雅詩蘭黛 (EL) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Companies's fiscal 2002 second-quarter conference call.

Today's call is being recorded and webcast.

For opening remarks and introductions, I would like to turn call over to Vice President of Investor Relations Mr. Dennis D'Andrea.

Please go ahead, sir.

Good morning, everyone and thank you for joining us to discuss our second-quarter results.

On the call today are Fred Langhammer President and Chief Executive Officer.

William Lauder, Chief Operating Officer and Richard Kunes, Senior Vice President and Chief Financial Officer.

As you know, William became the Chief Operating Officer on January 1.

Some of our remarks today contain forward-looking statements and actual results could differ from those that we expect.

In addition to risks described on this call, you will find additional factors that could cause actual results to differ materially from these forward-looking statements in our press release and in our 10-Q which we expect to file today.

And I will turn the call over to Fred now.

Thank you, Dennis.

Good morning, ladies and gentlemen.

I am glad that you have an opportunity to join us today.

William and I are here in Seattle and it is 6:30 in the morning but we are in great spirits.

It is a great start to the New Year with the quarter we are reporting.

By now, you will have read our press release and you will see that we had an excellent quarter.

This is particularly satisfying given the consumer sentiment in the U.S. and the uncertainty around the globe.

We went into the holiday season with confidence based on strong marketing programs, some extra AMP spending, new product ammunition, and a highly motivated sales organization and came out with strong growth around the globe.

We achieved this despite the backdrop of of negatives, including the continued soft economy in the key market here in the U.S., also in Germany and Japan.

And also a lackluster global fragrance industry and social and political upheaval in Venezuela which virtually cut our business in half down there.

New products, together with gift sets, attractive Christmas presentations at the counter all drove sales.

Sales grew in all product categories and geographic regions.

Let me give you some details.

Net sales for the quarter on a reported basis increased 9% to $1.41 billion from $1.3 billion in last year's quarter.

Constant currency sales before the impact of foreign currency, translation rolls a healthy 6%.

Net earnings for the quarter rose 22% to $109.6 million compared to $90.1 million in a prior year quarter, reflecting modest gross margin improvement, as well as operating expense reductions.

In absolute dollars, we spent more on advertising and promotion while certain other expense categories showed robust productivity gains.

Diluted earnings per share came in at 44 cents, which is 3 cents above the high end of our previous forecast, compared to the 35 corrects in the prior year's quarter all product categories saw growth this quarter led by make-up.

This quarter we launched several new products, and we have a full pipeline for the second half, that I will tell you about a little later.

In make-up, sales this quarter grew 11% to $476.8 million on a reported basis and increased 9% in local currency.

Each of our make-up brands, M.A.C., Bobbi Brown, Sila turned in double growth due to increases in execution.

The Estee Lauder brand posted solid growth in this category reflecting their strategy to increase the volume of make-up launches as a percent to the overall sales.

Most of the brands have special holiday color stories and gift ideas.

During the quarter, Clinique launched Eye Defining Dual very successfully, a new eye shadow and eyeliner combination.

The Estee Lauder brand further build its Pure Color Make-up line with the launch of Pure Color crystal lip sticks, lip gloss and nail lacquers, a hit in Asia.

M.A.C. introduced several color collections helping it to continue its momentum and had exceptional growth.

M.A.C. has had a tremendous success due to its wide range of color products and a lot of excitement stemming from its cutting-edge image.

Prescriptives launched virtual youth, a new foundation, and many other existing products also had solid sales increases.

Skin care reported sales grew a healthy 8% to $479.3 million and sales increased 5% on a constant dollar basis.

In December, Clinique introduced Repair Wear, the brand's entry into the night treatment category.

Estee Lauder introduced a product that we have great expectations for called Perfectionist Correcting Serum for lines and wrinkles, supported with TV, print and radio ads.

In the short time, the product has been on the counter, it has cited 16% increase in the repair category for the brand.

And, by the way, in Japan, in January alone, retail of Estee Lauder is growing at 16%.

That's the whole brand.

Also contributing to skin care growth were initial shipments of Origins A Perfect World for eyes which builds on success of A Perfect World franchise doing extraordinary well for brand.

Fragrance grew despite have-wide sluggishness.

For the quarter increased 7% to $386.3 million on reported bases 3% excluding currency translation.

Important to remember the large portion of our travel retail business is in the fragrance category and this quarter travel retail jumped an impressive 50% following, of course, a substantial decline last year during the December quarter.

For the quarter, the U.S. fragrance sales declined 3% according to NPD beauty trends.

Despite a difficult market, as well as a number of new launches, four of the top ten women's fragrances are Estee Lauder products.

Key Estee Lauder products for the franchise are Beautiful, Pleasures and Intuition, driving this season is the combination of new products, consistent support and attractive gift sets drove sales.

Donna Karan, Cashmere Mist continued to show strong retail sell-through and we have several fragrances that made their Christmas debut including including Intense and Intuition For Men for Estee Lauder.

Tommy T from Tommy Hilfiger complementing the prior year launch of T for him, Donna Karan Black Cashmere and Kate Spade were also introduced.

Hair care rose 3% this quarter to $62.2 million.

Aveda sales, Life Elements, added an additional three lifestyle stores.

Aveda continues to grow while still strategically decreasing the number of salons that sells it.

Bumble and bumble sales increased as it selectively adds to the sales network.

In a geographic basis, in the Americas region, sales increased 4% from the prior year quarter to $783.5 million despite the softness in the economy that impacted consumer sentiment and purchasing.

Nevertheless, overall, we believes could met particulars performed better than the other categories in the department stores, particularly make-up and skin care.

In this region, we have sales increases across most product categories reflecting the success of new and recent product launches, as well as our AMP investment strategy.

In the U.S., we are seeing progress from the investment we have made in the Estee Lauder brand renewal over the past year stemming from product innovation, as well as new advertising and reduced promotions.

As you will recall, I have explained in previous calls, we have reduced a blockbuster vehicle from over a million units down to 500,000 in this fiscal year.

Which obviously was a tremendous move, at the same time, we have been able to grow our business.

For the Lauder brand, we strategically shortened the timing of their holiday blockbuster program to create a high degree of probability while supporting it with more broadcast media worked better than expected achieving a 98% sell-through.

Clinique had a great variety of gift sets with a broad selection of price points which proved to be successful.

Sell-through on sets was particularly good in skin care and make-up collections and about 97% overall.

New product activity also has been strong for the brand.

Almost all developing brands posted exceptional double-digit sales growth, and there has been a lot of press citing the Internet as one of the bright spots of the holiday season, and our business was no exception.

Our Internet sales rose about 75% during the period.

Let me now turn to Europe.

Europe, the Middle East and Africa results were exceptional.

Net sales lead 10% over last year on a local currency basis.

Debt follow is strong, sales growth already for the last two and a half years.

We are benefiting from currency translation, particularly in the UK and in the Euro markets resulting in the reported sales gain of 19% to $438 million.

Our travel retail business led the region growth rising 50% over the prior year quarter which was, of course, difficult.

We expect continued growth for this area throughout the remainder of the fiscal year.

While we are encouraged by the recovery in this important division, there continues to be, of course, some risks associated with unforeseen world events.

Our business, again, was very strong at the affiliate level, particularly in the UK, Spain, France, and Switzerland.

In Asia Pacific, net sales rose 5% on local currency basis and reported net sales grew 7% over the prior year to $191.2 million.

Sales were up in most markets with particularly strong double-digit increases in Korea and Thailand.

In the important Japanese market, business will remain somewhat soft and our sales there increase modestly with the exception of the Estee Lauder brand, which turned in middle single-digit growth and in January is running at a 16% clip.

This quarter continued to benefit from the Asian launch of Optimizer Repair boosting lotion by Estee Lauder.

Optimizer was developed specifically for the needs of Asian skin.

Looking ahead to what the remainder of the year holds, we are still cautious about the retail environment in the U.S. as well as in certain international markets, particularly markets such as Germany, et cetera.

However, we feel very good that the powerful new products we recently launched, coupled with new product line-up and Spring promotional programs in the second half will drive strong sales growth.

Our performance in select European and Asian markets have been strong, and we anticipate continuing this momentum in those markets.

As we turn to the full-year outlook, we continue to expect sales growth of approximately 5% in cost and currency in line with our previous guidance.

We expect that the positive effect of changes in the exchange rate could increase reported sales by approximately 2.5 to 3 percentage points.

Sell-through numbers in January have been mixed so far.

We continue to assume a gradual recovery in the U.S. economy during the year.

We expect that our sales growth estimates, coupled with productivity gains in our operating units and supply chain, will generate diluted earnings per share in the range of 1.28 to 1.33, also in line with our previous guidance.

These estimates imply the following for the second half of the year: We expect sales in constant currency to grow between 5% to 6%.

That's current forecasted exchange rate, currency translation is expected to have a positive effect of approximately 2.5 to 3%.

On the marketing front, as we did in the first half, we will continue to work closely with our retail customers to implement our aggressive plans to drive traffic in sales.

As I mentioned, our slate of new product offerings across all categories is full.

Let me mention a few.

Clinique is introducing Happy Heart Fragrance and Color Search Lipstick, City Base Oil Control Foundation and Lash Curling Mascara are set to launch throughout the third quarter.

Clinique is expecting 33% more new product activity second half compared to last year.

To further penetrate the eye category, the Estee Lauder brand will launch Magnascopic Mascara in March and support it with a strong media campaign.

Day Wear Plus, a multiprotection antioxidant moisturizer by Estee Lauder will also arrive on the counter in March.

M.A.C. has its Spring collection consisting of 29 SKUs lined up to launch during the spring season.

Our other brands have a full line-up of new products and new ideas, as well as many new products scheduled to launch each month throughout the second half.

The combination of sales growth, improved gross margins from the normalization of our production volumes and restructuring and other cost savings benefits should enable us to deliver second-half EPS in the range of 55 cents to 60 cents while continuing to invest to build long-term brand momentum.

Naturally, our forecast includes assumptions.

Our estimates are based on modest improvement in the economic conditions and consumer sentiment approximating sell-through and they do not assume unforeseen risk associated with major global political events that could adversely affect our performance.

These estimates and assumptions reflect our best outlook at this time.

Let me briefly touch on another element of our strategic focus.

Earlier this month, we entered into a purchase agreement to acquire the Paris-based [Dolphin] Group of companies for several strategic reasons.

First, it will enhance our position in skin care, which is a high-margin category.

Second, it allows us to enter a new distribution channel, namely independent pharmacies, where we will continue the strategy of focusing on only the most strategic pharmacies.

And third, it leverages our infrastructure in markets like U.S. and Asia where Dolphin [Phonetic] products is distributed through specialty stores, the agreement is subject to certain conditions and we will keep you posted and apprised of our progress.

Now I would like to hand it over to Richard Kunes, our Chief Financial Officer, to take you through the financial details.

Rick.

Thank you, Fred.

And good morning, everyone.

Turning to our second-quarter operating profitability, the company achieved operating income of $170 million compared with $143.5 million reported last year.

This reflects a healthy recovery in operating margin of 90 basis points to 12.0% due to a slight improvement in gross margin, combined with the benefits from restructuring and discipline cost containment.

Our gross margin of 73.7% for quarter increased 10 basis points over last year's 73.6%, reflecting lower cost of promotional activities and ongoing efforts relative to our manufacturing and global sourcing initiatives.

These improvements were partially offset by a change in our mix of business, notably the recovery of travel retail and higher fragrance sales.

Operating expenses as a percentage of sales decreased 80 basis points to 61.7%, reflecting plan red structuring savings and general cost containment.

For the quarter, advertising sampling and merchandising spending increased 7%, but decreased slightly as a percentage of sales as we benefited from our strategic marketing investment in the first quarter.

Looking at operating profits by category, make-up increased 12.3 million to $57.4 million and skin care rose $7.1 million to $84.4 million primarily due to the strength of our new or recently-launched products.

Fragrance jumped 9.8 million to $21.3 million primarily reflecting the improved result from our travel retail business.

Hair care operating results fell 5.2 million to $4.8 million due to planned spending to build distribution and product infrastructure to support future growth, as well as advanced costs of developing certain international markets.

Turning toward operating profit by region, the Americas increased 9.8 million to $70.9 million.

The increase was primarily due to higher sales and restructuring benefits and other cost containment efforts.

In Europe, the Middle East and Africa, operating income for the quarter grew strong double digits rising $19.6 million to $73.3 million versus last year with our travel retail business, the United kingdom and France posting the most significant increases.

As Fred mentioned, our travel retail business which has among the highest margins saw a sharp recovery against the backdrop of last year's negative events.

Asia Pacific operating income decreased 2.9 million to $25.7 million with higher operating income in Australia, Korea and Thailand being offset primarily by lower results in Taiwan.

Regarding our interest costs, we reported net interest expense of $2.2 million this quarter versus $1.9 million last year.

The increase is due to a higher effective interest rate reflecting the conversion of variable rate-to-fixed rate debt last year.

The effective income tax rate for the quarter was 33.5% versus 34.5% in the prior year.

We expect the effective tax rate throughout fiscal 2003 to remain approximately 33.5%.

The improvement was primarily due to ongoing tax planning initiatives.

Net earnings for the quarter rose 22% to $109.6 million compared with $90.1 million in the prior year.

Diluted earnings per share for the quarter were 44 cents compared to 35 cents in the prior year quarter.

You may have noticed that in our press release today, we included additional tables for condensed balance sheet and select cash flow data.

Even though it has been our long-standing practice to file the complete 10-Q on the same day as our conference call, we thought this additional disclosure would be more timely to aid you in analyzing our results.

In the future we may further expand the information we provide.

Turning to our financial position, the company's cash position was $655 million December 31, 2002, an increase of $212 million versus last year.

During the six months ended December 31, we generated net cash from operating activities of 370 million dollars, a 41% increase over the $262 million in the prior year period.

The favorable change over the prior year period reflects improvements in the company's networking capital components, particularly accounts receivable and accounts payable and an increase in accruals for advertising, sampling, and merchandising cost which correspond to a higher level of spending and type and timing of these activities.

During the six months we spent $166 million to repurchase approximately 5.4 million shares of stock under our share repurchase program, bringing the total shares repurchased under the program to just under 8 million.

Funds were used for capital expenditures and dividend payments.

Looking briefly to the remainder of the year, a few items that will affect our cash flow.

They include higher dividend payments in January as a result of the change in our common stock dividend policy from a quarterly to an annual basis, and additional pension contributions we expect to make to maintain appropriate funding levels.

By the way, as an aside, we are taking a more conservative approach and recently reduced our assumption on return for -- on our pension asset from 8.75% to 8.5% which will not have an material impact on our financial results.

We also anticipate reducing our commercial paper balance by approximately $80 million, lowering our outstanding debt; however, we still expect a very positive cash flow this year.

Let me now update you on our working capital.

At December 31, 2002, inventory was $535 million, a decrease of $10 million versus June 30, 2002 and $26 million lower than last year reflecting our ongoing efforts to lower inventory balances.

Our inventory days were 149 at December 31st, versus 167 days at December 30th, 2001.

Regarding receivables at December 31st, our receivable balance was $695 million, a $31 million increase compared to last year due to higher sales.

Our DSOs of 44 days at December 31st, 2002 improvement proved from 46 days a year ago.

An important working capital measurement that we look at is net trade cycle, which combines DSOs and days inventory supply, less days payable to measure how efficiently these working capital items are converted to cash.

Net trade improved to 129 days the end of December versus 151 days last year.

The debt-to-capital ratio is 19% at December 31st, 2002 compared to 18% last year.

Recently, Standard & Poor's and Moody's reviewed their credit rating of us and their long-term raiding is A-plus and A-1 respectively unchanged.

Let me update you on fiscal assumptions for 2003.

For the full year as Fred said, we anticipate sales growth and local currency of approximately 5%.

Our reported sales are expected to be positively impacted by foreign exchange by approximately 2 1/2 to 3 percentage points.

We expect gross margin to improve 30 to 50 basis points for the fiscal year, benefiting from ongoing supply chain initiatives and more normal production levels.

We anticipate improvements in operating expenses of approximately 10 to 30 basis points reflecting sales growth, expense controls, and the impact of the cost savings from the restructuring charge taken in fiscal '02.

Operating margin is expected to increase 40 to 80 basis points.

You will note that we are tightening our guidance range for all areas as we become more confident in our sales performance and firm up spending plans.

These plans balance our profitability performance with strategic investments to continue sales momentum and build brand equity in our developing and established brands.

In times of uncertainty, we need to be opportunistic and maintain flexibility in using advertising and promotional vehicles to drive our business which may affect our mix of gross margin and operating expense improvements.

For the second half, sales are expected to grow between 5% to 6% in local currency and a positive foreign exchange impact will likely add approximately 2.5 to 3 percentage points.

We expect a 40 to 80 basis-point improvement in gross margin and 180 to 230 improvement in operating expenses.

Gross margin improvement will principally come in the third quarter where we anniversary the under absorption of fiscal '02 and operating expense improvement will come in the fourth quarter where we anniversary significant advertising and promotional investment in the fourth quarter of last year.

This will lead to an expected increase in operating margins of between 220 and 310 basis points.

Diluted earnings per share for the second half are expected in the range of 55 to 60 cents.

I would like to reiterate that the achievement of our forecast is sensitive to economic and political disruptions which can impact the desire of consumers to travel and to shop and adversely affect our performance.

And that concludes my comments for today and we would be happy to take your questions now.

Thank you, gentlemen.

The question-and-answer section will be conducted electronically today.

If you have a question, simply press the star key followed by the digit 1 on your touch-tone telephone.

To ensure everyone has the opportunity to ask their questions, we will limit each person to one question and a related follow-up.

Time permitting we will return to you for additional questions.

Just queue up again by pressing the star key and the digit 1.

We will take our first question today from Andrew McQuilling from UBS Warburg.

Thanks very much and congratulations on a terrific quarter.

I had a two-parter.

The strength in Europe through the first half of the European affiliate business, do you expect this to continue through the back half of the fiscal?

My second question had to do with the weak U.S. retail environment, where do you see the flaws in the MPD data and overall fragrance trends for this holiday and thoughts on how to improve the fragrance business for Estee Lauder going forward.

Okay.

First of all, in the European -- your question with regard to Europe, yes, I think in the markets where we have momentum, I think we have a very good indicator that we will continue.

However, there are some markets where business is expected to continue to be difficult, particularly as it relates to Germany, and also in France we are seeing some difficulties there.

But in the other areas in Europe, whether it is Greece, Italy, Spain, Switzerland, UK, our business continues to be very strong.

As far as the MPD data is concerned, you know, I have to look at our own numbers here, and we obviously he have some sell-through numbers, as well as for all our different distribution channels.

I guess the MPD data doesn't differentiate against what is, for instance, a purchase-repurchase program and what is regular sales, et cetera.

So, for instance, in the Lauder brand, as you know, we reduced dramatically the purchase-repurchase as it relates to blockbuster and that will affect the MPD data numbers.

In addition to that, our sales growth in some of the younger brands are not reflected in some of those numbers, nor are our activity with Aveda and Bumble and bumble in their own retail stores.

So that is the way I would look at that.

Having said that, the U.S. retail environment in November and December, as you know from all the retail reports you saw was very sluggish, and, therefore, affected the larger brands because they rely on foot fall because they have such a huge percentage of the transactions in department stores.

For instance, Clinique has 25% of their transactions in the cosmetic business in department stores.

So, if the foot fall in the malls slow down, those major brands will be affected by it.

And, Fred, in terms of outlook for U.S. or America sales in the back half of the year, is a 3%, 4% range appropriate?

Or are you looking for something higher?

No, I am not looking for something higher.

I think that is about the right for the major brands that is about right, except our developing brands such as M.A.C., Bobbi Brown, et cetera, they have all been growing double digit and I see the same pattern in January, by the way.

So I think that with the programs we have in place for the larger brand, 2%, 3% sell-through at retail I think is what we expect.

As far as the international situation is concerned with the product innovations we are bringing into the market, we are seeing tremendous responsiveness.

I quoted some numbers in Japan that really surprised me because I didn't expect the growth to be that substantial.

But, you know -- so we feel pretty good about what's going on.

Terrific.

And just maybe one last one on the free-standing store business.

Can you talk about trends there, if you have seen some improvement?

Yeah, we are growing on the comp store basis in the single digits.

Terrific.

Thank you.

Okay.

We will take our next question from Wendy Nicholson from Salomon Smith Barney.

Hi, good morning.

Just to follow up on that.

Just to be clear, you don't believe even know the MPD data shows some market share declines you are don't believe that retailer inventories are too high?

Not really because, you know, when I look at our inventory, going into--December going into January, it is selling and sell-through all equals to last year.

In fact, we are carrying a little bit more unshipped order this January than we did last year.

Okay.

So the pressure on inventory continued in the stores, and it is at an acceptable level and we like the idea that sales through approximately sell-in because a much more predictable pattern than one or the other is out of sync.

Good.

Second thing is, you are just building a humongous amount of cash.

And I am wondering what you are planning to do with that.

I know you have a share repurchase program, but any thoughts of raising your dividend .

Your yield is the lowest in the peer group or are you building cash for some acquisitions?

We will certainly review our options on this one and I don't want to take the position on this right now as to what we are going to do, but suffice it to say, we feel pretty good about the position we are in, and we are going to take some action in one direction or another.

We will take our next question --

Certainly a topic at the next board meeting

I apologize.

We will take our next question from Amy Chasen from Goldman Sachs.

First of all, Fred, I want to follow-up, you said your retail stores were up in the single digits.

Can you say whether that was high, low, or mid.?

I said single digits.

I will leave it at that, Amy.

Between 1 and 9%.

Exactly right.

And I can tell you the -- the international stores were growing at the higher level than the domestic stores.

Okay.

I just wanted to talk about your assumptions a little bit.

I understand you have slow steady recovery in the U.S.

It sounds to me like there is a high probability that there is going to be a war.

And I just wanted to know what you are assuming about that, because I would suspect if there is, your travel retail business will not continue at the rate we are seeing?

Well, you know, as we are getting closer towards the end of the year, I mean, the impact of that is obviously going to be reduced if you have a geopolitical problem in September, you have got -- in our case, we have nine months ahead of us, and we are going to schlep through that.

In this particular case, whatever takes place, I hope that we only have to have one quarter to deal with.

I think that's one thing.

The other thing is, of course, if something really dramatic happens in the Middle East from this is a short affair or if it should come to war and it is a short affair, that's one thing.

If there is some real serious problems in terms of chemical warfare and things like that, we may have a different situation.

You know, depending on how to affects the sentiment of people around the world.

It is the magnitude, which is unforeseen at this juncture.

We will go next to Linda Bolton Weiser with Finestock.

Thank you very much.

You commented on how the Estee Lauder brand did in Japan.

Can you comment on how Clinique brand did in Japan?

Clinique we are still struggling a little bit in Asia, and we are having obviously major activities planned, and we have been working on it for the last 12 months.

And some of these ideas are being introduced in the second -- in the third and fourth quarter.

Clinique was below last year in Japan.

Okay, so would you expect for Clinique to start growing again in Japan not until FY '04?

I think that is a pretty good assumption.

Okay.

And secondly, on the hair care sales growth in that segment, can you give us some idea of what the growth was excluding the closure?

I think you mentioned you had closed some Aveda stores?

Yeah, I think that -- no, we didn't close Aveda stores, we reduced some of the salons, et cetera.

I think the sales in the quarter are not reflective directionally as to the growth of the hair category.

You will see that in the next two quarters.

In other words, it will grow higher again in the next two quarters than in this last quarter.

Next to Neil Goldner with State Street Global.

A couple of quick questions I hope.

Just real quickly, the guidance you gave for the full-year gross margins, 30 to 50 operating expenses down 20 to 30, operating margin up 40 to 80, that's actually a change from the last -- at least the last thing in my notes were gross margins will be up 40 to 60 and operating margins up 80 to 100.

Did I miss something since October or did something change in the last two months?

You didn't miss anything, Neil.

What has happened is we have been able to firm up what we believe our sales results will be for the year.

And we've also put together some plans, which balance hopefully our profitability performance, which we are committed to for the year and we have held our range for that, and also our plans to invest and build for future on some of our newer brands and some of our existing brands.

So you didn't miss anything.

We tightened ranges up because now things are getting clearer as the year goes on.

And that's where we are.

So basically you had good sales second quarter.

Looking forward for the back half of year, you are expecting better top line than what you were so you see an opportunity to reinvest in the business as opposed to following it through.

Let me give you a little flavor on that.

Here is the situation.

When we look at our business for the first six months and look at the business for the next six months, our expenditures which are not directly related to sales growth like AMP are all coming down very nicely as a percent-to-sales.

So the area where we have some flexibility is obviously in the AMP spending and depending on what the circumstances are over the next six months, we can get more aggressive or a little less aggressive in that area.

So we are not as locked in as we used to be with the fixed expenditure base like in the years before.

So we have greater flexibility in terms of driving our business.

Based on some of the introductions we have, you know, if we see something really take off, we can be more opportunistic.

We will go next to Rob Nye of Equity Advisor.

Tell me what the foreign exchange benefit for the quarter?

Rick.

The foreign exchange benefit for the quarter was a little over a penny.

A little over a penny a share?

A little over a penny a share.

Tax rate benefit?

Tax rate benefit, unfortunately, Neil, I don't have it.

The tax rate has gone down, about a penny, I believe, but I don't have the calculation.

I think it is around one cent.

What is it down from from last quarter? 34.5?

From last year it was 34 1/2 and now down 33 1/2 this fiscal year.

So two cents in the quarter between the tax benefit and the foreign exchange benefit.

Correct.

Thank you

Our next question from Rebecca Schuman from Allstate.

Yes, thank you.

I would like to follow-up a little bit on Amy's question.

Is it fair to say that a short war in Iraq would not affect your expectations but a longer drawn-out war would maybe put some risk in the numbers?

Usually -- look, this is hard to determine at this juncture.

You know, based on -- it really depends of the severity as to what is going on and what affects the psyche of the consumers around the world.

The last time there was a war and the news came out very quickly that the allied forces had control over the situation.

So you are know, there was no major psychological overhang.

Having said that, if you have a major problem with chemical warfare, who knows what the sentiment is going to be.

So more directionally in that area where we have, perhaps, some concern.

But, you know, we will see when we get there.

Okay.

And lastly, you had mentioned that Clinique in the second half, the launches will have a 33% increase over the prior year.

Can you give me a similar statistic for the Estee Lauder brand?

Well, the Estee Lauder brand will have, I think it has it at about a 22% new product element in the second half.

I think last year that was about 17, 18.

So it is not as pronounced as in Clinique.

The Clinique one, we are primarily talking about about new introductions here in the United States.

Next to Bill Steele with Banc of America.

Thanks.

I was wondering if you could update us on restructuring savings program for the full year and what the benefit was in the fiscal second quarter?

Okay, Rick.

Sure.

The full year -- the annual numbers of the restructuring program will generate, Bill, a little over $40 million a year in savings.

Pretaxed?

Pretaxed, yes.

We will not achieve all of that this year because that was phased in.

But for the second half, it should be just about $10 million per quarter for the third and fourth quarter.

A little less than $10 million in the third quarter -- in the second quarter, sorry.

In the second quarter a little less than 10.

Great, thank you very much

Our next question comes from Carol Wilke with Merrill Lynch.

Fred, when you were talking about the holiday blockbuster you commented that the sell-through was 98, 97%.

Out of curiosity compare that to what you saw last year because obviously it was a lot better this year.

Here is what happened.

Last year a lot more blockbusters and the program started was a lot longer.

This year we didn't come out with the blockbuster until after Thanksgiving.

And we were basically out of store close to the 15th, 16th of December and that was the intent.

Last year, we were dragging it all the way through to January, quite frankly.

So we've tightened up the promotional program.

You know we have been on the strategy to less promotion, more innovation, more advertising, so we are changing the mix, and it is basically a three-year program, because I feel that the future is not in necessarily giving more stuff away, but it is in clearly more desirability.

And that's been our strategy and it is working.

We can see it working very effectively because we started this program already two years in advance of the U.S. in international, and it is giving us a lot of confidence and now in the last two years we have taken on the U.S. market and I am very pleased in what I am seeing.

I just spent three days in San Francisco with the entire Lauder team from around the world and we looked at our next two years' program and I must tell you I haven't seen anything like it in the last 20 years.

We have a lot of enthusiasm going on here.

Just a point of clarification from your comments earlier.

When you said Estee Lauder brand was up 16%.

Was that skin care or was that --

That was the whole brand in Japan.

Oh, so the 16% was Japan.

The whole brand?

The whole brand in Japan and month of January, so far, is running at 60% plus at sell-through.

And is the brand as a whole --.

It is the highest sell-through rate that I can remember actually in the brand, because Lauder is such a huge brand in Asia.

And then overall for the company, is it still running the mid single digits like as you see in the recovery.

Absolutely..

In international in domestic, it has been harder, I must tell you.

Tough in the U.S. but in the overseas market it has been running very well.

We will take our next question from Amy Chasen from Goldman Sachs.

I have two follow-ups.

First of all, can you talk a little bit, Fred, about nonrestructuring savings, you know, savings you are seeing just from -- you mentioned a couple of times sort of general cost reduction focus.

Can you talk about, you know, what's happening there?

Well, all expect expenditures, non AMP expenditures, are trending down as a percentage.

For instance, give you an example, selling expenses.

Okay.

Overhead expenses, everything in the area which is which is not directly linked to AMP as a percent is moving down in the company.

And that's just because, you know, people are more focused on it than they had been?

It is not only more focused on it, it is basically we've undertaken a major strategy in the company to say, you know, from all the expenditures we incur, what does the customer see and what does the customer not see?

So we have basically looked at our accounting in a way to help drive our business units around the world that they are cutting into the areas where the customer can't see and we are increasing or holding what the customer can see.

Because when you go out and say, listen, I want operating expense improvement, before you know it, the people are -- cut things that are easier to cut and guess what that is, AMP and sampling and things that drive business and they don't hit the hard stuff that -- you know, that -- that takes more conviction.

So we basically have changed the accounting and said, look, whatever -- identify the resources that are being spent, the customer can see versus the one he can't see and we have been zeroing in over the last 18 months to two years on areas which the customers can see and we are starting to see the benefits of it.

Um, and yet I think you said that advertising was down as a percent of sales in the quarter?

In the quarter.

But -- don't drive me crazy about the quarters.

I am looking at the annual scenario.

You know, we have two major seasons here, the Fall season and the Spring season.

You know, managing this business by quarter drives everybody crazy.

So I am looking basically what is the strategy and what is the research allocation for the first six months and then I look at the same thing for the next six months.

I don't even get into the quarters when I look at my own planning.

I let the quarters come out the way they come out.

Next to Andrew McQuilling with UBS Warburg.

Thanks very much.

Maybe one more, Fred.

You mentioned heavy strategic investment areas in the December quarter and through the rest of the fiscal year.

Can you talk about them by brand and by region?

Where your priorities are?

For instance, give you an example.

Aveda.

Aveda has been doing very well in the United States.

Next thing is, we have invested in the UK and we are building that business.

It is starting to work very well.

Now we are working on an Asian strategy, and we, of course, have already hired people in Japan.

We have already are in the development phase.

But before we launch, you usually need a year, year and a half in preparatory activity in changing some of the formulas for the Japanese hair, et cetera, et cetera.

So we are investing in that area.

We are building in Europe beach heads for Aveda in the various markets.

That's one scenario.

The other scenario is M.A.C. is on fire, and basically, we are building infrastructure and distribution overseas in the market.

So that takes a lot of effort, because it is not just about selling more product.

It is about creating an emotional connection with consumer to the brand supported by great product.

So we are working on that.

Again, in Asia, there is a lot of opportunity there, as well as in Europe.

Bobbi Brown, all these younger brands you see are really underperforming in terms of profitability at this juncture to the total corporation when it comes to the international penetration.

So in the U.S., they are having a high operating margins and in some of the markets like in the UK they have high operating margins, but when we enter and build these brands in other countries, it requires some investment, but those are the things that ensure future growth.

Understood.

Hey, would you be willing to say how large the Aveda business should be in fiscal '03?

Well, I am not going to give you specific numbers by brand, but I have always gone on record by saying I think the Aveda is a billion dollar opportunity over time.

For us.

Terrific.

Thank you very much.

Next to Andrew Shore with Deutsche Banc.

Fred, good morning.

Hi, Andrew.

In relationship to the question about what should do you with your cash, did you ever any of present valuing the royalty payment for the international and buying it now?

You know, the issue is, there's all kinds of complications on the tax side of this equation.

We looked at that originally and bought the domestic one, if you recall, when we went public but the international one was fraught with all kinds of tax issues.

We haven't looked at that lately but perhaps we might as well take another look of it, Rick.

Yep.

Rick, get on it now. [ LAUGHTER ] Thanks.

We will take our next question from Neil Goldner with State Street Global.

Real quickly on a follow-up on the travel retail conversation.

What percentage of a typical year -- and I put quotes under "typical", typical year, what percentage of your travel retail business is done in the second quarter?

You know, it's not really -- it is not really that quarter sensitive.

I think -- Rick, I think you have some numbers there.

I would -- overall, just to give you a flavor, overall the business, I think, we do about 52% of our business in the first half, and about 48 in the second half.

As it relates exactly to travel retail, Rick, do you have any specific numbers?

I don't think it is that out of whack.

No, it is pretty constant certainly for first three quarters and the one quarter that is a little higher than the others is the fourth quarter and that's related to the summer travel.

People traveling during the break time.

Okay.

And if I could just -- one more question.

Follow-up on Amy's question a little bit.

Advertise or something going to be down -- was down in the quarter.

I probably just missed this.

I assume advertising for the full year is up?

Yes, it certainly is up.

It was also up in dollars, actual dollars in the fourth quarter, just as percent of sales was lower.

Yeah, grew 7%.

Advertising grew 7% in the quarter.

We will take a follow-up from Amy Chasen with Goldman Sachs.

Neil just asked my question, but I guess, can you tell us what the Estee Lauder market share trends look like in the U.S., Fred?

I don't know.

I will have to take a look when the actual data comes out, but I think we probably held our own.

I am surprised given -- you know it sounds like there is such great momentum there, you don't think it is growing?

The issue is that -- first of all, when you look at the trends, as I said earlier, the P with P in the sales numbers of retailers, not with us but in the retailers have it in the sales numbers, so we dramatically reduce that component.

Number one.

The make-up and skin care business was doing very well.

Fragrance was a really tough season for everybody.

So that's what -- that's what the numbers look like.

If you look now in the second half, I think that because of the -- the fragrance and -- is less important the second half than in the first half.

I think you will see the make-up momentum and the treatment momentum taking over.

Great, thank you.

I expect better retail sales-through percentages in the second half than certainly in the first.

Great, thanks.

Okay.

Just a reminder, if you do have a question, please star 1 on your telephone keypad.

We will take our next question from Vladimir Zalkov with Tudor Investment.

Hi, everyone.

You mentioned on the restructuring savings, what's the strategy that you have there in terms of the savings overall?

How do you view it, the potential to push further on that front and what would be the time frame of that, if any?

Thanks.

Sure.

Vladimir, the restructuring savings that were related to last year's charge are basically fully implemented at the moment so we will save, as I mentioned earlier, about $10 million per quarter for the third and fourth quarter.

I think that Fred also outlined other programs we have in place, unrelated to the restructuring charge that we took last year which are driving our -- our cost reduction programs.

This does conclude today's question-and-answer session.

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This does conclude today's Estee Lauder conference call.

I would like to thank you all for your participation and wish you all a good day.

Thank you.

Thank you.