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Good day, everyone, and welcome to the Estee Lauder Companies, Inc. fiscal 2004 year-end conference call.

All participants have been placed in a listen-only mode and the floor will be open for questions and comments following the presentation.

Today's call is being record and webcast.

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

Please go ahead, sir.

Good morning, everyone.

Thank you for joining us.

On today's call are William Lauder, President, Chief Executive Officer and Rick Kunes, Senior Vice President and Chief Financial Officer.

Some of our remarks today contain forward-looking statements which involve risks and uncertainties.

In addition to specific risks described in this call, you will find additional factors that could cause actual results to different materially from these forward-looking statements in our press release today and in our latest 10-Q.

For ease of comparison, our discussion today will focus on results from continuing operations, and also excluding the effects of a special charge we took in last year's fourth quarter related to a pending settlement of a class-action lawsuit brought against a number of dependents including the Company.

Let me refer you to our press release today furnished to the SEC on form 8K, and also posted on our web site.

There you will find a reconciliation of our results before and after the special charge.

Now, I will turn the call over to William.

Thank you, Dennis.

Good morning, I am glad you are could joins us.

Today I'd like to review our fiscal 2004 results and describe our expectation for fiscal 2005.

We couldn't be more pleased with the outstanding annual performance turned in this year.

We had solid momentum throughout the year that allowed us to raise ours sales and EPS expectations twice and finish the year on a high note.

Slightly ahead of our expectations we reported a net sales increase of 14% to 5.79 billion from 5.10 billion in fiscal 2003.

This $700 million of additional sales is a record one-year increase for our company.

Excluding the impact of foreign currency translation, net sales rose a healthy 9%.

We delivered diluted earnings per share from continuing operations at the high end of our expectations, coming in at $1.62, a terrific increase of 21%, compared to $1.35 in the prior year, excluding the special charge.

At this time last year, we laid out expectations for 6 to 7% organic sales growth and EPS of $1.45 to $1.50.

The recovery of U.S. department stores, particularly the high-end specialty retailers, along with better-than-expect recovery in travel retail helped us to significantly exceed our plan.

Let me briefly recap few highlights of the year.

During the year we announced some management promotions.

I am pleased to be picking up the CEO reins from Fred Langhammer who led our company so well.

Also, drawing on the depth and strength of our management team we appointed Malcom Bond, Executive Vice President for Global Operations.

We elevated Lynn Green to President Specialty Group Worldwide leading Prescriptives, La Mer and Jo Malone brands.

At the same time, Daria Myers took up the leadership of Origins [Nikko] resources as President. [Fabrese] Weber is leveraging his experience in travel retail as the new President of Aramis and designer fragrances, and Sarah Moss, joined us as Senior Vice President, General Counsel and Secretary of the Company.

The year was led by strong innovation in each of our categories around the world.

In recognition of these great products, our brands captured countless awards globally.

Notably this year, we won 11 out of 23 cosmetic executive women's awards for excellence.

We've also continued to expand our brand portfolio.

At the beginning of the year we acquired Rodan + Field, a brand developed by two top names in the dermatologist field.

We formed an exciting strategic alliance with Kohl's to develop brands for a beauty department for them.

The first of the brands, American Beauty, Flirt! and Good Skin were recently announced and will launch in October.

We entered into a license agreement to develop and market a new fragrance line with Sean P. Diddy Combs, under his Sean John fashion label, and we divested the Jane brand to focus on opportunities which offer higher levels of earnings growth.

We continue to seek innovative and exciting ways to market our brands, including the involvement of celebrities such as Beyonce Knowles, Ashley Judd, Michelle Branch, Madonna, Liza Minnelli, Boy George, and others.

We grew in each region with the strongest growth in International as we continued to become more of a global presence.

We saw exceptional growth from our emerging businesses in China and Russia, and travel retail recovered faster than expected, aided by the absence of any major disruptions this year.

We completed a 13 million share secondary offering by certain Lauder family trusts, including -- increasing our public float by over 10% and improving our liquidity.

And, we expanded our share repurchase program another 10 million shares and increased our annual dividend by 50%.

These were all wonderful accomplishments, and I want to thank all the talented people in our organization for making it happen.

With that brief update, let's review our full-year results.

As I mentioned, we saw momentum increase throughout the year resulting in sales growth in all geographic regions and product categories.

Our International business posted strong numbers with Europe and Asia growing 24 and 17% respectively, including the positive effects of changes in foreign exchange rates.

In the Americas, stronger consumer sentiment and an improved retail environment in the U.S. helped fuel growth in this region.

Net earnings attributable to common stock from continuing operations for fiscal 2004 were 375.4 million, a 19% increase over the 315.7 million last year.

This growth reflects strong gross margin improvement, as well as productivity gains in selling and administrative expenses.

At the same time, we invested more in advertising, sampling and merchandising.

All product categories had solid growth.

Two of our categories, skin care and makeup, reached milestones this year with both exceeding $2 billion in sales for the first time in our history.

In skin care, reported sales increased 13% to 2.14 billion and grew a strong 8% in constant dollars.

The Darphin product line, which is predominantly skin care, added incremental sales.

Our exclusive La Mer brand saw double digit growth in every region.

We had strong sales of Clinique's Repairwear Day and Pore Minimizer, as well as their classic 3-step system.

Hydra Complete, Idealist Micro-D, and Re-Nutrive intensive lifting products from the Estee Lauder brand also contributed to solid growth.

Makeup sales growth was outstanding, rising 14% to $2.15 billion in dollars and 10% in local currency.

We have had terrific performances from M-A-C and Bobbi Brown with each brand posting strong double-digit growth.

M-A-C has continued its streak as one of our fastest-growing brands worldwide.

Some of the major launches this year were, Perfectly Real Makeup and High Impact Mascara from Clinique, and Electric Intense Lip Creme and Ideal Matt Refinishing Makeup by Estee Lauder.

New launches propelled our fragrance business this year, with sales increasing 15% to $1.22 billion on a reported basis and 10% excluding currency.

This growth came primarily from outside the U.S. along with strong travel retail fragrance sales.

As you know, this category continues to be challenging with total prestige channel sales in the U.S. declining modestly this fiscal year.

The launch of Estee Lauder Beyond Paradise, combined with the top-rankings in our key franchises, allowed us to claim 5 of the top 10 fragrances in U.S. department stores.

For the full fiscal year, Beyond Paradise ranked number 4 in women's and number 5 overall in U.S. department stores.

The launches of Aramis Life and Clinique Simply, along with incremental sales from our new license arrangement with Michael Kors, also helped our sales in this category.

Hair care rose 9% this year to 249.4 million on a reported basis, and grew 7% in local currency.

Both Aveda and Bumble and bumble, our major hair care brand, each had double-digit increases this year.

Their growth resulted from existing and recent product launches, existing door growth, and new distribution.

At Aveda, we are seeing strong growth both domestically and International market [inaudible] to new products and a sharp focus on concept salons and other high performance salons.

The brand added five retail stores, over 130 concept salons and a number of spas, while strategically decreasing the number of nonconcept salons that offer Aveda products.

Bumble and bumble's growth reflects a positive influence of both product education offered to salons, while also increasing salon doors by 219 over the past year.

On a geographic basis, in the Americas region, sales increased 7% from the prior year to 3.15 billion.

This 3 billion mark is yet another company milestone we are excited about reaching.

Throughout the year, an improved retail environment generated additional store traffic, resulting in better-than-expected growth.

Consumer traffic and spending picked up in the U.S., allowing most retailers to deliver robust same-store sales.

The most impressive growth was seen at high-end specialty stores where we sell the greatest breadth of our portfolio.

Most our established brands posted higher sales along with growth from virtually all our developing brands, with most posting double-digit sales increases, and in total, our free-standing retail stores generated double-digit growth with M-A-C leading the way.

Once again, growth in the prestige beauty industry in the U.S. for the fiscal year, as measured by MPD, outpaced the AC Nielsen mass universe, including Wal-Mart panel data in our three major categories, and by 4 percentage points overall, confirming the validity of our commitment to department and specialty stores.

Additionally, our Internet business has been doing very well and jumped 36% for the year.

Europe, the Middle East, and Africa had another excellent year with net sales increasing 24% over the prior year to $1.87 -- excuse me, 1.87 billion, and increased an impressive 14% on a local currency basis.

Our travel retail business was strong this year, contributing to the region's local currency growth with a 30% increase over the prior year.

This solid increase came off last year's 10% growth in this channel.

Our business was very strong in most countries, particularly the UK, Spain, Greece, Russia, and South Africa.

A few countries remain challenging, with Italy and Switzerland posting weaker sales and France and Germany, excluding Darphin, also below last year.

Virtually all of our developing brands in Europe turned in strong double-digit growth, while Estee Lauder and Clinique reported growth in the single digits.

The European region also benefited from the inclusion of a full year of sales from Darphin which generates most of its sales in Europe.

In the Asia/Pacific regions, net sales grew 17% over the prior year to 771.4 million, in local currency sales were up 9%.

I am happy to say all countries were up in this region.

The largest double-digit sales increases in local currency came in China, Taiwan, Thailand, Hong Kong, and Malaysia.

Sales in Japan edged up slightly due to the opening of Aveda's new holistic center in Tokyo.

That wraps up fiscal '04 and now let's look to fiscal '05.

Fiscal '05 starts the third year of a five-year plan we previously presented with a stated operating margin target of 13 to 13.5% by fiscal 2007.

We believe we are on target to achieve that goal as our gross margin improvements are ahead of schedule and our operating expense discipline continues to bear fruit.

As we start the year, we are optimistic about our business globally, despite pockets of softness in some countries.

For the top line, we expect sales growth in fiscal '05 of between 7 and 8% on a reported basis, with a slightly negative currency impact.

We will continue to pursue our stated strategies that have successfully worked for us in the past and also look for new opportunities.

Our success has been driven by product innovation, effective marketing, geographic expansion, and distribution diversification.

And there is more to come.

Let me comment on a few of our plans for this year that support these strategies.

First is product innovation.

You have heard us say before that approximately one-third of our sales come from products launch in the last three years.

That has been a stable statistic, one that we're proud of, but that also has deeper meaning.

It encompasses our commitment to breakthrough innovation and product leadership, listening to consumers and responding to their needs.

This will continue to be a priority thought fiscal 2005 and beyond.

We have developed a blueprint to add a new R&D center in China to support the virgining business in the region and to be closer to the Asian cultures, concepts, formulations, and raw materials.

Our R&D teams will pursue new-age technologies across all categories that we believe will result in products with multiple benefits.

In our product categories, we expect hair care and skin care to lead growth, followed by makeup and fragrance.

While hair care for us is still in it's relative infancy, our professional salon brands Aveda and Bumble and bumble have made tremendous strides in developing and executing their growth strategies.

Their focus on training and exclusivity generates the highest productivity in the industry.

The salons and education centers they have opened in fiscal 2004 produce missionaries for our brands ensuring future growth.

Breakthrough technologies, consistent performance by existing offerings, new doors and International opportunities will drive this up and coming category.

For example, Aveda just launched global products such as Hair Control and Pure Abundance shampoo and conditioner, as well as an Asia/Pacific formulation for the full-spectron hair color line.

Skin care is a tremendous company strength, and we will increase our leadership in this category with notable innovations.

We will invest in our core product brands and grow the category with high-tech offerings such as Estee Lauder Future Perfect Anti-Wrinkle Radiance Cream, an exciting new moisturizer which works faster and more directly, allowing targeted ingredient distribution.

Clinique will also introduce a number of new offerings in the skin care category throughout the year.

We are well positioned to take advantage of favorable demographics, notably aging baby boomers and the emergence of dermatologist brands, La Mer, Darphin and Rodan + Fields, have plans to expand their presence through new products, increased distribution and targeted marketing strategies.

Last, but not least, we have two new brands, American Beauty and Good Skin, launching in Kohl's this October, enabling us to bring our skin care expertise to a new segment of the market.

In makeup, we expect our makeup artist brands to once again be the fastest growers in the category.

M-A-C has exciting new seasonal collections, such as RECOCO, as well as key new products such as Prolong Wear Lip Color.

Bobbi Brown is introducing new concealers, palates and tube tins.

Estee Lauder's mascara and lip segments will be supported by the addition of Lash Excel mascara and Pure Color Pops.

Clinique will launch a new foundation called Super Balance Compact Makeup, along with several fun formulations of Color Surge Eye Shadows.

We will also add to the makeup category with the launches of our newest brand, American Beauty and Flirt!, in Kohl's.

Overall, we have new product launches in every makeup segment throughout the year.

Lastly, in the fragrance category, the catalyst is newness, and we have seen the number of industry launches reach an all-time high, we have been part of it, but with a clear focus on developing the classics of tomorrow.

As evidence, we continue to command top rankings in prestige U.S. department stores with fragrances that are, on average, about ten years old.

We have several new launches in fragrance that we feel very good about, starting with Beyond Paradise for men from Estee Lauder, which is on the counter now and follows on the successful heels of its women's counterpart.

Additionally, an exciting new Tommy Hilfiger fragrance, featuring music icon Beyonce Knowles, is launching nationwide this month and globally in October.

And DKNY's newest scent, Be Delicious, is also set to launch in the U.S. in October.

This slated new product is expected to continue our momentum in this category in fiscal 2005.

Going forward, designer and celebrity-endorsed fragrances will continue to be en vogue as consumers aspire to celebrity lifestyles.

We are excited about our new licensing deal with Sean John to develop a fragrance line for men, and will continue to identify popular personalities for fragrance marketing.

However, producing blockbuster fragrances is not without costs, primarily in packaging, advertising and sampling.

We are challenging ourselves to improve operating margin in this category through rigorous value analysis of all fragrances and sets, pairing marginal SKUs, and building cost and efficiency into new fragrances to improve our mix as we move forward.

Regarding marketing, we are committed to supporting our new product innovation with strong advertising support to ensure we launch strong and stay strong.

In this coming year, we will increase investment behind the expansion of our developing brands, to continue their momentum, utilizing a variety of mediums suited to each brand.

For example, you can expect increase use of advertorials and carefully targeted media outlets to more thoroughly describe the features an benefits of our skin care offerings from different brands.

As we have done this past year, we will continue to pair promotional programs in favor of advertising, sampling, merchandising and in store events to build brand equity.

The third leg of our strategy is geographic expansion.

In fiscal '05 we expect each region to contribute to growth and profitability improvement.

Expansion plans continue for our developing brands.

For example, M-A-C will leverage its global appeal in new markets like China, Holland, and Turkey, to name a few.

La Mer will launch in China this fall, and expand further throughout Europe, and Jo Malone will launch outside the U.S. and UK for the first time this year by entering Australia and France.

In the Americas, we are hopeful that consumer sentiment and spending will remain steady, although it is difficult to predict what the potential impact of continued conflicts in the Middle East, terrorist threats, and the presidential election might have.

Continued expansion of our developing brands, our launch of three new brands into Kohl's, and further development of markets like Brazil, should enable us to produce above-market growth in the region.

The Europe, Middle East and Africa region is expected to remain strong, although at a slower pace than we have seen over the past year.

In travel retail, we anticipate continued growth barring any unforeseen events.

According to the International Air Transport Association, global air passenger travel traffic is up 20% for the first half of the calendar year, and they are forecasting double-digit growth for the full year, up from the March forecast of 7.5%.

This clearly bodes well for the travel retail sector.

We see countries like the UK and Spain continuing to be strong, and we will continue our expansion throughout Russia and Eastern Europe.

Asia/Pacific is also expected to deliver another year of solid growth with newer markets like China continuing at a brisk pace.

While continued softness in Japan will temper our results there, we anticipate low single-digit-growth in Japan only to expansion of developing brands and new product activity.

Looking at distribution channels and diversification.

Our e-commerce strategy continues to move forward.

New sites will be launched this year for La Mer, Jo Malone and Aveda.

Our new Beauty Bank brands will have complete marketing sites with links to Kohl's for e-commerce.

Additionally, we will continue to add brands selectively to gloss.com and seek appropriate on-line retailer alliances.

Our retail store strategy has proven effective, and we are currently committed to less than 20 additional stores in fiscal '05, mostly for M-A-C.

This strategy is shifting from the rapid growth of new doors to maintaining robust same-store sales growth and above-average profitability.

As I said earlier, we expect travel retail to maintain a positive trajectory.

We have now owned Darphin for a year and are going through our learning curve about the independent pharmacy channel.

We are refining our strategy for the expansion of new doors and possibly additional brands.

We believe these strategies to gross sales are clear, obtainable and support our long-term financial goals.

Now, let me shift to profitability.

Our focus on the strong top-line growth is the best way to ensure consistent, sustainable bottom-line growth.

Our supply chain initiatives have delivered cost savings ahead of schedule, and we are well on track to achieve the 75.6 to 75.8% gross margin goal we have previously stated, in operating expenses, we will continue to drive efficiencies and cost savings in our selling expenses and all our nonsales related activities.

With this combination of sales growth, expense savings, and incremental investment, we expect to deliver fiscal 2005 diluted earnings per share in the range of $1.88 to $1.93.

I am very pleased with our performance in fiscal '04, and I am confident in our prospects for the coming year.

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

Rick.

Thank you, William, and good morning, everyone.

Let me begin with a few reported results.

For the full fiscal year, reported net earnings attributable to common stock from continuing operations increased 24% to 375.4 million, compared with 302.2 million last year.

While diluted earnings per share from continuing operations rose 26% to $1.62 versus $1.29 for the 12 months of last year.

Reported net earnings attributable to common stock, including discontinued operations, rose 15% to 342.1 million compared with 296.4 million last year.

Diluted net earnings per share, including discontinued operations were $1.48, or 17% increase versus $1.26 for the 12 months of last year.

As you know, during the year, we sold the assets and operations of our Jane brand.

All statements of earnings information for the periods reported have been restated to treat Jane as a discontinued operation.

Also, as a reminder, in last year's fourth quarter, we recorded a special pre-tax charge of 22 million in connection with a pending settlement of a class-action lawsuit against various defendants, including the company.

The charge was 13.5 million after tax, equal to 6 cents per share.

The remainder of my discussions today will focus on our continuing operations and before last year's special charge.

As this is the way we evaluate and view our business performance.

You will find a reconciliation between GAAP and non-GAAP financial measures in our press release today and also on our corporate web site.

Turning to full-year -- to the full fiscal year operating profitability, the company achieved operating income of 644 million, a 23% increase compared with 525.7 million last year.

This reflects an increase in operating margin of 80 basis points to 11.1% due to a strong improvement in gross margin, as well as operating and expense controls.

Our gross margin of 74.5% for the fiscal year increased 50 basis points over last year's 74%.

This increase reflects favorable supply chain initiatives of 70 basis points and lower promotional activities of approximately 60 basis points.

These benefits were partially offset by changes in foreign exchange rates, costs related to inventories, and a change in our mix of business, notably the continued recovery in travel retail.

Operating expenses as a percentage of sales for the full fiscal year improved 30 basis points to 63.4% from 63.7% last year.

The decrease as a percentage of sales reflects the higher rate of sales growth and continued tight management of operating costs.

Once again, we strategically invested in advertising, sampling and merchandising expense, but at the same time focused on reducing other operating expenses as a percentage of sales.

For the 12 months, we have reduced selling distribution and administrative costs by 100 basis points, increasing advertising, sampling and merchandising by 70 basis points, while at the same time, exceeded our initial financial performance objectives.

For the full fiscal year, total advertising and promotional spending, including the amounts reflected in both cost of sales and operating expenses was 1.61 billion versus 1.42 billion last fiscal year.

As we have said and done in the past, we continue our commitment to support our long-term top-line growth and enhanced brand equity.

Operating expenses also benefited from savings of approximately 3.7 million of royalties that ceased to accrue on April 24 with the passing of Mrs. Estee Lauder.

Looking at operating profits by category for the full fiscal year, skin care rose 63.1 million to 336.3 million, makeup increased 51.1 million to 257.7 million, and hair care was up 8.8 million to 23.6 million, reflecting higher sales, partially offset by continued advertising, sampling and merchandising costs to promote new or recently launched products.

Fragrance operating income decreased 7.3 million to 24.8 million.

This decline in fragrance was due to the soft fragrance business in the U.S. and increased support spending behind recent product introductions and their International rollout, particularly Beyond Paradise.

The decrease was also due to development costs for future fragrances and brands, partially offset by improved results from our travel retail business.

Switching to operating profitability by region, all region posted operating income growth.

The Americas increased 63.9 million to 319.2 million.

The increase was primarily due to higher sales and improved retail environment, growth from newer brands, and cost containment efforts.

In Europe, the Middle East, and Africa, operating income in fiscal 2004 rose 46.7 million to 274.4 million versus last year.

With our travel retail business, the United Kingdom and Spain posting the most significant increase.

As William mentioned, our travel retail business, which has among the highest margins, saw a continued sharp recovery during the fiscal year.

Operating results benefited from the inclusion of a full year of Darphin and also improved in a number of other countries including Greece, Benalux and South Africa.

Asia/Pacific operating income increase 7.7 million to 50.4 million with the largest increase coming in Taiwan, Hong Kong and Thailand.

Our Japan affiliate reported higher results, which were partially offset by start-up costs related to the opening of Aveda's holistic center in Tokyo.

Regarding our interest cost, we reported net interest expense of 27.1 million this fiscal year versus 8.1 million last year.

The increase is due to the inclusion of the dividends on redeemable preferred stock, higher average net borrowings, and a marginally higher effective interest rate during the year.

The effective income tax rate for the year was 37.7% versus 33.2% in the prior year.

The increase was due to the inclusion in interest of the preferred stock dividend, which are nontax deductible, as well the full-year mix of global earnings and the timing of certain tax savings initiatives.

For the full year, net earnings attributable to common stock from continuing operations rose 19% to 375.4 million, compared with 315.7 million in the prior year.

While diluted earnings per share from continuing operations for the year increased 21% to $1.62 from $1.35 in the prior year.

The $1.62 was within, and at the high end, of our guidance given last quarter.

Regarding our financial position, the Company's cash balance was 612 million at June 30, 2004, an increase of 248 million versus last year.

For the full year, we generated net cash from operating activities of 670 million, a 21% increase over the 553 million in the prior-year period.

The favorable change over the prior-year period primarily reflects higher net earnings and improvements in certain working capital components.

In fiscal '05, we expect net cash from operating activities to grow at a slower rate, due to certain deferred compensation and supplemental retirement payments.

Let me now highlight some of our uses of cash this year.

We returned $184 million to stock holders in the form of stock repurchases and dividends. 116 million was spent to repurchase approximately 2.8 million shares of common stock under our share repurchase programs, bringing the total shares repurchased on to the programs to 16.7 million.

In the fourth quarter, we repurchased a total of 372,000 shares.

We made dividend payments on our common stock of 68 million reflecting a 50% increase in our annual dividend.

We reduced our debt levels by redeeming 292 million of the preferred stock, which represents approximately 80% of total outstanding preferred, and we used 207 million of funds for capital expenditures which was approximately 43 million higher than last year.

Improved economic conditions this year allowed us to appropriately spend for some of the projects that we referred for the prior year.

In fiscal '05 we expect our capital expenditures to increase further as we continue to catch up on some deferred spending, begin our company-wide systems upgrade program, and invest in leasehold improvements for our recently extended corporate office lease.

We continue to maintain the financial flexibility and access to liquidity required to take advantage of business opportunities as they arise.

Let me now update you on our working capital.

At June 30, 2004, inventory was 653 million, an increase of 54 million versus last year.

Inventory days were 162 at the end of this fiscal year versus 165 days last year.

While we continue to improve our inventory performance, as a company, we will always carry more inventory than other consumer products companies due to our business model, which generates exceptional gross margins but requires greater inventory levels.

Regarding receivables, our DSOs of 43 days at June 30, 2004, improved by 4 days from 47 days a year ago.

Once again, our return ratios continue the improvement we experienced last year.

Now let me give you a few assumptions for fiscal 2005.

For the full year, as William said, we anticipate reported sales growth of approximately 7% to 8% which includes a modest negative foreign exchange impact.

We expect gross margins to improve about 10 to 30 basis points for the fiscal year, with approximately half coming from supply chain savings and half from strategically lower promotional activities, slightly offset by the impact of Kohl's.

We anticipate operating expenses to improve between 50 and 70 basis points.

This is due primarily to the sales growth and tight cost controls in nonbusiness building areas.

These improvements are expected to be partially offset by continued investment in the Beauty Bank initiatives, strategically higher advertising sampling and merchandising spending, and the shift of a portion of our marketing investments from promotional to advertising spending, which benefits our cost of sales, but increases operating expenses.

Operating expenses will also also reflect the end of the International royalty payments that were made to Mrs. Lauder, and cease to accrue upon her passing last April.

The incremental full-year benefit in fiscal '05 of the terminated royalty payments is approximately 5 cents a year -- per share.

Included in our fiscal '05 forecast is the first year of sales to Kohl's.

Our plans call for initial pipeline product shipments to approximately half of Kohl's stores in their first fiscal quarter and the remaining stores in our fiscal third quarter.

The second and fourth quarters will reflect replenishment shipments.

As we said before, longer term, this business will have a lower gross margin and a lower operating expense structure than our corporate average.

The lower gross margin will reflect a relatively lower product price point and different margin structure, while operating expenses will include beauty advisor, training, product development, and creative costs, as well as our portion of advertising spending.

In fiscal 2005, the first year of operation, the impact of the Kohl's business is expected to lower our overall gross margin by 10 basis points and increase operating expenses as a percentage of sales by 10 basis points.

We are forecasting approximately a break-even up earning income for this business in fiscal '05.

Operating margin is estimated to increase 50 to 90 basis points in line with our five-year business plan.

As you know, of the $360 million of redeemable preferred stock, approximately 292 million was redeemed in June.

Approximately 68 million are still outstanding, however, the dividend rate on these shares dropped from 6.5% during the first quarter last year to 4.75% through April 24, to the tax-affected six-month treasury bill rate which is currently around 1%.

You will see net interest decrease substantially in fiscal '05 due primarily to the lower amount of dividends paid on the remaining preferred stock.

The incremental full-year net impact of the preferred stock, after considering financing cost, is approximately 5 cents per share annually.

We let the majority of the incremental preferred stock dividend benefit, as well as the royalty benefit, drop to the bottom line in our fiscal 2005 plan.

At this time, we expect our effective tax rate will be approximately 37% throughout fiscal 2005.

The decrease versus fiscal '04 is primarily due to the redemption of a portion of the preferred stock and the mix of global earnings.

Our effective tax rate is subject to change during the course of the fiscal year, as the rate is a function of mix of earnings, including a continued recovery in the U.S., and higher earnings in developed countries that carry a higher tax rate, as well as potential new government legislation and tax initiatives.

And, as William said earlier, for the full fiscal year, we anticipate diluted earnings per share of between $1.88 and $1.93.

Regarding the fiscal '05 first-half, we are continuing to increase advertising, sampling and merchandising spending, to support major launch activities and to stimulate sales momentum ahead of the holiday season as we did in fiscal 2004.

We expect the split of sales and earnings between the first and second halves to be approximately 52% and 48% respectively.

We expect reported sales in this fiscal year's first half to grow between 8% and 9%, including approximately a 60 to 80 basis point positive impact of foreign exchange.

In local currency we anticipate sales to grow between 7 and 8%.

Gross margin, operating expenses and operating margin for the first half are expected to be comparable to the same period in fiscal '04.

They will reflect the initial start-up of the Kohl's business along with advertising, merchandising, and promotional expenses growing faster than sales to support new launch activities, including several new fragrances.

Diluted earnings per share for the first half is expected to be in the range of 95 to 98 cents.

This concludes our comments for today and we'll be happy to take your questions now.

Thank you.

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

And our first question comes from Andrew McQuilling at UBS Warburg.

Thank you very much.

William, I guess I had a question on the first-half fiscal '05 guidance.

You know EPS up in the range of 8 to 11.5%.

Can you talk about -- you know you mentioned that the Kohl's joint venture is break-even on the full-year.

But can you talk about the Kohl's -- is there a drag in the first half of the fiscal from launching the Kohl's brand?

Yeah, there is, Andrew.

I think one of the things that Rick may have mention -- you may have heard Rick say is that we are piping -- that's our term for shipping in new stores, in the first quarter of the year.

The stores actually open for business for retail sales really in October which is the second quarter of the year.

So, while there are shipment expenses, there are expenses, as well as shipments, in the first quarter, but they come at the very end.

So, there's far more -- a far greater weight of expenses to shipments.

In the first quarter of the year?

In the first quarter of the year, yeah.

And, okay maybe one -- will you quantify the type of earnings drag in the first half from the Kohl's?

You know, Andrew, we historically have not given guidance and the results on a brand-by-brand basis and we will continue that practice with all the Beauty Bank brands.

So, no sales estimate for Beauty Bank either?

No.

Andrew, if you remember, in the second half of this year, we have had basically Beauty Bank expenses and no sales, and next year we will have Beauty Bank expenses with sales.

So, in a sense, there is -- there is a big impact, if you will, on the profitability of the second half as well related to Beauty Bank, which is part of the reason for that -- you know, that kind of shift, if you will, in profit growth toward the second half.

Thanks, Rick.

That helps.

Have you quantified the -- I guess, the back half of fiscal '04, the earnings drag from Beauty Bank?

Because you mentioned 15 million in total spend.

I didn't know how it broke down.

A little more than -- a little more than $15 million and a little more than half in the second half of the year.

Okay.

And maybe one more if I could.

I guess the June quarter, the -- the MPD data for prestige cosmetics in the June quarter was -- was okay for the industry, but softer for Lauder, yet your America sales were obviously very positive.

Can you talk about, you know, some of the discrepancy between that MPD data and your reported results for the Americas?

Well, there are a number different things, and, you know, this is something that we may have talked about before.

I would -- I would advise all -- everybody looking at MPD -- MPD is good from a guidance perspective, a general direction perspective, but it is statistical sampling, and statistical -- statistical sampling does not cover 100% of our universe.

It doesn't cover many specialty stores like Neiman Marcus and it doesn't cover any of our retail stores, our own retail-operated stores.

So, while MPD could be used directionally, I wouldn't necessarily use it as a direct barometer that tracks one to one on our sales.

Fair enough.

Would you say how strong your sales growth was for your retail stores year-over-year?

We had good double-digit retail sales growth.

We are very -- we are very comfortable to happy on the retails -- retail sales store growth.

Terrific, Thank you.

Next to Linda Weiser at Oppenheimer.

Thank you.

William, I was wondering if you can comment on just the profitability of your fragrance business, it is a pretty big business for you, and yet, the profitability has declined over the last couple of years.

Can you comment on that, and is that a source of good profit growth in FY '05.

I certainly hope it will be a source of profit growth in FY '05.

Generally, Linda, the fragrance business in the United States and really around the world has been severely challenged for any number of reasons.

One of the key reasons is what I would liken to be launch mania.

Just to give you a perspective, in the period 1992 to 1994, there were 45 major new fragrance launches.

In the period 2002 to 2004, there were 245 fragrance launches.

The resulting noise from the increased volume and frequency of launches, has made each and every launch -- has required each and every launch to have significant spending behind it to improve its likelihood for success, as well, the ability for a new fragrance brand to survive beyond the next wave of noise coming -- becomes great are and greater.

The result is the up-front spending in new fragrance launches is far greater, and the ability of these fragrances to take hold in a significant way also becomes somewhat of a challenge.

In that environment, I would say that we would like to see our fragrance business improve its profitability to a level that would be at least at our corporate average, if not better.

We are not there yet, and we are working very hard with the fragrance group to make sure they can achieve numbers like that.

What do you think the time frame would be for trying to achieve that profitability?

Well, idealisticly it would be next month.

Realistically, I would say two to three years.

And can you just cite a couple of things that might be factors that would contribute to the increasing profitability?

Well, there are any number of factors.

First and foremost, stronger retail sales-through that is not dependent on extraordinary promotional spending, which is fundamentally strong consumer demand that is not incentivized by extraordinarily expensive offers.

Secondly, will be better management of the cost of goods componentry, which is both the juice in the bottle itself, as well as the packaging, and was there more effective advertising and sampling spending that is targeted in the manner that drives sales in a more effective manner rather than broad, multimillion dollar spend.

And finally -- thank you, William.

That's very helpful.

Can you give us the travel retail growth in the quarter, please?

Globally --

30% for the year.

Right.

Fourth quarter was up -- was up -- quarter was up, up 50, full year was up 30.

Remember, fourth quarter last year we had SARS.

Right, that's right.

So year-on-year comparison, they were going up against an extraordinarily weak quarter.

But the full-year at 30% is good.

And, if I am not mistaken, at the end the fiscal year, we had not yet achieved the pre-9/11 number, but we are going to blow through it this year for certain.

So, we will be back to pre-9/11 sales levels in travel retail.

Okay.

Great.

Thanks a lot.

I appreciate it

Next to Chris Ferrarra at Merrill Lynch.

Hi, I was wondering if you could give an idea of where European sales would be if you backed out travel retail and the impact of things like Darphin.

If you look at organically businesses that were around last year and excluding currency, how would sales have looked year-over-year.

I think what you are asking is how is your local retail business, excluding travel retail, and Middle East and Africa, and if you are looking at continental Europe, on a market by market basis, as we may have mentioned, certain markets are challenged and certain markets are doing extremely well.

And, I think the major western European markets, the UK is doing extremely well.

We are very pleased with our continued strong sales momentum in that market.

The French market continues to be somewhat of a challenge for us.

Spain, on the other hand, is doing quite well.

Germany, after many years of -- of weaker business, seems to be doing better.

It certainly -- the last few months of the year seem to do better; however, it is still a challenging market overall.

Italy, also, was significantly challenged in the year.

Greece, on the other hand, has done quite well for us.

The Nordic markets, which are not very significant in size, have done quite well for us.

Switzerland was a challenge in the year, there was some significant issues for some retailers.

And overall, total Europe was a success for us at retail, excluding travel retail. 8.8% for the fiscal year.

Got it.

And also I want to get clarity on what Andrew asked initially.

I know you are saying you are having a lot of shipment in Q1 and Q3 for Beauty Bank, but is that -- I guess why would that result in big back-half earnings as opposed to, you know, the first half.

Wouldn't it be just in Q1 and Q3 and Q2 and Q4, respectively?

I wondered if you can flesh it out a little bit.

There is more spending activity as we initiate the -- our venture with Kohl's in the first half of the year.

Even though there are the initial shipments in the first quarter, there are a lot of activities to get this off the ground in a strong fashion.

We have always had a tradition of trying to launch strong and be strong, out of the box, and so, you know, that's kind of skewed some of the spending towards the first half.

But even if you look at just a macro level, look at our sales and profitability first half, second half, you'll see we have about 52% of our sales, 52 or 51% of our profits.

And, you know, 48% of our sales in the second half and 48 to 49% of our profits.

So, it is sort of consistent year-over-year.

It is a little bit different than the pattern we experienced this year, but that's it.

There is a lot of -- a lot of costs in first half with -- with the Kohl's business, with training of the staff and hiring of the people, and, you know, a lot of that happens, kind of right up front as the business gets going.

And can you just also talk real quick about Flirt! being in Bergdorfs and whether that was part of the original plan and what the rationale was behind it.

I will let Dan Brestal, who is our group President responsible for the Beauty Bank business talk about that.

It has been part of the plan.

As you can understand, the launch of these brands at Kohl's is significant for us.

In the building of brands is very important.

In conjunction with Kohl's, we decided that Bergdorf would like to have Flirt! it would be nice to help build the brand.

Each of the new brands will have different places where they will sell to help brand positioning.

Beyond Kohl's.

Beyond Kohl's.

And that will continue through the launch, not just sort of a prelim launch period.

No, if Bergdorf continues to do well, they will continue to keep the line.

Thanks

We will move next to Bill Schmitt with Deutsche Bank.

Good morning.

Good morning, Bill.

Can you talk about gross margin in the quarter, and why it was down so significantly?

There were a couple of things.

One was -- one was the weighting of fragrances higher than we had originally anticipated in the quarter.

And the second was that -- with our inventory position at the end the year we had hoped would be a little bit better, even though we improved year-over-year, it wasn't quite as good, and based on a formula that we used to provide for -- for provisions for obsolescence, if you will, and a higher inventory level, it required us to take a higher provision at the end of the year.

That was really the shift from where we thought it would be.

Is there an inventory built for Kohl's, in those numbers, in the inventory numbers at the quarter-end balance sheet.

There is some, but it's not a great inventory build because a lot of those inventory is from third-party suppliers, and they're holding that inventory because we are using outside manufacturing for the brands for Kohl's right now.

Okay.

Can you also talk about working capital, and why it was negative this quarter or so negative.

I think it was about a $30 million quarter-over-quarter blip over the fourth quarter of last year.

The operating cash flow was down year-over-year in the quarter.

Again, you know, we have to -- two things.

Number one, I just mentioned about the inventory level at the end of the year.

But secondly, you have to look at our working capital overall.

If you look at our receivables, they are down four days versus last year.

Our inventory in terms of days to sell it are down three days versus last year and our payables are kind of flat.

We had a reasonably good performance for the year, and our overall cash flow grew 21% versus prior year, and you have to remember that 21% is impacted by the reclassification into operating cash flow activity of the preferred dividend.

So, that actually decreased that number -- you know, decreased that number substantially and would have been much higher than 21% had that been treated the same as it was in the year before.

Right, I didn't think of that.

I also thought -- maybe I am just confused the Kohl's Beauty Bank thing.

I thought the brands were exclusive to Kohl's in the U.S. and you can use them Internationally.

Am I mistaken?

No, the brands are exclusive to Kohl's, the brands were built for Kohl's, however, with Kohl's concurrence, if there are selected stores that we feel will enhance the brands' positioning, they will be launched and sold in those stores.

Okay.

Does Kohl's get a royalty on Flirt! sales in Bergdorf's?

No they do not.

Can we very briefly talk about Rodan + Fields?

I know you sort of started with a pit start, I think it got kicked out of Bergdorf's or Bendall's or one of the places.

I guess it got relaunch on the West Coast.

What have you learned there, and is this part of a broader relaunch of the brand?

I am not sure kicked out is the term we would use.

We opted to take it out of Bergdorf Goodman because the positioning wasn't where we think the positioning should be.

It has been in Nordstrom's, and about 13 select stores on the West Coast, and we are trying to develop the positioning, and how the brand will operate within that environment in the West Coast -- on the West Coast before we bring it back east.

With the exception of the launch in Bendall's, which I believe is scheduled for next week. [inaudible] in the East Coast [inaudible].

Gotcha.

Then one more.

Can you break out what skin care sales did in North America and the Americas region?

Skin care North America was -- a soft shoe just for a moment as I give you the specific number, but skin care North America was largely very good, driven both by Estee Lauder and Clinique as well as La Mer.

I mean those three brands are significant players in the skin care arena and they have been successful.

Okay.

Very good is --.

Up 5.6% total.

Right.

Thanks very much.

You are welcome.

Our next question comes from Wendy Nicholson at Smith Barney.

Hi, my first question has to do with the margin expansion and the earnings growth you are expecting the back half.

I still don't know if I fully understand exactly why the Kohl's initiative is so much more margin diluted in the first half.

I am wondering if the reason for the margin pressure in the first half is all Kohl's, or is it also just a lot of investment spending in your core business?

Well, it is both, you are correct.

We have three fragrance launches, major launches in the first half of next year, plus three brands related to Kohl's.

That is a lot of activity in the first half of the year, and when you talk about year-over-year, we are talking not only -- you know, what happened in '04 versus what will happen in '05, and that's where, I mentioned earlier, that in '04 we have spending in the second half of '04 but without any revenue, and actually in the second half of '05, the Kohl's begins to -- the Kohl's business is profitable for us, so there's a big shift, if you will, between year-over-year end comparison.

Isn't it fair to assume that the Kohl's advertising spending "A," doesn't break until the product actually hits the store, and then only builds from there in terms of, you are adding new stores, so you should be adding more advertising as the year rolls along?

You know -- Another way to look at it, Wendy.

In the first half -- in the first quarter of this fiscal year, there will be no retail sales of Beauty Bank brands in Kohl's.

Yet, there are just, at the very tail end of the quarter, there are some shipments.

In the second quarter of the year, there are more shipments and retail sales.

In the third quarter, there are more shipments still.

There is existing replenishment shipments, piping shipments, retail sales in existing stores, and then retail sales in the new stores.

By the fourth quarter, there is just replenishment shipment, as well as retail sales throughout the full chain.

So, if you will, as the crescendo builds of both income and revenues, as well as some expenses; however, one thing you should remember in this -- is a different business and different margin structures, like we talked about, from our existing businesses in North America, and some of the advertising spend and responsibility is really borne by Kohl's, which is why they have a different margin structure, and some of it is borne by us, but, again, it's a different from our comparable businesses.

Because most companies when they talk about a pipeline fill talk about that as being like pure profit because you are just -- even if it is slightly lower gross margin from what you are already spending.

Since you are pipelining a bunch of stuff early and your're not going to be launching advertising right away, I guess I don't understand why that isn't accretive to earnings.

I think if -- you are talking about a specific business as opposed to this specific business contribution to the overall.

If you looked at what Rick -- if you listened to what Rick said before, not only in the first quarter are we piping Kohl's, but we are also piping three new fragrance launches, also experiencing a lot of the expenses associated with that for a first-half launch.

So, I think to try to dig into the pennies -- the pennies of the details, suffice it to say, I think one the things Rick said is that we do believe, certainly by the fourth quarter, the Beauty Bank operation will be profitable for us, certainly, and if you were to look at the full-year operation, we expect it to be either break-even or marginally profitable, and going forward into fiscal '06, we expect it to be significantly profitable.

Okay.

Because, I guess if I backout the effect of the royalty payment from the first half, you are hardly showing much earnings growth at all, which coming off such a strong '04, just trying to figure out whether you are being extremely conservative in looking at your first half, or whether you sort of borrowed from the first half maybe by some of the things you did here in the back half of '04.

No, it wasn't borrowing from '04, but, again, don't -- don't discount those three major fragrance launches, as well and the spending that goes along with that.

We did this in '04, you saw in '04 that we did invest fairly heavily in the first half of the year and it seemed to work out fairly well for us and we are continuing that kind of strategy going into '05.

Okay.

With the full-year numbers.

I mean, we still have to play with our numbers a little bit but looks like you are targeting basically, oh, 50 basis points of operating margin expansion for full-year '05, and I guess, given that you are as far along as you are in your restructuring program, you know, you kind of picked a lot of the low-hanging fruit it sounds like, whatever -- to get to your, even the low end of your target for 2007, the operating margin rate of change, if you will, is going to have to accelerate from there, and I wonder if there is a fear that maybe that operating margin goal for 2007 is looking a little bit more aggressive now?

Well -- you know, the -- the guidance that we gave is 50 to 90-basis point improvement in operating margin for next year.

When we laid out our five-year plan, 60 to 70 per year.

We have done better than that in the first two years of the program, and if we are at the higher end of our range we will do better than that in fiscal '05 as well.

We are not backing off of our range.

We actually think we are making pretty steady progress toward that end.

We said that initially the benefits would come from gross margin, and then they would start to come more from operating expenses, and I think you are seeing that kind of change, if you will, going into next fiscal year.

Okay.

Perfect.

And then, very last question.

The capital spending for 2005.

Have you said how much capital spending is going to be targeted toward Kohl's?

Or are they going to bear the brunt of the fixed --

No capital expending on our part related to that, other than some tooling and things like that.

Perfect, thank you very much.

Capital spending on their side

Move next to Amy Chasen from Goldman Sachs.

Good morning.

Can you talk a little bit about the tone of business in the U.S.

William, on the last conference call, you talked about two things.

Number one, the velocity throughout the quarter, and also, just how your business was improving, in terms of quality, with the basic business being stronger than the promotional business.

Can you comment on each of those aspects of the U.S. growth?

Well, Amy, for the fiscal year '04, those numbers pretty much held.

I would say the last couple of weeks -- last couple three weeks of June, and certainly for a good part of July, were not quite as good as the -- the months leading up to it, and I don't know if one week is a trend in August, but the first week in August seemed to be significantly better than the previous four or five weeks.

So, the general tenor of retail business in the United States as we see it, is somewhere between good and pretty good.

I wouldn't say I have enormous confidence, but the general tenor seems to be okay.

And it looks like, you know, from the press release, that you are expecting your U.S. business to also accelerate in the second half.

Is that correct?

And is that being driven by Kohl's?

Or is there something else in there that we should know about?

Well, certainly Kohl's is a part of that, but, by no means, when you consider, I think, what we are forecasting for the first-year contribution for Kohl's is it material, we are largely looking at the big -- the big brands in the United States, Estee Lauder and Clinique will be delivering the vast majority of our retail sales growth, as well as brands like M-A-C, Bobbi Brown, Origins Prescriptives, which also has very significant business in the United States.

And, we certainly have very conservatively planned for the retail sales and the net sales contribution to our company of the Beauty Bank brands of Kohl's, and in that conservative plan, if we certainly hope they do better, and if they do, we'll do better.

Okay.

And last, but not least, just to get to the inventory improvement again.

You know, those -- those numbers continue to be better than I would have thought you could do from an inventory days perspective.

Can you give a little color on whether we should expect that improvement to continue over the next couple of years?

And also, Rick, if could you just repeat what this inventory adjustment at the end of the fourth quarter was?

I was a little bit confused about that.

Sure.

We intend to continue to improve our inventory levels, Amy, but the point that I made I think in -- in the -- in the prepared text was -- was the fact that, you know, we carry more inventory as a company than other consumer products companies because we just manufacture in a couple of locations and supply 130 markets around the world.

So, we will always have higher inventory levels than some consumer product companies in which -- which are in our universe that we're compared against.

Do you have a -- do you have a target for days relative to your own numbers?

We have a target to -- to reduce our inventory over -- over time by about 10 to 15% as it relates to our sales level.

So, another -- another -- another 15 to 20 days off of our inventory number would be our long-term target, but having said that, you know, we have to make sure that we do that carefully.

Missing a sale by being out of stock for one of our products is much more costly to us than the carrying cost of inventory.

As you know, our inventory, really, is not impacted by shelf life or seasonality.

There is very little of that.

So, when we have that inventory it will get used, and we don't really throw away a great deal.

So, that's kind of the picture for that.

You said, what happened at year-end?

We had hoped our inventory would be a little lower at year end.

But, since it was not quite as low as we had hoped, based on certain mathematical, if you will, calculations, there's a provision for obsolescence, which we require internally, and which, obviously, our auditors are comfortable with, that says that based on this inventory level, we should have a reserve in case some of that become obsolete of X dollars, and that's why there was a little bit more of cost in the fourth quarter than we anticipated.

And, can you quantify the impact to gross margin in the fourth quarter from that?

Gosh, I don't think I did that calculation, overall that plus a couple of other things were about 40 basis points for the year.

For the year.

Okay.

And in the quarter?

In the quarter, Amy, I don't have it, but if you want to call Dennis later we can let you know.

But, overall, we said 70 basis points was due to supply chain initiatives improvements. 60 basis points due to the shift to advertising promotional or -- advising merchandise and sampling expense, and that was offset by foreign exchange impact of about 40 basis points, and 40 of all other, which includes the item that we were just talking about.

I am sorry, those numbers you just gave Rick, those were for the quarter or the year?

Those were for the year.

Great.

Thank you.

You're welcome.

We will go next to Connie Maneaty at Prudential.

Miss Maneaty, your line is open, please go ahead.

Please check your mute button.

Hi, can you hear me?

Yes, we can.

Okay.

Great.

What is capital spending going to be next year?

Capital spending will probably be in the area of around 250 million.

Okay.

Great.

And what is the status of the new R&D facility in China?

Well, our -- our head of R&D was over in China a couple, three weeks ago and working on the establishment of it.

He has begun to recruit some very capable, talented scientists, and we are well along the way in negotiation of a location for this facility, and we would expect by the -- some time i in the October period of time this facility will be up and running.

but it's -- it's August.

Yes.

So you are not going to build anything?

Oh, no.

We are not going to construct anything.

No, we are going to be using an existing -- we will be in the four walls of somebody else's existing building, and we will be buying and using scientific materials and equipment and using the talent of the Chinese scientists who we hire.

But we will not be constructing anything.

Oh, okay.

Because I think on your comments you said blueprint and that made me think that --

I think that is a euphemism for establishing a presence in this -- in this expanding marketplace, and developing the blueprint for how we develop our presence in the marketplace, not a blueprint as in what -- what an architect designs so he can build.

Okay.

Just one more question on Flirt! at Bergdorf's.

I just don't get how having the brand there is gonna help its overall awareness.

Women who shop at Bergdorf's probably don't go to Kohl's.

Are you advertising at Bergdorf's?

Are we going to see it featured in magazines, you know, like Flirt! at Bergdorf, or something?

No, you're not going to see it advertised.

To tell you the truth, it was a -- Bergdorf saw the line and thought the line was terrific, and that [inaudible] New York presence would like to sell line.

It is as simple as that.

The customer at Bergdorf is the customer at Bergdorf.

She likes the line.

It is on the fifth floor, by the way.

You haven't been there.

It is not on the cosmetic floor.

So, it's not in the windows, or anything like that.

It's on the fifth floor, in the more trendy area.

Connie, there is a traditional belief in our industry that there are certain retailers who are trend-leading retailers who establish an image for a brand, and that many aspirational consumers, who don't have the disposable income to actually shop up at the level of these trendy stores, would like to have access to, and buy, those brands which were available in these trend-leading stores.

Bergdorf's is one of those trend-leading stores.

How is it that Kohl's doesn't feel gyped?

Here they were going to have an exclusive, and now it is not an exclusive.

Kohl's feels -- they love it.

There's nothing that Kohl's would love more than to be able to sell a brand in their store to their consumer that is also for sale at Bergdorf Goodman.

Okay.

Thank you.

Next, we'll move to Ann Gillin-Lefever at Lehman Brothers.

If you can stand one more question on Flirt!.

I thought, in your prepared remarks, you talked about two brands rolling out of Kohl's, American Beauty, Good Skin, first half.

I think you were listening to us when we were talking about skin care.

We've got three brands that we will be launching in Kohl's this season.

We have American Beauty, which is a skin care and makeup brand, we have Good Skin, which is just a skin care brand, and Flirt!, which is just a makeup brand.

That's it.

Thanks.

And, then, I wonder if you could just talk through your comments about potential expansion in the European pharmacy channel?

Would this be through acquisition, or through some of your brand development here in the U.S. might give you opportunity to develop from scratch and in Europe too?

Ah, yes, all of the above.

Any priority?

Well, our first priority, of course, is to continue to refine and to understand the dis-- distribution itself, the needs of those consumers, and what brands, and what kind of brands could be effective and successful in this channel.

While -- you know Darphin as a company has been part of our company now since April of last year.

It has just been slightly over a year.

We are coming to understand this channel of distribution, by no means are we at a point where we can say we really truly understand it and know what the opportunity is.

We believe and we see that there is an opportunity there.

And we believe that there probably is a multiple -- if we were to make a commitment to this channel, we would make a commitment to this channel, not only with the Darphin brand, but, with a look towards, what other acquisition targets might be possible to help give us a significant presence in this channel, and thirdly, to see which of our existing brands, which currently don't have a significant presence in the European Prestige perfumery arena, our traditional channel of distribution in this marketplace, might be focused with their skin care offerings into the pharmacy channel to give our -- our network a range of brands and positions to offer to this -- this channel.

And in the scenario where you would add in some incremental SKUs, brands.

Do you have the distribution and logistics capacity for that?

Or would you be having to spend to add incremental?

Well, fundamentally, the core distribution, we have the infrastructure to be able to support that, both through the Darphin network, as well as our own distribution networks.

Just a last question of housekeeping.

I am not clear as to what Darphin's contribution was to fiscal year '04 in revenues.

The European regional about 2%.

Terrific.

Thanks very much.

We will go next to John [ Inaudible ] At Founders -- [ Inaudible ]

My questions have been addressed.

Thank you.

Thank you.

Next, we'll go to Brad Daniels at [Lower] Asset Management.

In the business you're gonna have at Kohl's, do you recognize the revenue on the sell-in to Kohl's -- on the piping or in the sell-through.

On the sell-in.

Sell-in?

Net sales.

Okay, that's it.

Thanks.

Our next question comes from Neil Goldner at State Street Global Advisors.

I didn't actually expect to get in.

The 8.+ or 8.8, 9% number you threw out there a little while ago for organic European growth.

I wanted to make sure, that doesn't include Darphin?

You actually grew western Europe at almost 9%?

The number I gave you was -- was total Europe and -- did it include Darphin?

Yeah, it included Darphin.

It included Darphin, yes.

Okay, so it's around 6% to 7% excluding that?

Yeah.

That's good.

That's it.

Great and then --

I am looking at the bottom of the column, Neil, you have to forgive me, I can't add the numbers as fast as you can, probably with the calculator in front of you.

But, yeah, that's about right.

That's fine.

I don't actually add that fast.

Still wearing my Yankees hat in Boston, by the way.

Good for you.

Good for you.

Last question.

The tax rate was higher than, I think, I and most people expected in the quarter.

Was there anything -- is it a mix, a country mix?

I am curious as to why that was?

Yeah, it's -- it's really a mix, Neil.

Unfortunately, for us, we sell our products in developed countries, and they tend to have a higher tax rate just overall than -- then, you know, some other countries which are in a development stage, particularly, like Latin America and some of those countries.

So, it was a mix issue, and in -- and then also related to the amount of earnings subjected to U.S. tax rates.

So, both the possibility improvement here in the U.S. and some other foreign income that is subject to U.S. -- the effective U.S. tax rate has drove the rate up for the year.

That tax rate was supposed to come down for the quarter because of the lower preferred.

The same reason the tax rate is going to come down next year, so it's a real big change relative to, I think -- well, at least relative to my expectation

Well, you know, it -- unfortunately that's -- that's what -- it is what it is, you know.

Maybe we are a little conservative in some of that, but we don't go in for any extravagant tax shelters or those type of things, and --

Good

The rate is -- the rate unfortunately comes what it is.

Good, I appreciate you don't do any of that stuff.

Don't forget the tax rate is one-half of those two inevitable things in life.

If you -- if you look over the last several years, there has been a few things that affected us.

We have had -- we have had some benefits in tax rates to an R&D credit.

We have had restructuring charge a couple of years ago that gave us a tax benefit.

We have had some others, as you said the preferred thing, which worked the other way against us.

If you back out all of these kind of one-offs, our rate has hovered around the 36% level for the last several years, and kind of, in a sense is -- is that same thing for next year.

Okay.

What we are saying 37% because of some other issues, but if you strap out -- if you strip out, rather, some unusual things, the rate is kind of been consistent for last several years.

Two more questions.

If you don't mind.

Rick, I wonder if you -- if you calculated your return on capital as of June 2004, kind of where it is now, and then William, if you can, just a tone of Japan.

Maybe not -- beyond Estee Lauder's business, but what Japan looks like today, relative to maybe what it was maybe a year or two ago?

I would say the overall Japanese retail environment, consumer retail environment in our world in the last year and where we currently see it today, Neil, is -- it's slightly better, but only very slightly better.

That is not -- you know, some of our brands are doing extremely well.

We seem to have been seeing some important improvements.

Just to give you an example of some other Prestige brands, like Tiffany's reported down 10% in the last quarter in Japan.

We are not seeing those kind of numbers, certainly, but by no means is there the same kind of exuberance as there were either in the late '70s, early '80s or the mid-'90s during the bubble period.

Still deflationary?

The general tone is it's sideways, not entirely confident consumer.

And is still deflationary, as far as your categories?

Our categories.

I wouldn't say they are necessarily deflationary, but the growth is extraordinary marginal at best, and in an environment -- in an overall retail environment where the stores themselves are deflationary, cosmetics being in better located in the stores, they have the same trends, if you will, as they do in North America, cosmetics does better in the store, but sadly doing better than the store when the store is not doing well just means you do less worse.

Thanks.

And, Neil, on your question on return, and I guess these really go in the category of non-GAAP measures, but calculated comparable year-over-year, return on invest to capital is 15.4% last year, 16.5% this year.

Our return on capital last year 19.9 and this year 23.3.

23.3.

And where does that relative to company's high, since it is in public?

The 23.3 number?

Well, you know, again, comparing against other companies, I -- you know I want to stay away from, if you will, I think you can do that and you can do these calculations yourself if you will, but we are continuing our trend of improving, and we set our target for return on invested capital around 20%, and, you know, we are moving in that direction fairly steadily, and we are happy with the progress.

I actually was asking, you versus yourselves at 23.3 is just the highest the company has been since it was in public?

I don't think it is the highest, Neil, you about it -- it's getting back in -- into where it was for sure.

Great, thank you so much.

You are welcome.

Good quarter, guys.

By the way.

Thank you very much.

We will go next to Kathleen Reed at Stanford Financial.

Good morning.

Just a question on your fragrance business.

Your fragrance had a very strong year, although, I think you said in your remarks that most of the growth was outside the U.S.

Although, then, in your Americas, your Americas region, I think you commented you are seeing improved retail environment, especially at the high end.

So, I just wondered if there was something else going on in the fragrance category, in addition to what you have already stated just all the new entrants or is that the majority of the reason the domestic fragrance market has been soft?

No, I think you have to look at it -- a number of different things Kathleen.

One of the things you have to look at is the different componentries of the global fragrance business.

In the United States, or North America, fragrance contributes approximately 30% in total prestige sales in cosmetics.

Okay.

In Europe, fragrance contributes approximately 60% of total sales in prestige cosmetics.

In travel retail it is 60% of total sales in prestige cosmetics.

And in Asia, the number is about 5%.

So, on a region-by-region basis, fragrance makes a significantly different contribution to the total.

Referring to the 30% total in North America, it's probably the most challenged segment of the prestige business right now for any number of reasons.

Some of it being launch mania.

Some of it being the expansion of many prestige brands into what we euphemistically call popular distribution.

Okay.

The net result of the expansion of these brands into popular distribution is that it has challenged the prestige retailers, the channel, to maintain growth momentum when those -- many of these brands, not necessarily the brands in their launch seasons or the season after, but many of the brands which they have launched in the season past are finding their way into broader distribution patterns, and the result being that the retailers themselves are struggling to find newer and different ways to maintain their growth in fragrance.

What most retailers are finding, and what we are finding, is that the more steady growth of skin care and makeup, and the more unique branding that goes around skin care and makeup, is giving them more regular growth, more regular profitability, and more uniqueness, as compared to those fragrance brands which have expanded their distribution.

But, with the fragrance added, does that put more pressure on you to launch new brands, because if the older brands are finding their way into the more popular, as you said, channels, does that imply that we will even see -- you know, a heightened level of new product activity?

I think you will have to look at it in a different way.

What is the consumer saying she is willing to respond to?

An interesting dichotomy to look at is that last year, 80% of most advertising in the fragrance category was devoted to newness, new brands in this category, yet, if you look at the sales-through, some 75% to 80% of the sell-through, of what the consumers actually spent was on established brands.

Beyond Paradise was the only brand that was launched last year that broke into the top ten, in fragrances and sell-through in the prestige channel in the United States.

So, you have a very interesting breakdown here where, essentially, the noise we are making through advertising for branding is attracting consumers into the stores, but when she's getting there, she is buying the brands she knows and likes, and at a far greater rate than the advertising voice we've actually created; however, when we have shifted our voice out of newness into established brands, they are not as responsive to that and, therefore, we don't drive as many customers to the store.

So, they obviously want to know there is something new that interests them, and the question is, when we get them into the store, what is attracting them to get us to give us their money to say I will take it?

Great.

That is very helpful, thanks

Your welcome.

We'll go next to Janet [Closenburg] At [JJK] Research.

Good morning.

Can you repeat for me again what the travel retail business was up in the fourth quarter?

I think 50%.

5-0?

5-0.

Okay.

And, so that has a great impact on gross margin, doesn't it?

Would that -- would that have negatively impacted your company --

You are correct, Janet.

It does negatively impact gross margin and positively effect operating expense.

Putting together all that has been said about fragrance, is it correct to assume that in the United States and North America that sales of fragrance declined in the fourth quarter?

For the year our fragrance business was relatively flat, I think, in the U.S..

No, in the fourth fourth quarter please.

Fourth quarter?

Traditionally, the fourth quarter is the weakest fragrance quarter of the year, in absolute value, and as far as year on year, Janet, you have to give us a moment --

I will speak to Dennis later, so, I can get it from him.

Okay, fine.

I also wanted to talk about the first-quarter '04 versus first-quarter '05, with respect to fragrance launches.

If my memory is correct, you had three major launches last year in the first quarter as well.

Correct.

Wouldn't the expense -- the relative expense be similar to each other, and, therefore, why would there be an impact on the first quarter of '05's earnings?

I think you have to look at the nature of the brands that we are doing the launches last year versus the nature of the brands we are doing this year.

If you look at the brands which we are launching in this year, they are more pure fragrance brands.

And, our pure fragrance brands, if you will, the Aramis and designer fragrance is Tommy, DKNY, those brands have a different way of driving their business and the Estee Lauder and Clinique brands, which both launched fragrances last year.

Estee Lauder and Clinique brands are driven -- their sell-through is driven a great deal through the available of the Clinique consultant and the Estee Lauder beauty advisor to sell through the product, and they both advertise at a rate that is somewhat greater than what these guys do, but because of the underlying dynamics, the underlying dynamics of the brands themselves and the businesses that they do, there is a difference between them.

So it's more costly then to launch the brands that you are launching this fall?

The likelihood -- the likelihood of cost and the likelihood of success for a pure fragrance brand is very different than from a demonstrated brand.

Okay.

And then, Rick, with respect to the inventory.

I guess the level was higher than you wanted it to be coming out of the fourth quarter, so you had some obsolescence, ending up with an inventory increase of 9% versus a sales increase of 12% -- well, 12% for the quarter.

Is that the ratio we should expect to see going forward?

Or, how should we be looking at that?

You know, again, I think that we are looking for about a 10% to 15% inventory improvement related to sales over time, so you will continue to see improvement.

Hopefully, quarter over quarter and year-over-year, getting us through that kind of day's level of around 145 or so by the end of '07.

So this -- this kind of waiting could go on in the future then?

Yeah, but we will probably go on and continue to improve.

Okay.

And my last question is, on your outlook for the first half of fiscal '05, can you give us your -- your level of confidence or your level of caution, if you will, with respect to the holiday season?

Thank you.

Oh, boy, you know what, it is hard to say right now the way the holiday season is going to end up.

We are very confident in our programs.

We love the programs we have.

Right.

We think all of our brands have got very strong, very powerful programs.

The retailers have commented to us that they think we've got strong, powerful programs.

If I could see into the minds of consumers, I would love it, but I can't see through that far out.

I wish I could.

But did you -- in your -- in your outlook, infuse in that outlook, a relatively strong outlook for the holiday season?

Or something more conservative than that?

I think we -- we put a fairly conservative number in.

Okay.

Thanks very much.

You are welcome.

We will go next to Chris Ferrarra at Merrill Lynch.

Hi, when you were talking about Cap Ex, you were saying -- I think you mentioned something about a catch-up in delayed spending.

I was wondering if you could give a little more color on that?

Sure, some spending related to -- I will give you the major increases that we see next year, and it is in the manufacturing and distribution area.

Some leasehold improvement spending -- we recently extended the lease here at our corporate headquarters for a lengthy period of time, so spending that we have been delaying to renovate some of that.

There's spending relating to systems, as we work on a -- on a global IS initiative that will -- that will be going on for several years that we have described before.

And, there are some counter spending as well, where -- where we are enhancing on -- our look at the point of sale, and catching up a little bit on some of the things we held off on while we were trying to make sure that we were conservative when business was a little tougher.

So, those are really the areas that are increasing in spending next year.

Okay.

And this one is more longer term, I am not looking for specifics here, but if you were talking real broadly, as you get to the '06-'07 time frame.

Where are you cutting spending on the operating expenses side?

Is it still sort of just tightening the belt and streamlining a little bit or are there more specific things that can be, you know, that could be sort of enacted to get spending more efficient in that time frame?

Because it seems like, obviously, it will get tougher as time passes.

Well, I think we -- our general focus has always been we will try to separate those items behind the curtain and not visible to the consumer, and those things visible to the consumer.

We are really looking at reducing our spending on a very aggressive approach to all those things that are not visible to the consumer, and refining our spend on those things that are visible to the consumer.

Examples of those things that are visible to the consumer are advertising, promotions, and sampling, store construction, you know, retail store construction, counter construction.

Those items that the consumer sees that affect brand equity, can improve brand equity and enhance brand awareness.

We are looking to enhance that spending and improve that spending, and enhance it both by increasing in an absolute bases, and as well as enhancing it and getting it better, and more effective and more efficient.

Anything that's behind the curtain, and not visible to the consumer, we will look to cut that to the lowest level as reasonably possible to run our business.

And we have time for one more question.

That will come from Bill Schmitt from Deutsche Bank.

A quick follow-up.

Hair care, I think your long-term plan is for plus 16% I guess sales growth through '07.

And it looks like that has been your weakest performing category over the last couple of years, and even this year.

It wasn't great.

So, why do you instill so much confidence in that growth in hair care?

And are you sticking with that 16% top annual growth rate from '02 to '07?

Well, Bill, don't forget right now almost 90% of our hair-care business comes from North America, and we are really now getting to the point where we are beginning to expand our two hair care -- our main hair care brands of Aveda and Bumble and bumble, beyond the shores of North America to Europe and to Asia.

And we think, in both these markets there is an opportunity in the prestige sector in hair care where we will get some outside growth from these brands in these regions where we really don't have much of a presence.

That concludes today's question and answer session.

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That concludes today's Estee Lauder conference call, I would like to thank you all for your participation and wish you all a good day.

Thank you.