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 months ended September 30, 2024 and 2023, 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 months ended September 30, 2023. See Note 13 – Segment Data and Related Information for additional details. Three Months Ended September 30 (In millions) 2024 2023 NET SALES By Product Category: Skin Care $ 1,529 $ 1,640 Makeup 1,038 1,062 Fragrance 630 636 Hair Care 139 148 Other 25 32 3,361 3,518 Returns associated with restructuring and other activities — — Net sales $ 3,361 $ 3,518 By Region (1) : The Americas $ 1,187 $ 1,208 Europe, the Middle East & Africa 1,230 1,252 Asia/Pacific 944 1,058 3,361 3,518 Returns associated with restructuring and other activities — — Net sales $ 3,361 $ 3,518 OPERATING INCOME (LOSS) By Product Category: Skin Care $ 117 $ 37 Makeup (185) (40) Fragrance 60 107 Hair Care (18) (22) Other 11 18 (15) 100 Charges associated with restructuring and other activities (106) (2) Operating income (loss) $ (121) $ 98 By Region (1) : The Americas $ (168) $ (182) Europe, the Middle East & Africa 90 144 Asia/Pacific 63 138 (15) 100 Charges associated with restructuring and other activities (106) (2) Operating income (loss) $ (121) $ 98 (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. 34 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table presents certain consolidated earnings (loss) data as a percentage of net sales: Three Months Ended September 30 2024 2023 Net sales 100.0 % 100.0 % Cost of sales 27.6 30.4 Gross profit 72.4 69.6 Operating expenses: Selling, general and administrative 68.4 66.8 Restructuring and other charges 2.9 — Talcum litigation settlement agreements 4.7 — Total operating expenses 76.0 66.8 Operating income (loss) (3.6) 2.8 Interest expense 2.7 2.7 Interest income and investment income, net 1.0 1.2 Other components of net periodic benefit cost 0.1 (0.1) Earnings (loss) before income taxes (5.4) 1.3 Provision (benefit) for income taxes (0.7) 0.3 Net earnings (loss) (4.6) 1.0 Net earnings attributable to redeemable noncontrolling interest — (0.1) Net earnings (loss) attributable to The Estée Lauder Companies Inc. (4.6) % 0.9 % Not adjusted for differences caused by rounding Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in mix and those due to strategic pricing actions, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation. The 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. 35 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 51 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 by deploying our brands to grow sales and pursue 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 with the aim of competing effectively for a greater share of a consumer's beauty routine. Elements of our strategy are described below, as well as in the Overview on page 31 of our Annual Report on Form 10-K for the year ended June 30, 2024. • Our skin care net sales decreased 7% for the three months ended September 30, 2024, primarily driven by lower net sales from La Mer and Estée Lauder. Net sales from La Mer decreased, primarily driven by lower net sales in our Asia travel retail business, due to lower replenishment orders reflecting (i) the challenging retail environment, including worsened consumer sentiment in China, (ii) travelers diverting spending towards experiences, which continued to dampen conversion for beauty products and (iii) inventory pressure given the further retail market deceleration. The decrease in net sales from Estée Lauder was primarily driven by lower net sales in mainland China, reflecting the impacts from further softening in overall prestige beauty in mainland China, due in large part to worsened consumer sentiment. • Our makeup net sales decreased 2% for the three months ended September 30, 2024, primarily reflecting lower net sales from M·A·C, and to a lesser extent, Too Faced and Smashbox. The decrease in net sales from M·A·C was primarily driven by lower net sales in North America, reflecting softness in the brand's retail sales, resulting in lower replenishment orders, and lower net sales in the Middle East reflecting ongoing business disruption. Partially offsetting the decrease in makeup net sales was higher net sales from Clinique and, to a lesser extent, Estée Lauder. • Our fragrance net sales decreased 1% for the three months ended September 30, 2024, reflecting lower net sales from TOM FORD, Clinique, and Estée Lauder. Net sales from TOM FORD decreased, primarily driven by lower net sales in North America, reflecting softness in the brand's retail sales, resulting in lower replenishment orders. The decrease in net sales from Clinique reflected lower replenishment orders in our global travel retail business and in other parts of Europe, the Middle East & Africa primarily due to lower demand. Net sales from Estée Lauder decreased, primarily driven by lower net sales across our product portfolio. Partially offsetting the decrease in fragrance net sales were higher net sales from Le Labo and Kilian Paris. • Our hair care net sales decreased 6% for the three months ended September 30, 2024, primarily attributable to lower net sales from Aveda and to a lesser extent, The Ordinary. The decrease in net sales from Aveda was primarily driven by the timing of shipments and continued softness in our North America salon channel and our direct-to-consumer business. 36 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are 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 continually 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 strive to strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets. • Net sales in The Americas decreased 2% for the three months ended September 30, 2024, primarily reflecting lower net sales in North America and Mexico. The decrease in net sales in North America reflected the challenges from M·A·C, Aveda, TOM FORD, Too Faced and Smashbox. Partially offsetting these pressures in North America was the launch of seven brands to-date in Amazon's U.S. Beauty store. Net sales in Mexico decreased, primarily driven by the unfavorable impact of foreign currency translation. • Net sales in Europe, the Middle East & Africa decreased 2% for the three months ended September 30, 2024, primarily driven by lower net sales from our Asia travel retail business and the United Kingdom. Asia travel retail net sales declined, due to lower replenishment orders reflecting (i) the challenging retail environment, including worsened consumer sentiment in China, (ii) travelers diverting spending towards experiences, which continued to dampen conversion for beauty products and (iii) inventory pressure given the further retail market deceleration. Partially offsetting the decrease in net sales in Europe, the Middle East & Africa were higher net sales in Germany, the Nordic countries and Russia. • Net sales in Asia/Pacific decreased 11% for the three months ended September 30, 2024, primarily driven by lower net sales from mainland China and Hong Kong SAR, reflecting worsened consumer sentiment. This drove further softening in overall prestige beauty in mainland China and low conversion rates among traveling consumers in Hong Kong SAR. Outlook We have experienced challenges within our business, including in our Asia travel retail business, and we expect volatility and uncertainty to continue including inventory pressure in Asia travel retail given the further retail market deceleration. We have experienced, and are expecting to continue to experience, weakness in overall prestige beauty due in large part to worsened consumer sentiment in China, which is also expected to impact Asia travel retail. Looking ahead, we are cautiously optimistic about the potential medium- to long-term growth opportunities presented by the new economic stimulus measures in China, but volatility and uncertainty remain elevated in the near-term. In North America, we are experiencing ongoing competitive pressures along with the continued slowdown in prestige beauty growth. We also expect further business disruption in Israel and other parts of the Middle East. Net sales from Israel and the Middle East accounted for approximately 2% and 3% of consolidated net sales in fiscal 2024 and the first quarter of fiscal 2025, respectively. These challenges are collectively expected to impact net sales and profitability, including impacts to our effective tax rate from changes to our geographical mix of earnings. We believe that the best way to increase long-term stockholder value is to provide superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices. Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable. We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth. We continue to monitor the effects of the global macro environment, including the risk of recession; currency volatility; inflationary pressures; supply chain challenges; social and political issues; competitive pressures; legal and regulatory matters, including the imposition of tariffs and sanctions; geopolitical tensions; and global security issues. For example, the geopolitical tensions between the United States and China 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, and the impact of changes being made in the organization, including those related to the Profit Recovery and Growth Plan. Declines 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. 37 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Restructuring Program Component of the Profit Recovery and Growth Plan As previously communicated on November 1, 2023, we launched the Profit Recovery and Growth Plan ("PRGP"), to help progressively rebuild our profit margins in fiscal years 2025 and 2026. The PRGP 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 PRGP, 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, as of September 30, 2024, we continue to 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 of the PRGP, which includes the restructuring program, are expected to be between $1,100 million and $1,400 million. Further information about the Restructuring Program Component of the Profit Recovery and Growth Plan, is described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein. Talcum Litigation Settlement Agreements From the end of August 2024 through October 2024, we reached agreements with certain plaintiff law firms (collectively, the “talcum litigation settlement agreements”) for: (i) the resolution of pending cosmetic talcum powder matters handled by those firms as well as (ii) a process for resolving potential future cosmetic talcum powder claims expected to be brought on behalf of plaintiffs by those firms from January 1, 2025 through December 31, 2029, with annual capped amounts per year for each participating law firm. To account for the talc litigation settlement agreements, we recorded a charge of $159 million for the three months ended September 30, 2024 for the amount agreed to settle these current and potential future claims. Further information about the talcum litigation settlement agreements, is described in Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies herein. 38 Table of Contents THE ESTÉE LAUDER COMPANIES INC. NET SALES Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 3,361 $ 3,518 $ Change from prior-year period (157) % Change from prior-year period (4) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (5) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased for the three months ended September 30, 2024, reflecting a decrease in net sales in all product categories, primarily driven by skin care. The decrease in skin care net sales was primarily driven by lower net sales from La Mer and Estée Lauder. By region, reported net sales decreased for the three months ended September 30, 2024, reflecting lower net sales across all regions, primarily driven by Asia/Pacific. The decrease in net sales in Asia/Pacific was primarily driven by lower net sales from mainland China and Hong Kong SAR. Reported net sales were impacted by approximately $18 million of favorable foreign currency translation for the three months ended September 30, 2024. Reported net sales decreased 4% for the three months ended September 30, 2024, driven by the decrease from volume of 8%. Partially offsetting this decrease was an increase from pricing of 3% due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact of foreign currency translation of 1%. Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business. For the three months ended September 30, 2024 and 2023, there were no returns associated with restructuring and other activities. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 1,529 $ 1,640 $ Change from prior-year period (111) % Change from prior-year period (7) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (8) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 39 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported skin care net sales decreased for the three months ended September 30, 2024, reflecting lower net sales from La Mer and Estée Lauder, combined, of approximately $117 million. Net sales from La Mer decreased, primarily driven by declines in our Asia travel retail business, due to lower replenishment orders reflecting (i) the challenging retail environment, including worsened consumer sentiment in China, (ii) travelers diverting spending towards experiences, which continued to dampen conversion for beauty products and (iii) inventory pressure given the further retail market deceleration. The decrease in net sales from Estée Lauder was primarily driven by declines in mainland China, reflecting the impacts from further softening in overall prestige beauty in mainland China, due in large part to worsened consumer sentiment. Skin care net sales were impacted by approximately $13 million of favorable foreign currency translation for the three months ended September 30, 2024. Reported skin care net sales decreased 7% for the three months ended September 30, 2024, driven by the decrease from volume of 8%. Partially offsetting this decrease was an increase from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact of foreign currency translation of 1%. Makeup Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 1,038 $ 1,062 $ Change from prior-year period (24) % Change from prior-year period (2) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (2) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup net sales decreased for the three months ended September 30, 2024, reflecting lower net sales from M·A·C, and to a lesser extent, Too Faced and Smashbox, combined, of approximately $55 million. The decrease in net sales from M·A·C was primarily driven by lower net sales in North America, reflecting softness in the brand's retail sales, resulting in lower replenishment orders, and lower net sales in the Middle East reflecting ongoing business disruption. Net sales from Too Faced decreased, primarily driven by North America, reflecting lower net sales in the lip and mascara subcategories. Net sales from Smashbox decreased, primarily driven by North America, reflecting lower net sales in the foundation, concealer and lip subcategories. Partially offsetting the makeup net sales decrease for the three months ended September 30, 2024 were higher net sales from Clinique and, to a lesser extent, Estée Lauder, combined, of approximately $34 million. Net sales from Clinique increased across all geographic regions, driven by the success of hero products. Net sales from Estée Lauder increased, primarily driven by higher net sales in the foundation, concealer and corrector subcategories. Makeup net sales were impacted by approximately $2 million of favorable foreign currency translation for the three months ended September 30, 2024. Reported makeup net sales decreased 2% for the three months ended September 30, 2024, driven by the decrease from volume of 9%. Partially offsetting this decrease was an increase from pricing of 6% due to the favorable impact from strategic pricing actions and changes in mix. 40 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Fragrance Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 630 $ 636 $ Change from prior-year period (6) % Change from prior-year period (1) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (1) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported fragrance net sales decreased for the three months ended September 30, 2024, reflecting lower net sales from TOM FORD, Clinique, and Estée Lauder, combined, of approximately $29 million. Net sales from TOM FORD decreased, primarily driven by lower net sales in North America, reflecting softness in the brand's retail sales, resulting in lower replenishment orders. The decrease in net sales from Clinique was primarily due to lower replenishment orders in our global travel retail business and in other parts of Europe, the Middle East & Africa, primarily due to lower demand. Net sales from Estée Lauder decreased, primarily driven by lower net sales across its fragrance portfolio. Partially offsetting the reported fragrance net sales decrease for the three months ended September 30, 2024, were higher net sales from Le Labo and Kilian Paris, combined, of approximately $18 million. Net sales from Le Labo increased, primarily reflecting targeted expanded consumer reach, growth of hero products and new product launches. The increase in net sales from Kilian Paris reflected the success of new product launches. Fragrance net sales were impacted by approximately $3 million of favorable foreign currency translation for the three months ended September 30, 2024. Reported fragrance net sales decreased 1% for the three months ended September 30, 2024, driven by the decrease from volume of 7%. Partially offsetting this decrease was an increase from pricing of 6% due to the favorable impact from strategic pricing actions and changes in mix. Hair Care Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 139 $ 148 $ Change from prior-year period (9) % Change from prior-year period (6) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (6) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 41 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported hair care net sales decreased for the three months ended September 30, 2024, driven by lower net sales from Aveda and to a lesser extent, The Ordinary, combined, of approximately $9 million. The decrease in net sales from Aveda was driven by the timing of shipments and continued softness in our North America salon channel and our direct-to-consumer business. Reported hair care net sales decreased 6% for the three months ended September 30, 2024, driven by the decrease from volume of 5% and a decrease from pricing of 1%, due to changes in mix, partially offset by the favorable impact from strategic pricing actions. Geographic Regions The Americas Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 1,187 $ 1,208 $ Change from prior-year period (21) % Change from prior-year period (2) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (1) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales in The Americas decreased for the three months ended September 30, 2024, primarily reflecting lower net sales in North America and Mexico, combined, of approximately $18 million. The decrease in net sales in North America reflected the challenges from M·A·C, Aveda, TOM FORD, Too Faced and Smashbox as previously mentioned. Partially offsetting these pressures in North America was the launch of seven brands to-date in Amazon's U.S. Premium Beauty store. Net sales in Mexico decreased, primarily driven by the unfavorable impact of foreign currency translation. Net sales in The Americas were impacted by approximately $11 million of unfavorable foreign currency translation for the three months ended September 30, 2024. Reported net sales in The Americas decreased 2% for the three months ended September 30, 2024, driven by the decrease from volume of 6% and the unfavorable impact from foreign currency translation of 1%. These decreases were partially offset by an increase from pricing of 5%, due to the favorable impact of strategic pricing actions. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 1,230 $ 1,252 $ Change from prior-year period (22) % Change from prior-year period (2) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (4) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 42 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Reported net sales decreased in Europe, the Middle East & Africa for the three months ended September 30, 2024, primarily reflecting lower net sales from our Asia travel retail business, due to lower replenishment orders reflecting (i) the challenging retail environment, including worsened consumer sentiment in China, (ii) travelers diverting spending towards experiences, which continued to dampen conversion for beauty products and (iii) inventory pressure given the further retail market deceleration. Partially offsetting the decrease in Europe, the Middle East & Africa in fiscal 2024 was higher net sales in Germany, the Nordic countries and Russia, combined, of approximately $29 million. The increase in net sales from Germany was driven by the favorable year-over-year impact relating to the timing of shipments. Net sales from the Nordic countries increased, primarily driven by the favorable year-over-year impact relating to the expansion of The Ordinary towards the end of the fiscal 2024 first quarter. The increase in net sales from Russia was primarily driven by growth in fragrance and makeup. Net sales in Europe, the Middle East & Africa were impacted by approximately $23 million of favorable foreign currency translation for the three months ended September 30, 2024. Reported net sales in Europe, the Middle East & Africa decreased 2% for the three months ended September 30, 2024, driven by the decrease from volume of 4%, partially offset by the favorable impact from foreign currency translation of 2%. The impact of pricing was flat compared to the prior-year period. Asia/Pacific Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Net sales $ 944 $ 1,058 $ Change from prior-year period (114) % Change from prior-year period (11) % Non-GAAP Financial Measure (1) : % Change from prior-year period in constant currency (11) % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported net sales decreased in Asia/Pacific for the three months ended September 30, 2024, primarily driven by lower net sales from mainland China, and Hong Kong SAR, combined, of approximately $105 million, reflecting worsened consumer sentiment. This drove further softening in overall prestige beauty in mainland China and low conversion rates among traveling consumers in Hong Kong SAR.. Net sales in Asia/Pacific were impacted by approximately $6 million of favorable foreign currency translation for the three months ended September 30, 2024. Reported net sales in Asia/Pacific decreased 11% for the three months ended September 30, 2024, driven by the decrease from volume of 15%. Partially offsetting this decrease was an increase from pricing of 4%, 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%. 43 Table of Contents THE ESTÉE LAUDER COMPANIES INC. GROSS MARGIN Gross margin increased to 72.4% for the three months ended September 30, 2024, as compared with 69.6% in the prior-year period. Favorable (Unfavorable) Basis Points September 30, 2024 Three Months Ended As Reported: Mix of business (60) Obsolescence charges 210 Manufacturing costs and other 150 Foreign exchange transactions 10 Charges associated with restructuring and other activities (30) As Reported Gross Margin Basis Point Variance 280 Non-GAAP Financial Measure Adjustments Charges associated with restructuring and other activities 30 Non-GAAP Gross Margin Basis Point Variance 310 The increase in gross margin for the three months ended September 30, 2024 was driven by lower obsolescence charges, due to a reduction in excess inventory. Also contributing to the increase in gross margin was the favorable impact from manufacturing costs and other, reflecting the impact in the three months ended September 30, 2024 from the recognition of manufacturing variances associated with reduced manufacturing volumes on our standard cost within cost of sales in the fiscal 2024 third quarter, as well as favorability in cost management, partially offset by the impact of inflation on our costs. These increases were partially offset by an unfavorable impact from our mix of business, driven by the impact of lower net sales, including the change in category mix reflecting a decrease in skin care net sales which typically have higher margins than other product categories. These increases in mix of business were partially offset by the benefit of strategic pricing actions. 44 Table of Contents THE ESTÉE LAUDER COMPANIES INC. OPERATING EXPENSES Operating expenses as a percentage of net sales was 76.0% for the three months ended September 30, 2024, as compared with 66.8% in the prior-year period. Favorable (Unfavorable) Basis Points September 30, 2024 Three Months Ended As Reported: General and administrative expenses (20) Advertising, merchandising, sampling and product development (30) Selling (120) Shipping 10 Store operating costs (30) Stock-based compensation — Charges associated with restructuring and other activities (290) Talcum litigation settlement agreements (470) Changes in fair value of acquisition-related stock options 30 As Reported Operating Expense Margin Basis Point Variance (920) Non-GAAP Financial Measure Adjustments: Impact of restructuring and other activities 290 Talcum litigation settlement agreements 470 Changes in fair value of acquisition-related stock options (30) Non-GAAP Operating Expense Margin Basis Point Variance (190) Higher selling expenses in the fiscal 2025 first quarter were driven by continued investments in our business, including in support of new product launches and targeted expanded consumer reach. OPERATING RESULTS Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating income (loss) $ (121) $ 98 $ Change from prior-year period (219) % Change from prior-year period (100+)% Operating margin (3.6) % 2.8 % 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, talcum litigation settlement agreements and the change in fair value of acquisition-related stock options 33 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. 45 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The decrease in reported operating margin for the three months ended September 30, 2024 was primarily driven by a decrease in net sales and an increase in operating expense margin, partially offset by an increase in gross margin, as 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 (loss) by Product Categories and Geographic Regions exclude the impact of charges associated with restructuring and other activities for the three months ended September 30, 2024 and 2023 of $106 million and $2 million, respectively. Product Categories Skin Care Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating income $ 117 $ 37 $ Change from prior-year period 80 % Change from prior-year period 100+% Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options 100+% (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported skin care operating income increased for the three months ended September 30, 2024, reflecting favorability in cost of sales across the category, including lower obsolescence charges compared to the prior-year period due to a reduction in excess inventory, as well as higher operating results from Clinique, primarily driven by a decrease in cost of sales, due in part, to a decrease in promotional items, and lower advertising and promotional expenses due to the timing of advertising and promotional activities compared to the prior-year period. Partially offsetting the increase in reported skin care operating income for the three months ended September 30, 2024 was lower operating results from La Mer, driven by a decrease in net sales, partially offset by lower cost of sales. 46 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Makeup Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating loss $ (185) $ (40) $ Change from prior-year period (145) % Change from prior-year period (100+)% Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of talcum litigation settlement agreements 35 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported makeup operating loss increased for the three months ended September 30, 2024, primarily reflecting the talcum litigation settlement agreements of $159 million, as well as lower operating results from M·A·C and Too Faced, combined, of approximately $23 million. The decrease in operating results from M·A·C was primarily driven by a decrease in net sales, partially offset by a decrease in cost of sales, including lower obsolescence charges compared to the prior-year period due to a reduction in excess inventory, and lower advertising and promotional expenses due to disciplined expense management and the timing of advertising and promotional activities compared to the prior-year period. Operating results from Too Faced decreased, primarily driven by a decrease in net sales. Partially offsetting the decrease in reported makeup operating results for the three months ended September 30, 2024 was higher operating results from Clinique, primarily driven by an increase in net sales. Fragrance Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating income $ 60 $ 107 $ Change from prior-year period (47) % Change from prior-year period (44) % Reported fragrance operating income decreased for the three months ended September 30, 2024, reflecting lower operating results from TOM FORD, and to a lesser extent, Jo Malone London, combined, of approximately $32 million. Operating income from TOM FORD decreased, primarily driven by a decrease in net sales, higher advertising and promotional activities to support new product launches and targeted expanded consumer reach, and higher selling expenses also driven by targeted expanded consumer reach. The decrease in operating results from Jo Malone London was primarily driven by an increase in selling expenses and store operating costs to support new product launches and targeted expanded consumer reach. 47 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Hair Care Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating loss $ (18) $ (22) $ Change from prior-year period 4 % Change from prior-year period 18 % Reported hair care operating loss decreased during the three months ended September 30, 2024, primarily reflecting lower cost of sales, including lower obsolescence charges compared to the prior-year period due to a reduction in excess inventory, lower general and administrative expenses, and a decrease in advertising and promotional activities, partially offset by a decrease in net sales. Geographic Regions The Americas Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating loss $ (168) $ (182) $ Change from prior-year period 14 % Change from prior-year period 8 % Non-GAAP Financial Measure (1) : % Change in operating income from the prior-year period adjusting for the impact of talcum litigation settlement agreements and change in fair value of acquisition-related stock options 95 % (1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 51 for reconciliations between non-GAAP financial measures and the most directly comparable U.S. GAAP measures. Reported operating loss in The Americas decreased for the three months ended September 30, 2024, primarily reflecting lower operating losses in North America, of approximately $20 million. The decrease in operating loss was primarily driven by lower cost of sales, including lower obsolescence charges compared to the prior-year period due to a reduction in excess inventory, and a favorable year-over-year impact relating to net intercompany activity, largely offset by the talcum litigation settlement agreements of $159 million. Partially offsetting the decrease in operating loss in The Americas for the three months ended September 30, 2024 was lower operating results in Mexico, reflecting a decrease in net sales and higher selling expenses, partially offset by lower cost of sales. 48 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Europe, the Middle East & Africa Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating income $ 90 $ 144 $ Change from prior-year period (54) % Change from prior-year period (38) % Reported operating income decreased in Europe, the Middle East & Africa for the three months ended September 30, 2024, primarily driven by lower results from our travel retail business and the United Kingdom, combined, of approximately $54 million. The decrease in operating income from our travel retail business was primarily due to a decrease in net sales and an unfavorable year-over-year impact of net intercompany activity, partially offset by disciplined advertising and promotional expense management. Operating income decreased in the United Kingdom, primarily driven by an increase in cost of sales, higher advertising and promotional expenses to support key campaigns, and an unfavorable year-over-year impact of net intercompany activity. Asia/Pacific Three Months Ended September 30 ($ in millions) 2024 2023 As Reported: Operating income $ 63 $ 138 $ Change from prior-year period (75) % Change from prior-year period (54) % Reported operating income decreased in Asia/Pacific for the three months ended September 30, 2024, primarily driven by lower results in mainland China and Hong Kong SAR, combined, of approximately $55 million. The decrease in operating results from mainland China was primarily driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management. Operating results in Hong Kong SAR decreased, primarily driven by a decrease in net sales. INTEREST AND INVESTMENT INCOME Three Months Ended September 30 (In millions) 2024 2023 Interest expense $ 92 $ 95 Interest income and investment income, net $ 35 $ 41 Interest expense decreased for the three months ended September 30, 2024, primarily reflecting a lower average debt balance compared to the prior-year period. Interest income and investment income, net decreased, primarily reflecting a lower average cash balance compared to the prior-year period, partially offset by higher interest rates compared to the prior-year period. 49 Table of Contents THE ESTÉE LAUDER COMPANIES INC. PROVISION FOR INCOME TAXES The provision or benefit 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 stock-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 stock-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 September 30 2024 2023 Effective rate for income taxes 13.3 % 21.7 % Basis-point change from the prior-year period (840) The decrease in the effective tax rate of 840 basis points was primarily attributable to the impact of the discrete treatment of the charge associated with the talcum litigation settlement agreements and charges associated with restructuring and other activities recorded in the first quarter of fiscal 2025. The loss before income taxes in the first quarter of fiscal 2025 increased the impact of these discrete items on the effective tax rate. NET EARNINGS (LOSS) ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC. Three Months Ended September 30 ($ in millions, except per share data) 2024 2023 As Reported: Net earnings (loss) attributable to The Estée Lauder Companies Inc. $ (156) $ 31 $ Change from prior-year period (187) % Change from prior-year period (100+)% Diluted net earnings (loss) per common share $ (.43) $ .09 % Change from prior-year period (100+)% 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, talcum litigation settlement agreements and the change in fair value of acquisition-related stock options 33 % (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. 50 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; talcum litigation settlement agreements; the change in fair value of acquisition-related stock options; and the effects of foreign currency translation. The following table provides 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 September 30 Variance % Change % Change in constant currency 2024 2023 Net sales, as reported $ 3,361 $ 3,518 $ (157) (4) % (5) % Returns associated with restructuring and other activities — — — Net sales, as adjusted $ 3,361 $ 3,518 $ (157) (4) % (5) % Operating income (loss), as reported $ (121) $ 98 $ (219) (100+)% (100+)% Charges associated with restructuring and other activities 106 2 104 Talcum litigation settlement agreements 159 — 159 Change in fair value of acquisition-related stock options — 8 (8) Operating income, as adjusted $ 144 $ 108 $ 36 33 % 23 % Diluted net earnings per common share, as reported $ (0.43) $ 0.09 $ (.52) (100+)% (100+)% Charges associated with restructuring and other activities .23 — .23 Talcum litigation settlement agreements .34 — .34 Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) — .02 (.02) Diluted net earnings per common share, as adjusted $ .14 $ 0.11 $ .03 33 % 7 % 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. 51 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table reconciles 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 September 30 ($ in millions) 2024 2023 Variance By Product Category: Skin Care $ 1,529 $ 1,640 $ (111) $ (13) $ (124) (7) % (8) % Makeup 1,038 1,062 (24) (2) (26) (2) (2) Fragrance 630 636 (6) (3) (9) (1) (1) Hair Care 139 148 (9) — (9) (6) (6) Other 25 32 (7) — (7) (22) (22) 3,361 3,518 (157) (18) (175) (4) (5) Returns associated with restructuring and other activities — — — — — Total $ 3,361 $ 3,518 $ (157) $ (18) $ (175) (4) % (5) % By Region: The Americas $ 1,187 $ 1,208 $ (21) $ 11 $ (10) (2) % (1) % Europe, the Middle East & Africa 1,230 1,252 (22) (23) (45) (2) (4) Asia/Pacific 944 1,058 (114) (6) (120) (11) (11) 3,361 3,518 (157) (18) (175) (4) (5) Returns associated with restructuring and other activities — — — — — Total $ 3,361 $ 3,518 $ (157) $ (18) $ (175) (4) % (5) % 52 Table of Contents THE ESTÉE LAUDER COMPANIES INC. The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of talcum litigation settlement agreements and the change in fair value of acquisition-related stock options: As Reported Add: Talcum litigation settlement agreements Add: Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted Three Months Ended September 30 ($ in millions) 2024 2023 Variance By Product Category: Skin Care $ 117 $ 37 $ 80 $ — $ (8) $ 72 100+% 100+% Makeup (185) (40) (145) 159 — 14 (100+) 35 Fragrance 60 107 (47) — — (47) (44) (44) Hair Care (18) (22) 4 — — 4 18 18 Other 11 18 (7) — — (7) (39) (39) (15) 100 (115) $ 159 $ (8) $ 36 (100+)% 33 % Charges associated with restructuring and other activities (106) (2) (104) Total $ (121) $ 98 $ (219) By Region: The Americas $ (168) $ (182) $ 14 $ 159 $ (8) $ 165 8 % 95 % Europe, the Middle East & Africa 90 144 (54) — — (54) (38) (38) Asia/Pacific 63 138 (75) — — (75) (54) (54) (15) 100 (115) $ 159 $ (8) $ 36 (100+)% 33 % Charges associated with restructuring and other activities (106) (2) (104) Total $ (121) $ 98 $ (219) 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 September 30, 2024, we had cash and cash equivalents of $2,350 million compared with $3,395 million at June 30, 2024. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis. The Tax Cuts and Jobs Act 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. We continue to analyze the indefinite reinvestment assertion on our applicable foreign earnings. We do not believe continuing to reinvest these 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. 53 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Inflation impacted our overall operating results in the fiscal 2025 first 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 October 24, 2024, our long-term debt is rated A with a negative outlook by Standard & Poor’s and A2 with a stable outlook by Moody’s. 54 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Debt At September 30, 2024, 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), (16) $ 591 $ — $ 591 3.125% Senior Notes, due December 1, 2049 (“2049 Senior Notes”) (2), (16) 637 — 637 4.150% Senior Notes, due March 15, 2047 (“2047 Senior Notes”) (3), (16) 494 — 494 4.375% Senior Notes, due June 15, 2045 (“2045 Senior Notes”) (4), (16) 454 — 454 3.700% Senior Notes, due August 15, 2042 (“2042 Senior Notes”) (5), (16) 247 — 247 6.000% Senior Notes, due May 15, 2037 (“2037 Senior Notes”) (6), (16) 295 — 295 5.000% Senior Notes, due February 14, 2034 ("2034 Senior Notes) (7), (16) 644 — 644 5.75% Senior Notes, due October 15, 2033 (“October 2033 Senior Notes”) (8), (16) 198 — 198 4.650% Senior Notes, due May 15, 2033 ("May 2033 Senior Notes") (9), (16) 695 — 695 1.950% Senior Notes, due March 15, 2031 ("2031 Senior Notes") (10), (16) 564 — 564 2.600% Senior Notes, due April 15, 2030 ("2030 Senior Notes") (11), (16) 623 — 623 2.375% Senior Notes, due December 1, 2029 (“2029 Senior Notes”) (12), (16) 644 — 644 4.375% Senior Notes, due May 15, 2028 ("2028 Senior Notes") (13), (16) 697 — 697 3.150% Senior Notes, due March 15, 2027 (“2027 Senior Notes”) (14), (16) 499 — 499 2.000% Senior Notes, due December 1, 2024 (“2024 Senior Notes”) (15), (16) — 500 500 Other long-term borrowings 29 — 29 Other current borrowings — 4 4 $ 7,311 $ 504 $ 7,815 (1) Consists of $600 million principal, unamortized debt discount of $3 million and debt issuance costs of $6 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 $650 million principal, unamortized debt discount of $2 million and debt issuance costs of $4 million. (8) Consists of $200 million principal, unamortized debt discount of $1 million and debt issuance costs of $1 million. (9) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $4 million. (10) Consists of $600 million principal, unamortized debt discount of $3 million, debt issuance costs of $2 million and a $31 million loss to reflect the fair value of interest rate swaps. (11) Consists of $700 million principal, unamortized debt discount of $1 million, debt issuance costs of $3 million and a $73 million loss to reflect the fair value of interest rate swaps. (12) Consists of $650 million principal, unamortized debt discount of $3 million and debt issuance costs of $3 million. (13) Consists of $700 million principal, unamortized debt discount of $1 million and debt issuance costs of $2 million. (14) Consists of $500 million principal and debt issuance costs of $1 million. (15) Consists of $500 million principal. (16) The Senior Notes contain certain customary covenants, including limitations on indebtedness secured by liens. Total debt as a percent of total capitalization was 61% and 59% at September 30, 2024 and June 30, 2024, respectively. 55 Table of Contents THE ESTÉE LAUDER COMPANIES INC. Cash Flows Three Months Ended September 30 (In millions) 2024 2023 Net cash flows used for operating activities $ (670) $ (408) Net cash flows used for investing activities $ (160) $ (295) Net cash flows used for financing activities $ (226) $ (219) The change in net cash flows used for operating activities was primarily driven by the loss before tax for the three months ended September 30, 2024, excluding non-cash items, and an unfavorable change in operating assets and liabilities variances, reflecting an unfavorable change in other accrued and noncurrent liabilities, accounts payable and inventory and promotional merchandise, partially offset by a favorable change in accounts receivable. The change in net cash flows used for investing activities was primarily driven by a favorable year-over-year impact from payments made relating to the manufacturing facility in Japan, near Tokyo in the prior-year period. Dividends For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2024, 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, 2024. 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, 2024 . 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 (Fair Value Hedges, Cash Flow Hedges and Net Investment Hedges) . Credit Risk For a discussion of credit risk, see Notes to Consolidated Financial Statements, Note 4 – Derivative Financial Instruments (Credit Risk) . 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 $375 million and $371 million as of September 30, 2024 and June 30, 2024, 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 at each of September 30, 2024 and June 30, 2024. 56 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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 $49 million and $48 million as of September 30, 2024 and June 30, 2024, 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, 2024, 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. GAAP. 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 and income taxes. Since June 30, 2024, 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 . 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; 57 Table of Contents THE ESTÉE LAUDER COMPANIES INC. (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, government economic policies, 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) 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; (12) 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; (13) changes in product mix to products which are less profitable; (14) 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; (15) 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; (16) 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; (17) the timing and impact of acquisitions, investments and divestitures; and (18) 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, 2024. 58 Table of Contents THE ESTÉE LAUDER COMPANIES INC. 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.