combined, of approximately $70 million. Net sales from Le Labo increased in both periods, reflecting growth of hero products, including the successful City Exclusives collection, new product launches, successful performance during holiday and key shopping moments and targeted expanded consumer reach due to the brand's launch in mainland China during the fiscal 2023 fourth quarter. The increase in net sales from Jo Malone London for the three and six months ended December 31, 2023, was driven by new product launches and successful performance during holiday and key shopping moments. The increase in net sales from TOM FORD for the six months ended December 31, 2023, reflected the continued success of Signature and Private Blend fragrances and expanded distribution. Partially offsetting the increases in fragrance net sales for the three and six months ended December 31, 2023 were lower net sales from Estée Lauder and the unfavorable year-over-year impact of residual net sales in fiscal 2023 related to the transition of licenses due to the license terminations related to certain of our designer fragrances effective June 30, 2022, combined, of approximately $36 million and $44 million, respectively. The decrease in net sales from Estée Lauder for the three months ended December 31, 2023 was driven by an unfavorable impact due to timing of holiday shipments compared to the prior-year period. The decrease in net sales from Estée Lauder for the six months ended December 31, 2023 was primarily driven by business disruptions in Israel and other parts of the Middle East. Fragrance net sales were impacted by approximately $2 million and $3 million of favorable foreign currency translation for the three and six months ended December 31, 2023, respectively. Reported fragrance net sales were flat for the three months ended December 31, 2023, driven by the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. This increase was partially offset by the decrease from volume of 4%. Reported fragrance net sales increase 3% for the six months ended December 31, 2023, driven by the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix. This increase was partially offset by the decrease from volume of 1%. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 173 $ 183 $ 321 $ 340 $ Change from prior-year period (10) (19) % Change from prior-year period (5) % (6) % 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 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported hair care net sales decreased for the three and six months ended December 31, 2023, driven by lower net sales from Aveda, primarily reflecting a decline in North America, in the salon channel and in our online business. The hair care net sales decrease was impacted by approximately $1 million and $2 million of favorable foreign currency translation for the three and six months ended December 31, 2023, respectively. Reported hair care net sales decreased 5% for the three months ended December 31, 2023, driven by the decrease from volume of 12%. This decrease was partially offset by the increase from pricing of 6%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact of foreign currency translation of 1%. Reported hair care net sales decreased 6% for the six months ended December 31, 2023, driven by the decrease from volume of 11%. This decrease was partially offset by the increase from pricing of 5%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact of foreign currency translation of 1%. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions We strategically time our new product launches by geographic market, which may account for differences in regional sales growth. The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 1,242 $ 1,235 $ 2,450 $ 2,358 $ Change from prior-year period 7 92 % Change from prior-year period 1 % 4 % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency 1 % 4 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The increase in reported net sales in The Americas for the three months ended December 31, 2023 was primarily driven by an increase in net sales in Latin America, led by Brazil and Mexico, of approximately $19 million. The increase in net sales in Brazil and Mexico was led by growth in makeup and benefited from the success of holiday and key shopping moments. Partially offsetting the increase in net sales in The Americas for the three months ended December 31, 2023 was a decrease in net sales in the United States, primarily driven by the unfavorable year-over-year impact resulting from 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, partially offset by incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of $15 million. The increase in reported net sales in The Americas for the six months ended December 31, 2023 was driven primarily by increased net sales in the United States, Brazil and Mexico, combined, of approximately $80 million. The increase in net sales in the United States primarily reflected strong performance by The Ordinary, as well as growth in fragrance, led by Jo Malone London, TOM FORD, and Le Labo, and incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of $32 million. Partially offsetting the increase in net sales in the United States was the unfavorable year-over-year impact resulting from 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 increase in net sales in Brazil and Mexico was led by growth in makeup and benefited from the success of holiday and key shopping moments. Net sales in The Americas were impacted by approximately $2 million of unfavorable foreign currency translation for the six months ended December 31, 2023. Reported net sales in The Americas increased 1% for the three months ended December 31, 2023, driven by the impact from the royalty revenue from the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of 1% and the increase from volume of 1%. These increases were partially offset by a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by strategic pricing actions. Reported net sales in The Americas increased 4% for the six months ended December 31, 2023, driven by the increase from volume of 3% and the impact from the royalty revenue from the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of 1%. The impact from pricing was virtually flat, due to the unfavorable impact from changes in mix, offset by strategic pricing actions. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 1,589 $ 1,816 $ 2,841 $ 3,498 $ Change from prior-year period (227) (657) % Change from prior-year period (13) % (19) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (14) % (20) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 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, 2023, primarily driven by lower net sales from our Asia travel retail business. The decrease in net sales from our Asia travel retail business was primarily due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers. While these efforts continue, as a result of actions taken to date our retailer inventory levels have decreased. Partially offsetting the decrease in Europe, the Middle East & Africa for the six months ended December 31, 2023 were higher net sales in the United Kingdom, primarily driven by strong performance by The Ordinary. Net sales in Europe, the Middle East & Africa were impacted by approximately $23 million and $52 million of favorable foreign currency translation for the three and six months ended December 31, 2023, respectively. Reported net sales in Europe, the Middle East & Africa decreased 13% for the three months ended December 31, 2023, driven by the decrease from volume of 21%. This decrease was partially offset by the increase from pricing of 7%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact from foreign currency translation of 1%. Reported net sales in Europe, the Middle East & Africa decreased 19% for the six months ended December 31, 2023, driven by the decrease from volume of 23%. This decrease was partially offset by the increase from pricing of 3%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact from foreign currency translation of 1%. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Net sales $ 1,449 $ 1,570 $ 2,507 $ 2,700 $ Change from prior-year period (121) (193) % Change from prior-year period (8) % (7) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (7) % (5) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales decreased in Asia/Pacific for the three and six months ended December 31, 2023, primarily reflecting the impacts from the ongoing softness in overall prestige beauty in mainland China. Partially offsetting the net sales decrease in Asia/Pacific for the three and six months ended December 31, 2023 was an increase in net sales in Hong Kong SAR, primarily driven by the resumption of travel from mainland China to Hong Kong SAR due to the lifting of travel restrictions. Net sales in Asia/Pacific were impacted by approximately $15 million and $53 million of unfavorable foreign currency translation for the three and six months ended December 31, 2023, respectively. Reported net sales in Asia/Pacific decreased 8% for the three months ended December 31, 2023, driven by the decrease from volume of 13% and the unfavorable impact from foreign currency translation of 1%. Partially offsetting these decreases was the increase from pricing of 6%, due to the favorable impact from strategic pricing actions and changes in mix. Reported net sales in Asia/Pacific decreased 7% for the six months ended December 31, 2023, driven by the decrease from volume of 12% and the unfavorable impact from foreign currency translation of 2%. Partially offsetting these decreases was the increase from pricing of 7%, due to the favorable impact from strategic pricing actions and changes in mix. GROSS MARGIN Gross margin decreased to 73.0% and 71.5% for the three and six months ended December 31, 2023, respectively, as compared with 73.6% and 73.8% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2023 Three Months Ended Six Months Ended Mix of business 65 (10) Obsolescence charges (25) (65) Manufacturing costs and other (20) (70) Foreign exchange transactions (80) (85) Total (60) (230) The decrease in gross margin for the three months ended December 31, 2023 reflected higher obsolescence charges, primarily due to excess inventory on hand, both driven by the lower than expected demand primarily within our travel retail business and mainland China, and the unfavorable impacts from higher manufacturing costs and other, driven primarily by the under absorption of manufacturing variances due to lower production volumes in the second half of fiscal 2023, partially offset by the favorable impact from a change in our manufacturing variance deferral period as well as favorability in freight and transportation costs. Partially offsetting the decrease in gross margin for the three months ended December 31, 2023 was a favorable impact from our mix of business, primarily driven by brand mix, reflecting the favorable impact from the shift of manufacturing production volume from third-party manufacturers to our own facilities for The Ordinary, and decreased sales of our lower margin skin care product sets compared to the prior-year period. These favorable impacts within our mix of business were partially offset by higher costs associated with promotional items. The decrease in gross margin for the six months ended December 31, 2023 reflected unfavorable impacts from higher manufacturing costs and other, driven primarily by the under absorption of manufacturing variances due to lower production volumes in the second half of fiscal 2023, partially offset by the favorable impact from a change in deferral period as well as favorability in freight and transportation costs, and higher obsolescence charges, primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING EXPENSES Operating expenses as a percentage of net sales was 59.6% and 62.9% for the three and six months ended December 31, 2023, respectively, as compared with 61.6% and 59.5% in the prior-year periods. Favorable (Unfavorable) Basis Points December 31, 2023 Three Months Ended Six Months Ended General and administrative expenses — (100) Advertising, merchandising, sampling and product development (50) (180) Selling (110) (140) Stock-based compensation (10) (60) Store operating costs (80) (90) Shipping (10) (10) Foreign exchange transactions — 10 Subtotal (260) (570) Other intangible asset impairments 450 240 Changes in fair value of acquisition-related stock options 10 (10) Total 200 (340) The favorable change in operating expense margin for the three months ended December 31, 2023 was partially offset by the impact of the decrease in net sales, as well as higher selling costs and store operating costs as we continue to invest in our business including through increased demonstration expenses and targeted expanded consumer reach, while also decreasing certain expenses through disciplined expense management. The unfavorable change in operating expense margin for the six months ended December 31, 2023 was driven by the impact of the decrease in net sales and higher general and administrative expenses, as well as higher selling expenses and store operating costs as we continue to invest in our business including through increased demonstration expenses and targeted expanded consumer reach, while also decreasing certain expenses through disciplined expense management. The increase in general and administrative expense, including stock-based compensation, reflected higher employee-related costs, primarily driven by the unfavorable year-over-year comparisons in the recognition of expenses and adjustments related to our performance share units, restricted stock units, as well as annual increases to salaries and wages, partially offset by lower incentive compensation. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING RESULTS Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income $ 574 $ 556 $ 672 $ 1,217 $ Change from prior-year period 18 (545) % Change from prior-year period 3 % (45) % Operating margin 13.4 % 12.0 % 8.6 % 14.2 % 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 (25) % (52) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. The increase in reported operating margin for the three months ended December 31, 2023 was primarily driven by a decrease in operating expense margin, partially offset by a decrease in net sales and a decrease in gross margin, discussed above. The decrease in reported operating margin for the six months ended December 31, 2023 was primarily driven by a decrease in net sales, decrease in gross margin and the increase 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 for the three and six months ended December 31, 2023 of $8 million and $10 million, and for the three and six months ended December 31, 2022 of $9 million and $15 million, respectively. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Product Categories Skin Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income $ 415 $ 433 $ 452 $ 969 $ Change from prior-year period (18) (517) % Change from prior-year period (4) % (53) % 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 (22) % (57) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care operating income decreased for the three months ended December 31, 2023, reflecting lower operating results from Estée Lauder and, to a lesser extent, Clinique, combined, of approximately $146 million, primarily driven by decreases in net sales, partially offset by disciplined advertising and promotional expense management. Reported skin care operating income decreased for the six months ended December 31, 2023, reflecting lower operating results from Estée Lauder and La Mer, combined, of approximately $523 million. The decrease in operating results from Estée Lauder was primarily driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management. Operating results from La Mer decreased, primarily driven by the decrease in net sales and investments in advertising and promotional activities. The decrease in skin care operating income for the three and six months ended December 31, 2023 also included higher obsolescence charges primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China, and for the six months ended December 31, 2023, higher employee-related costs, including an increase in stock-based compensation expense, partially offset by lower incentive compensation, as discussed above. Partially offsetting the decrease in skin care operating income for the three and six months ended December 31, 2023 was the favorable year-over-year impact of the fiscal 2023 second quarter other intangible asset impairment related to Dr.Jart+ of $100 million, as well as higher results from The Ordinary, primarily driven by an increase in net sales. Also contributing to the increase in operating results from The Ordinary for the three months ended December 31, 2023 was a decrease in cost of sales primarily driven by the favorable impact from the shift of manufacturing production volume from third-party manufacturers to our own facilities for The Ordinary, partially offset by higher shipping costs to support key shopping moments. The increase in operating results from The Ordinary for the six months ended December 31, 2023 also reflected an increase in advertising and promotional activities and general and administrative expenses as the brand continues to invest and support the growth of the business. 50 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income (loss) $ 30 $ (24) $ (10) $ (4) $ Change from prior-year period 54 (6) % 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 (64) % (100+)% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup operating income increased for the three months ended December 31, 2023 primarily reflecting the favorable year-over-year impact of other intangible asset impairments related to Too Faced and Smashbox of $107 million, and higher results from Clinique, primarily driven by an increase in net sales. Partially offsetting the increase in makeup operating income for the three months ended December 31, 2023 and primarily driving the decrease in makeup operating income for the six months ended December 31, 2023 were lower results from M·A·C and Estée Lauder, combined, of approximately $54 million and $86 million, respectively. In both periods, the decrease in operating income from M·A·C was primarily driven by a decrease in net sales, partially offset by lower advertising and promotional expenses, due to timing of advertising activities and disciplined expense management. Operating income from Estée Lauder decreased for the three and six months ended December 31, 2023, primarily driven by a decrease in net sales, partially offset by lower advertising and promotional expenses due to disciplined expense management. The increase in makeup operating income for the three months ended December 31, 2023 was also partially offset by higher obsolescence charges primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China. The decrease in makeup operating income for the six months ended December 31, 2023 also reflected higher obsolescence charges primarily due to excess inventory on hand driven by lower than expected demand primarily within our travel retail business and mainland China, as well as higher employee-related costs, including an increase in stock-based compensation expense, partially offset by lower incentive compensation, as discussed above. Partially offsetting the decrease in operating income in makeup for the six months ended December 31, 2023 was the favorable year-over-year impact of other intangible asset impairments related to Too Faced and Smashbox of $107 million and higher operating results from TOM FORD and Clinique, combined, of approximately $31 million. The increase in operating results from Clinique for the six months ended December 31, 2023 was primarily driven by the increase in net sales. The increase in operating results from TOM FORD for the six months ended December 31, 2023 reflected a decrease in royalty expense as a result of the fiscal 2023 fourth quarter acquisition of TOM FORD brand and an increase in net sales. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income $ 131 $ 153 $ 238 $ 277 $ Change from prior-year period (22) (39) % Change from prior-year period (14) % (14) % Reported fragrance operating income decreased for the three months ended December 31, 2023, reflecting the unfavorable year-over-year impact of residual net sales in the prior-year period associated with the license terminations related to certain of our designer fragrances effective June 30, 2022 and lower results from Estée Lauder, combined, of approximately $19 million. The decrease in operating income from Estée Lauder was primarily driven by decreases in net sales, partially offset by lower advertising and promotional expenses due to disciplined expense management. Partially offsetting the fragrance operating income decrease for the three months ended December 31, 2023 were higher results from Jo Malone London, primarily driven by an increase in net sales and lower advertising and promotional expenses due to the timing of advertising activities compared to the prior-year period and disciplined expense management. Reported fragrance operating income decreased for the six months ended December 31, 2023, reflecting lower results from Clinique and TOM FORD, combined, of approximately $19 million. The decrease in operating income from Clinique was primarily due to a decrease in net sales. The decrease in operating income from TOM FORD was primarily driven by an increase in cost of sales, due in part to an increase in promotional items, higher advertising and promotional activities to support key shopping moments and an increase in selling expenses due to increased demonstration expenses compared to the prior-year period, partially offset by a decrease in royalty expense as a result of the fiscal 2023 fourth quarter acquisition of TOM FORD brand and an increase in net sales. The decrease in fragrance operating income for the six months ended December 31, 2023 also reflected higher employee-related costs, including an increase in stock-based compensation expense, partially offset by lower incentive compensation, as discussed above. Partially offsetting the fragrance operating decrease for the six months ended December 31, 2023 was higher operating results from Le Labo, primarily driven by an increase in net sales, partially offset by higher advertising and promotional activities to support new product launches, an increase in selling expenses due to increased demonstration expenses compared to the prior-year period and increased store operating costs, due to targeted expanded consumer reach. Hair Care Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income (loss) $ (3) $ 4 $ (25) $ (8) $ Change from prior-year period (7) (17) % Change from prior-year period (100+)% (100+)% Reported hair care operating results decreased for the three and six months ended December 31, 2023, primarily driven by lower results from Aveda and Bumble and bumble, combined, of approximately $5 million and $12 million, respectively, reflecting decreases in net sales. Partially offsetting the lower results from Aveda in both periods was disciplined advertising and promotional expense management. Also contributing to the decrease in hair care operating income for the six months ended December 31, 2023 were higher employee-related costs, including an increase in stock-based compensation expense, partially offset by lower incentive compensation, as discussed above. 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Geographic Regions The Americas Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income (loss) $ (55) $ (85) $ (237) $ 40 $ Change from prior-year period 30 (277) % Change from prior-year period 35 % (100+)% 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 (100+)% (100+)% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating results increased in The Americas for the three months ended December 31, 2023, primarily reflecting the favorable year-over-year impact of other intangible asset impairments relating to Too Faced and Smashbox of $107 million during the fiscal 2023 second quarter, partially offset by lower intercompany royalty income of $85 million compared to the prior-year period, driven by a decrease in net sales in our travel retail business. Reported operating results decreased in The Americas for the six months ended December 31, 2023, primarily reflecting lower results from the United States, reflecting lower intercompany royalty income of $270 million compared to the prior-year period, driven by a decrease in net sales in our travel retail business, higher cost of sales due to higher obsolescence charges primarily due to excess inventory on hand driven by lower demand, partially offset by the favorable year-over-year impact of other intangible asset impairments relating to Too Faced and Smashbox of $107 million during the fiscal 2023 second quarter, and an increase in net sales. Partially offsetting the decrease in operating results in The Americas for the six months ended December 31, 2023, was higher results from Canada, driven by lower cost of sales reflecting the favorable impact from the shift of manufacturing production volume from third-party manufacturers to our own facilities for The Ordinary and an increase in net sales. Europe, the Middle East & Africa Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income $ 379 $ 409 $ 523 $ 743 $ Change from prior-year period (30) (220) % Change from prior-year period (7) % (30) % Reported operating income decreased in Europe, the Middle East & Africa for the three and six months ended December 31, 2023, primarily driven by lower results from our travel retail business, primarily due to the decrease in net sales, partially offset by the associated decrease in intercompany royalty expense to The Americas of $85 million and $270 million, respectively. 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Partially offsetting the decrease in operating income in Europe, the Middle East & Africa for the three months ended December 31, 2023 were higher results from Russia, primarily due to an increase in net sales as we continue selling a limited selection of products to retailers in Russia, as well as a decrease in expenses as a result of our scaled down operations, including the closure of all of our freestanding stores. Asia/Pacific Three Months Ended December 31 Six Months Ended December 31 ($ in millions) 2023 2022 2023 2022 As Reported: Operating income $ 258 $ 241 $ 396 $ 449 $ Change from prior-year period 17 (53) % Change from prior-year period 7 % (12) % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments (24) % (28) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 56 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating income increased in Asia/Pacific for the three months ended December 31, 2023, primarily driven by higher results in Korea, led by the Dr.Jart+ travel retail business in Korea, primarily reflecting the favorable year-over-year impact of the fiscal 2023 second quarter other intangible asset impairment relating to Dr. Jart+ of $100 million. Partially offsetting the increase in operating income for the three months ended December 31, 2023 was lower operating results from mainland China, primarily driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management. Reported operating income decreased in Asia/Pacific for the six months ended December 31, 2023, primarily driven by lower operating results from mainland China and Taiwan, combined, of approximately $145 million. The decrease in operating income in mainland China primarily reflects a decrease in net sales, partially offset by disciplined advertising and promotional expense management. Operating income in Taiwan decreased, primarily driven by a decrease in net sales. Partially offsetting the decrease in operating income in Asia/Pacific for the six months ended December 31, 2023 was higher operating results from Korea and Hong Kong SAR, combined, of approximately $112 million. The increase in operating income from Korea was driven by the favorable year-over-year impact of the fiscal 2023 second quarter other intangible asset impairment relating to Dr. Jart+ of $100 million, partially offset by a decrease in net sales from our Asia travel retail business due to the ongoing actions that we and our retailers have taken to reset retailer inventory levels, including the changes in government and retailer policies in the second half of fiscal 2023 related to unstructured market activity, and lower conversion of travelers to consumers. The higher operating results from Hong Kong SAR was primarily driven by the increase in net sales, partially offset by an increase in cost of sales, due in part to an increase in promotional items. INTEREST AND INVESTMENT INCOME Three Months Ended December 31 Six Months Ended December 31 (In millions) 2023 2022 2023 2022 Interest expense $ 98 $ 52 $ 193 $ 98 Interest income and investment income, net $ 40 $ 26 $ 81 $ 41 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Interest expense increased for the three and six months ended December 31, 2023, primarily reflecting a higher debt balance, due in part to the financing of our acquisition of the TOM FORD brand, including the issuance of commercial paper primarily in the second half of fiscal 2023, and the issuance of Senior Notes in May 2023. Also contributing to the increase in interest expense was higher interest rates compared to the prior-year period. Interest income and investment income, net increased in both periods, primarily reflecting higher interest rates compared to the prior-year period. 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 2023 2022 2023 2022 Effective rate for income taxes 37.6 % 25.4 % 36.3 % 23.9 % Basis-point change from the prior-year period 1,220 1,240 For the three months ended December 31, 2023, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company's foreign operations, due to the Company's geographical mix of earnings for fiscal 2024, and the unfavorable impact associated with previously issued stock-based compensation, partially offset by a decrease in state and local income taxes. For the six months ended December 31, 2023, the increase in the effective tax rate was primarily attributable to a higher effective tax rate on the Company's foreign operations, due to the Company's geographical mix of earnings for fiscal 2024, and the unfavorable impact associated with previously issued stock-based compensation. 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) 2023 2022 2023 2022 As Reported: Net earnings attributable to The Estée Lauder Companies Inc. $ 313 $ 394 $ 344 $ 883 $ Change from prior-year period (81) (539) % Change from prior-year period (21) % (61) % Diluted net earnings per common share $ .87 $ 1.09 $ .95 $ 2.45 % Change from prior-year period (20) % (61) % 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 (43) % (66) % (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. 55 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 2023 2022 Net sales, as reported $ 4,279 $ 4,620 $ (341) (7) % (8) % Returns associated with restructuring and other activities 1 1 — Net sales, as adjusted $ 4,280 $ 4,621 $ (341) (7) % (8) % Operating income, as reported $ 574 $ 556 $ 18 3 % 5 % Charges associated with restructuring and other activities 8 9 (1) Other intangible asset impairments — 207 (207) Change in fair value of acquisition-related stock options (5) (4) (1) Operating income, as adjusted $ 577 $ 768 $ (191) (25) % (24) % Diluted net earnings per common share, as reported $ .87 $ 1.09 $ (.22) (20) % (19) % Charges associated with restructuring and other activities .02 .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 $ .88 $ 1.54 $ (.66) (43) % (42) % 56 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 2023 2022 Net sales, as reported $ 7,797 $ 8,550 $ (753) (9) % (9) % Returns associated with restructuring and other activities 1 6 (5) Net sales, as adjusted $ 7,798 $ 8,556 $ (758) (9) % (9) % Operating income, as reported $ 672 $ 1,217 $ (545) (45) % (43) % Charges associated with restructuring and other activities 10 15 (5) Other intangible asset impairments — 207 (207) Change in fair value of acquisition-related stock options 3 (3) 6 Operating income, as adjusted $ 685 $ 1,436 $ (751) (52) % (51) % Diluted net earnings per common share, as reported $ 0.95 $ 2.45 $ (1.50) (61) % (60) % 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 $ .98 $ 2.91 $ (1.93) (66) % (65) % 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. 57 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) 2023 2022 Variance By Product Category: Skin Care $ 2,173 $ 2,427 $ (254) $ 1 $ (253) (10) % (10) % Makeup 1,167 1,263 (96) (6) (102) (8) (8) Fragrance 737 734 3 (2) 1 — — Hair Care 173 183 (10) (1) (11) (5) (6) Other 30 14 16 — 16 100+ 100+ 4,280 4,621 (341) (8) (349) (7) (8) Returns associated with restructuring and other activities (1) (1) — — — Total $ 4,279 $ 4,620 $ (341) $ (8) $ (349) (7) % (8) % By Region: The Americas $ 1,242 $ 1,235 $ 7 $ — $ 7 1 % 1 % Europe, the Middle East & Africa 1,589 1,816 (227) (23) (250) (13) (14) Asia/Pacific 1,449 1,570 (121) 15 (106) (8) (7) 4,280 4,621 (341) (8) (349) (7) (8) Returns associated with restructuring and other activities (1) (1) — — — Total $ 4,279 $ 4,620 $ (341) $ (8) $ (349) (7) % (8) % 58 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) 2023 2022 Variance By Product Category: Skin Care $ 3,813 $ 4,539 $ (726) $ 18 $ (708) (16) % (16) % Makeup 2,229 2,320 (91) (10) (101) (4) (4) Fragrance 1,373 1,330 43 (3) 40 3 3 Hair Care 321 340 (19) (2) (21) (6) (6) Other 62 27 35 — 35 100+ 100+ 7,798 8,556 (758) 3 (755) (9) (9) Returns associated with restructuring and other activities (1) (6) 5 — 5 Total $ 7,797 $ 8,550 $ (753) $ 3 $ (750) (9) % (9) % By Region: The Americas $ 2,450 $ 2,358 $ 92 $ 2 $ 94 4 % 4 % Europe, the Middle East & Africa 2,841 3,498 (657) (52) (709) (19) (20) Asia/Pacific 2,507 2,700 (193) 53 (140) (7) (5) 7,798 8,556 (758) 3 (755) (9) (9) Returns associated with restructuring and other activities (1) (6) 5 — 5 Total $ 7,797 $ 8,550 $ (753) $ 3 $ (750) (9) % (9) % 59 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) 2023 2022 Variance By Product Category: Skin Care $ 415 $ 433 $ (18) $ (100) $ (1) $ (119) (4) % (22) % Makeup 30 (24) 54 (107) — (53) 100+ (64) Fragrance 131 153 (22) — — (22) (14) (14) Hair Care (3) 4 (7) — — (7) (100+) (100+) Other 9 (1) 10 — — 10 100+ 100+ 582 565 17 $ (207) $ (1) $ (191) 3 % (25) % Charges associated with restructuring and other activities (8) (9) 1 Total $ 574 $ 556 $ 18 By Region: The Americas $ (55) $ (85) $ 30 $ (107) $ (1) $ (78) 35 % (100+)% Europe, the Middle East & Africa 379 409 (30) — — (30) (7) (7) Asia/Pacific 258 241 17 (100) — (83) 7 (24) 582 565 17 $ (207) $ (1) $ (191) 3 % (25) % Charges associated with restructuring and other activities (8) (9) 1 Total $ 574 $ 556 $ 18 60 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) 2023 2022 Variance By Product Category: Skin Care $ 452 $ 969 $ (517) $ (100) $ 6 $ (611) (53) % (57) % Makeup (10) (4) (6) (107) — (113) (100+) (100+) Fragrance 238 277 (39) — — (39) (14) (14) Hair Care (25) (8) (17) — — (17) (100+) (100+) Other 27 (2) 29 — — 29 100+ 100+ 682 1,232 (550) $ (207) $ 6 $ (751) (45) % (52) % Charges associated with restructuring and other activities (10) (15) 5 Total $ 672 $ 1,217 $ (545) By Region: The Americas $ (237) $ 40 $ (277) $ (107) $ 6 $ (378) (100+)% (100+)% Europe, the Middle East & Africa 523 743 (220) — — (220) (30) (30) Asia/Pacific 396 449 (53) (100) — (153) (12) (28) 682 1,232 (550) $ (207) $ 6 $ (751) (45) % (52) % Charges associated with restructuring and other activities (10) (15) 5 Total $ 672 $ 1,217 $ (545) 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, 2023, we had cash and cash equivalents of $3,939 million compared with $4,029 million at June 30, 2023. 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. In the fiscal 2024 fourth quarter, we anticipate purchasing the remaining interest in DECIEM, pursuant to the terms of the net Put (Call) Option for a purchase price based on the performance of DECIEM. This will result in the settlement of the DECIEM stock options and the redeemable noncontrolling interest balances. 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. During the fiscal 2023 fourth quarter, we changed our assertion regarding our ability and intent to indefinitely reinvest undistributed earnings from certain foreign subsidiaries. We continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings. We do not believe that continuing to reinvest these remaining applicable 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. 61 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Inflation impacted our overall operating results in the fiscal 2024 second quarter and we expect it to continue. Generally, we have plans to introduce new products at higher prices, increase prices and implement other operating efficiencies which we expect to offset some of these cost increases. 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 29, 2024, our long-term debt is rated A with a negative outlook by Standard & Poor’s and A1 with a negative outlook by Moody’s. 62 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt At December 31, 2023, our outstanding borrowings were as follows: ($ in millions) Long-term Debt Current Debt Total Debt 5.150% Senior Notes, due May 15, 2053 ("2053 Senior Notes") (1), (15) $ 590 $ — $ 590 3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (2), (15) 637 — 637 4.150% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (3), (15) 494 — 494 4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (4), (15) 454 — 454 3.700% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (5), (15) 247 — 247 6.000% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (6), (15) 295 — 295 5.75% Senior Notes, due October 15, 2033 (“October 2033 Senior Notes”) (7), (15) 198 — 198 4.650% Senior Notes, due May 15, 2033 ("May 2033 Senior Notes") (8), (15) 695 — 695 1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (9), (15) 555 — 555 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (10), (15) 604 — 604 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (11), (15) 644 — 644 4.375% Senior Notes, due May 15, 2028 ("2028 Senior Notes") (12), (15) 696 — 696 3.150% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (13), (15) 499 — 499 2.000% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (14), (15) — 499 499 Commercial paper (16) — 995 995 Other long-term borrowings 32 — 32 Other current borrowings — 6 6 $ 6,640 $ 1,500 $ 8,140 (1) Consists of $600 million principal, unamortized debt discount of $3 million and debt issuance costs of $7 million. (2) Consists of $650 million principal, unamortized debt discount of $7 million and debt issuance costs of $6 million. (3) Consists of $500 million principal, unamortized debt discount of $1 million and debt issuance costs of $5 million. (4) Consists of $450 million principal, net unamortized debt premium of $8 million and debt issuance costs of $4 million. (5) Consists of $250 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million. (6) Consists of $300 million principal, unamortized debt discount of $2 million and debt issuance costs of $3 million. (7) Consists of $200 million principal, unamortized debt discount of $1 million and debt issuance costs of $1 million. (8) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $4 million. (9) Consists of $600 million principal, unamortized debt discount of $3 million, debt issuance costs of $3 million and a $39 million loss to reflect the fair value of interest rate swaps. (10) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $3 million and a $92 million loss to reflect the fair value of interest rate swaps. (11) Consists of $650 million principal, unamortized debt discount of $4 million and debt issuance costs of $2 million. (12) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $3 million. (13) Consists of $500 million principal and debt issuance costs of $1 million. (14) Consists of $500 million principal and unamortized debt discount of $1 million. (15) The Senior Notes contain certain customary covenants, including limitations on indebtedness secured by liens. (16) Consists of $1,000 million principal and unamortized debt discount of $5 million. Total debt as a percent of total capitalization was 59% at December 31, 2023 and June 30, 2023. 63 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Six Months Ended December 31 (In millions) 2023 2022 Net cash flows provided by operating activities $ 937 $ 751 Net cash flows used for investing activities $ (557) $ (285) Net cash flows used for financing activities $ (489) $ (685) The change in net cash flows provided by operating activities was primarily driven by a favorable change in working capital, reflecting a favorable change in inventory and promotional merchandise and other accrued and noncurrent liabilities which includes the favorable impact from the settlement of foreign currency forward contracts not designated as hedging instruments compared to the prior-year period, partially offset by lower earnings before tax, excluding non-cash items. The change in net cash flows used for investing activities reflected an increase in capital expenditures, primarily driven by the investments related to our new manufacturing facility in Japan, and an unfavorable impact from the settlement of net investment hedges compared to the prior-year period, for which there is a partially offsetting favorable impact related to foreign currency forward contracts not designated as hedging instruments that is reflected in working capital noted above. The change in net cash flows used for financing activities primarily reflected an increase in proceeds from the issuance of short-term commercial paper compared to the prior-year period, a favorable impact in repayments of debt due to the repayment of the outstanding principal balance of our $250 million, 2.35% senior notes that matured during the fiscal 2023 first quarter and lower treasury stock repurchases compared to the prior-year period, partially offset by repayments of commercial paper during the fiscal 2024 second quarter. 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, 2023, 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, 2023. 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, 2023 . 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) . 64 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 $254 million and $265 million as of December 31, 2023 and June 30, 2023, respectively. This potential change does not consider our underlying foreign currency exposures. We also enter into cross-currency swap contracts to hedge the impact of foreign currency changes on certain intercompany foreign currency denominated debt. A hypothetical 10% weakening of the U.S. dollar against the foreign exchange rates for the currencies in our cross-currency swap contracts would have resulted in a net decrease in the fair value of our cross-currency swap contracts of approximately $49 million as of December 31, 2023 and June 30, 2023, respectively. 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 $53 million and $55 million as of December 31, 2023 and June 30, 2023, 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, 2023, 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 and other indefinite-lived intangible assets - impairment assessment, income taxes and asset acquisition. Since June 30, 2023, there have been no significant changes to the assumptions and estimates related to our critical accounting policies. 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 . 65 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; 66 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 technology, including operational technology and websites, on a timely basis and within our cost estimates; to maintain continuous operations of our new and existing information technology; and to secure the data and other information that may be stored in such technologies 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, 2023. 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.