雅詩蘭黛 (EL) 2005 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Estee Lauder Companies fiscal 2005 third quarter conference call.

Today's call is being recorded and webcast.

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

Please go ahead.

Good morning, everyone.

Thanks for joining us.

We have on today's call William Lauder, President and Chief Executive Officer; and Rick Kunes, Executive Vice President and Chief Financial Officer.

Dan Brestle, our Chief Operating Officer, is here also and he'll be available for the Q&A session.

Our discussion today will focus on our results from continuing operations and will include an outlook for the balance of fiscal 2005.

Since some of our remarks today contain forward-looking statements, let me refer you to our press release today where you'll find factors that could cause actual results to differ materially from these forward-looking statements.

With that, I'll turn it to -- to William.

Thank you, Dennis.

Good morning, and thank you for joining us.

For the third quarter, we reported a net sales increase of 8%, to 1.54 billion from 1.42 billion in last year's quarter.

Excluding foreign currency, net sales rose 6%.

Net earnings from continuing operations for the quarter were up 6% to 106.2 million, compared with 100.1 million in the prior year's quarter.

We delivered dilutings earnings per share from continuing operations of $0.46 compared to $0.43 in the prior year, an increase of 8%.

As you know, we do not give quarterly guidance.

When we provided second half estimates during the conference call in January, we stated that for a number of reasons, second-half profit improvement would come substantially in the fourth quarter.

We continue to expect this will hold true.

In constant currency, sales growth this quarter was led by the Americas, followed by Europe and then Asia.

I'm pleased with our continued strong sales performance this quarter, but at the same time, I am disappointed that our sales growth came in lower than we expected.

This resulted from a number of factors that we now expect are going to carry through for the full fiscal year.

The first of the challenges come from the fragrance category of the Estee Lauder brand in the U.S., as well as more recently in certain international countries.

This resulted in the brand's performance this quarter and full-year projection not performing up to expectations.

In addition, we also experienced some production issues involving a few product launches slated for the third quarter that didn't happen as planned.

While these issues have been resolved, we do not believe we will recoup all these sales due to the delays in launching.

Based on these factors and our current outlook, we are revising our full-year sales expectations to between 8.5 and 9% on a reported basis, and between 6 and 6.5% in local currencies, slightly below our previous expectations.

And we are now forecasting EPS in the range of $1.87 to $1.90.

Let me take you back to the quarter to discuss our product category and regional results.

In our Skin Care category, we reported a 9% sales increase to 608.2 million, and grow 6% in constant dollars.

Perfectionist (CP+) from the Estee Lauder brand and Clinique's Repairwear Deep Wrinkle Concentrate were our major skin care launches this quarter.

These two products are our called to arms against some of the newer niche skin care brands that have been garnering some market share recently.

We believe our two new products are as effective or more than these niche players' products.

We further believe that we have greater longevity as we've seen a dramatic falloff in sales in one of the top niche players this quarter.

Also in the quarter, Future Perfect Anti-Wrinkle Radiance Creme and new products in the Re-Nutriv line from the Estee Lauder brand, as well as Superdefense Triple Action Moisturizer from Clinique contributed very nicely to sales growth.

La Mer, again, had strong growth this quarter, particularly in international from the continued success of The Lifting Face Serum & The Lifting Intensifier.

Makeup sales rose 6% to 628.2 million in dollars, and 5% in local currency.

Combined sales from our makeup artist brands were strong with M--A--C continuing its streak of double digit growth this quarter, and we expect it to continue at a strong pace.

With M--A--C, we believe we have done all the right things to make the brand an outstanding success in the marketplace.

We believe M--A--C is the largest brand in the makeup artist category and one of the largest brands in prestige cosmetics.

M--A--C's stellar growth is driven by like-door increases, new distribution, and great product introductions.

Additionally, the activities around the M--A--C 8 sun [ph] has generated significant attention to the brand with both consumers and the media.

Also in makeup, Superbalanced Compact Makeup and Colour Surge Eye Shadow from Clinique generated solid sales increases, while our new and new -- and more recent launches from Estee Lauder, such as Tender Blush, Pure Pops Brush-on Color, and Ideal Matte Refinishing Makeup added to sales growth.

The inclusion of our BeautyBank brands, Flirt! and American Beauty, also benefited this category's sales.

I'm happy to say that fragrance had a strong showing this quarter, getting a boost from recent launch activity.

Our third quarter fragrance sales increased 12% to 228.7 million on a reported basis and 11% excluding currency.

DKNY Be Delicious, the newest women's fragrance from our Donna Karan franchise, has proven to be a winner domestically, and this quarter, we rolled it out in certain international markets.

Full rollout is expected by the end of this fiscal year.

This fragrance has been doing exceptionally well, far exceeding our expectations and ranked number five for the quarter in U.S. prestige department stores.

Following on the heels of this fragrance, we also globally introduced the Be Delicious men's version this quarter.

Consumer reception to these fragrances has been tremendous, and we will ensure we allocate appropriate resources behind them to sustain their momentum and build them to blockbuster status.

We also benefited from the recent launches of True Star by Tommy Hilfiger, featuring Beyonce, as well as Lauder Beyond Paradise Men and the international introduction of Clinique's latest addition to its Happy franchise called Happy To Be.

While we feel good about these fragrances, overall category growth in the quarter was tempered by lower sales of the prior period launches, as well as from some existing fragrance brands.

Beyond Paradise from Estee Lauder, which was launched domestically in fall 2003 and internationally in spring 2004, has not met our overall expectations.

On the positive side, this fragrance achieved its initial objective of a top-10 ranking in its launch year, and it drew a broader rage of consumers to the Estee Lauder counter.

But the fragrance has met some resistance, specially in international markets, and its rate of decline has been more than we anticipated.

The fragrance ranked number 10 among U.S. prestige women's fragrances for the quarter.

In hair care, sales rose 10% this quarter to 67.3 million on a reported basis, and grew 9% in local currency.

Aveda grew nicely due to successful recent product introductions such as Pure Abundance and professional color products.

Bumble and bumble sales growth was strong, resulting from the continued success of its new hair and scalp treatment line, the success of the existing products, and new salon openings.

Let me now take you through our regions.

Sales in the Americas increased 8% from the prior-year quarter to 844.6 million.

New and recently launched products contributed to growth in all major product categories.

As I just mentioned, makeup and fragrance had a good quarter, primarily due to our M--A--C and Aramis and designer fragrance brands, which posted the strongest dollar gains; while the inclusion of our three BeautyBank brands, which launched in an additional 300 Kohl's stores this quarter, contributed to the region's higher sales.

This quarter, we continued our momentum in Canada, posting double digit growth there.

In Europe, the Middle East and Africa, net sales rose 10% over the prior year to 496.2 million and increased 6% on a local currency basis.

This quarter, local currency sales gains were led by travel retail Spain, Russia and the UK.

In the UK, our largest European business, sales growth this quarter was softer than expected.

Both Clinique and Jo Malone have taken some strategic steps to build some additional momentum through stepped-up sampling.

These increases were offset by lower sales in several countries that continued to have difficulties, particularly France and Italy.

In Asia Pacific, net sales for the quarter grew 6% over the prior year to 197.4 million.

In local currency, sales were up 2%.

The local currency increase reflects strong double-digit gains in China, Hong Kong and Australia.

Our business in China nearly doubled this quarter, and we're continuing to build our base business and also expand with additional brands.

Partially offsetting the increases were continued sales declines in Japan and Korea, which are our largest Asian businesses.

The delayed launch of Cyber White, a new whitening product from the Lauder brand, effected our sales in Japan.

Let's now look at the remainder of the year.

Our fiscal '05 business plan, which we developed almost a year ago, was based on assumptions and economic conditions that existed at the time.

We all know the factors that built that plan can change throughout the year.

As I mentioned earlier, certain categories within the Estee Lauder brand hit a few bumps in the road, particularly in fragrance this year, that will slightly veer us off of our full-year guidance ranges.

We believe the 6 to 6.5% forecasted full-year local currency sales growth I mentioned earlier is still a very strong level of growth.

The revised sales forecast, coupled with our expectation to continue to garner productivity gains in our operating units and supply chain, are projected to generate diluted earnings per share of $1.87 to $1.90, or between 15 and 17% growth.

We have and will continue to be proactive in addressing issues that temper our sales growth.

For the Estee Lauder brand, our ongoing actions already in progress, such as modernizing the brand's product introductions, advertising campaigns and point-of-sale inventory, have been positive.

We're committed to re-energizing the brand with initiatives we believe will have both near- and long-term benefits.

To that end, as we mentioned on last quarter's call on January 1, John Demsey took the helm of the Estee Lauder brand as Global Brand President, and he has already announced some new senior management appointments in the brand to continue its evolution.

For one, we're thrilled to welcome back Thia Breen as President, Estee Lauder brand North America.

Thia spent the majority of her career in our Company in a number of senior level positions.

Thia is returning to us after recently gaining experience in retailing at Federated Department Stores.

During the quarter, Andrea Robinson was appointed as Chief Marketing Officer for the Estee Lauder brand.

Andrea, who comes to us most recently from L'Oreal, will lead global marketing for the brand across all product categories.

In this newly-created position, Andrea's strong background and vast experience in marketing will bring a broad perspective to the brand.

And just two weeks ago at a well-attended press conference, we announced the creative collaboration between the Estee Lauder brand and world-renowned fashion designer and recognized image maker Tom Ford.

It's a multiyear deal with two phases.

For phase one, Estee Lauder and Mr. Ford will develop a Tom Ford for Estee Lauder collection that will be sold at Estee Lauder counters with initial products available for holiday 2005, followed by an additional collection for spring 2006.

This range of products will be sold for two years.

In phase two, Mr. Ford will launch a separate standalone Tom Ford beauty brand with fragrance and other related products.

These products are expected to begin launching in fall 2006.

We're excited about this alliance because Tom Ford is a visionary, creative designer and lifestyle icon with a global following.

These same characteristics are part of the Estee Lauder brand heritage, and this alliance is an important step in the brand's evolution that will enable the brand to express its historical values in a modern way.

While we have strong bench strength throughout the organization, this infusion of new talent will help bring new ideas and consumers to Estee Lauder.

Looking at the retail environment, we're continuing to see the U.S. sustaining its moderate growth level.

High-end retailers are maintaining their front-runner positions, while mid-tier department stores are posting mixed monthly results.

The continuing effect of rising gas prices and the potential for an upward trending of inflation may further erode consumer confidence and ultimately, their spending.

Our performance in select European and Asian countries has been strong, and we anticipate continued momentum in those countries.

We're building on our infrastructure in China, where, as I said in my earlier remarks, we're generating exceptional growth.

In the next fiscal year, we look forward to adding India to our list of fast-growing markets.

Switching gears, there's been a good deal of speculation around the consolidation and various ownership changes in the retail industry.

Federated and May Department Stores, our two largest customers, are expected to combine.

Marionnaud was purchased by the Watson, and several others in Europe and the U.S. are up for sale, including Neiman Marcus, Gauchaug's [ph], Boots [ph] and Saxony [ph] to name a few.

Until we know the specifics of these potential transactions in terms of store closures, timing and the strategies of new owners, we would be speculating about the true impact of any deal in our business.

We naturally have run our own analyses and scenarios, but we'd rather wait for more definitive information before sharing our expectations.

That said, there are a few things we can say.

Stronger prestige retailers aid our business in the long-run.

At the end of the day, strong brands will drive growth.

We will continue to support our brands with appropriate advertising to that end.

Our strategy to diversify our distribution into new channels has lessened our overall reliance on department stores and parfumeries.

These new channels have grown the fastest over the last few years.

This strategy will certainly help us to weather the changes with our core department store and parfumery customers.

There are likely to be some short-term disruptions to our business as we work with our retail customers in their own integration programs.

Near-term impacts are likely to include the following items: New owners have an incentive to reduce inventory to boost cash flow for debt service.

Overlapping stores may be closed, leading to some product returns, counter write-offs and lost sales.

We would anticipate that these impacts would be partially offset by related operating expense savings and the likelihood that a portion of the stores will be sold to other prestige retail customers with whom we do business.

Our largest brands, Estee Lauder and Clinique, will be the most affected due to their relatively broad distribution.

Our smaller brands will be affected slightly, and our brands sold exclusively in other channels, such as Aveda and Bumble and bumble, will not be affected.

We will do our best to keep you apprised as we learn more.

One of the testaments to the strengths of our brands and our innovation capabilities is the outstanding showing we had recently at the Cosmetic Executive Women Beauty Awards.

Seven of our brands garnered the most honors of any company, with 11 awards in all four major product categories.

We're very pleased with this, and hope to continue our innovation momentum into next year.

Looking at our products, we feel good about our recent product launches and those we have on tap, including eight new products from Clinique's Skin Supplies For Men, which is on counter this month.

The men's prestige skin care category in the U.S. has seen double digit growth over the past 12 months, and we are well-positioned to build on our 60-plus share in this emerging category.

Our first new fragrance from the Michael Kors brand, called Island, is launching now to be followed this summer by True Star Men by Tommy Hilfiger featuring Enrique Iglesias.

Our fourth brand from BeautyBank will be shipping to Kohl's toward the end of the fiscal year, and you will be hearing more about this brand next month.

And a broad array of makeup and skin care products from most of the brands, including Moisture Sheer tints and Pore Minimizer Thermal Active Refiner from Clinique, as well as seasonal color collections from M--A--C.

Earlier this month, M--A--C announced the edition of Pamela Anderson as the latest spokesperson for the M--A--C AIDS Fund.

As you know, M--A--C gives back to the community through the MAC AIDS Fund and uses diverse celebrities to promote its Viva Glam campaigns, which generate a lot of activity.

The fund has raised more than $40 million to date.

The high-profile spokespeople involved in the effort will help ensure that even greater heights are reached.

To sum up, we see continued strength throughout the Company and are confident in our future prospects.

Although somewhat short of our own 2005 expectations, our top-line growth continues to be among the highest within our sector; and our earnings per share growth on a year-over-year basis is still very respectable.

We are taking the necessary steps to position the Company to maintain a bill -- and build upon its record to date.

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

Rick?

Thank you, William.

Good morning, everyone.

The Company achieved third quarter operating income of 176.4 million, a 4% increase compared with the 169.6 million last year.

This translates to an 11.5% operating margin this quarter.

Our gross margin of 74.9% for the quarter increased 10 basis points over last year's 74.8%.

The increase reflects changes in production and supply chain efforts of approximately 50 basis points, primarily driven by favorable material sourcing, which were partially offset by increased obsolescence provisions proportionate to the growth in inventory of approximately 30 basis points.

Operating expenses as a percentage of sales for the quarter increased to 63.4% from 62.9% last year.

This increase reflects planned higher levels of spending that we discussed on last quarter's call to support launch activity, as well as a slight shift in business activity to the third quarter from the fourth quarter, resulting from the early Easter holiday.

This increase was partially offset by efficiencies in general and administrative expenses and from the elimination of related party royalties.

Looking at operating profits by category, fragrance operating loss for the quarter improved by 18.4 million to 9.2 million.

This improvement reflected the higher net sales from newer recently-launched products, as well as the strategic redeployment of advertising, sampling and merchandising spending into our skin care and makeup categories.

Hair care operating income increased 2.3 million to 5.6 million, reflecting improved international results, partially offset by increased operating expensed incurred to support growth in the U.S.

Makeup operating results decreased $6 million to 90.1 million, and the skin care declined 6.7 million to 89.3 million.

These decreases reflect a higher amount of planned advertising, sampling and merchandising spending behind new products and, to a lesser extent, a shift in certain gift with purchase expenses from our second fiscal quarter into the third.

Our operating profit in the Americas increased 9.7 million to 112.5 million, primarily reflecting an improved performance in our fragrance product category, partially offset by lower results in makeup and skin care, reflecting our emphasis on advertising, sampling and merchandising spending behind new and recently-launched products.

In Europe, the Middle East and Africa, operating income decreased 4.1 million to 53.1 million versus last year's quarter.

This quarter's decline was primarily due to lower results in the UK, France and Italy, partially offset by higher operating income in Spain and south Africa.

Asia-Pacific operating income increased to 1.2 million to 10.8 million.

Higher results in Korea, Thailand, Australia and Taiwan more than offset lower results in Japan and Hong Kong.

In China, operating income was flat -- was flat, where, as you know, we continue to invest in infrastructure to support future brand expansion and business opportunities.

Regarding our interest costs, we reported net interest expense of 3.3 million this quarter versus 6.9 million last year.

The decrease is primarily due to a lower amount of dividends on our redeemable preferred stock.

The effective income tax rate was 37.4% for the current quarter, the same as the prior year.

The full-year expected rate is 37.4%, compared to 37.7% last year.

Regarding the American Jobs Creation Act of 2004, the Company is evaluating the repatriation of extraordinary dividends of up to approximately 500 million during fiscal 2005 or fiscal 2006.

The potential income tax impact would be to record a liability based on the effective 5.25% rate provided by the Act.

While this liability would increase the overall effective tax rate -- effective income tax rate, the actual impact can only be determined once further anticipated technical guidance has been issued.

For the fiscal third quarter, net earnings from continuing operations increased 6% to 106.2 million, compared with 100.1 million last year.

While diluted earnings per share from continuing operations rose 8% to $0.46 versus $0.43 for the three months last year.

Regarding our financial position, the Company's cash balance was 518 million at March 31, 2005, a decrease of 350 million versus last year.

This decrease reflects in part the use of about $290 million to redeem 80% of our then-outstanding preferred stock in June 2004.

During the nine months ended March 31, 2005, we generated net cash from operating activities of 287 million versus 551 million in the prior year period.

This change reflects higher earnings from continuing operations, more than offset by certain working capital components, including other accrued liabilities, inventory and accounts receivable.

The change in other accrued liabilities in the current period compared to the prior year period was primarily due to significant deferred compensation and supplemental pension payments made to retired executives.

The increase in inventory was due to a number of factors, including the sales shortfall in the quarter, and anticipated lower full-year sales; the building of safety stock to open a new distribution center in Europe; and a general increase in inventory levels to support our new brands, such as BeautyBank, and certain new international activities.

Increased accounts receivable level reflects overall sales growth in the current period.

The initial shipments of BeautyBank products to additional Kohl's stores and the timing of receipt of payments from several major retailers.

In the first four days of April, we received payments of $40 million from those retailers.

For the full fiscal year, we now expect net cash from operating activities of between 575 and 600 million, or about 100 million lower than the prior year.

This decrease is due to sales growth towards the lower end of our expectations, affecting profitability and resulting in higher inventory levels, combined with certain deferred compensation and supplemental retirement payments.

During of the first nine months, we spent 217 million to repurchase approximately 4.9 million shares of common stock under our share repurchase program, bringing the total share repurchased under the program to 21.6 million.

In fiscal '05, we expect capital expenditures of about $245 million, as we continued to catch up on some deferred spending, invest in lease-hold improvements at our corporate offices where we recently signed a new lease, and begin a company-wide systems upgrade program.

Let me now -- I'll briefly update you on our working capital.

At March 31, 2005, inventory was 723 million, an increase of 149 million versus last March.

Inventory days were 166 versus at the end of the period versus 147 last year.

This increase reflects the inventory items I just mentioned when discussing our cash flow.

We do not expect inventories to return to our planned levels by fiscal year end.

Regarding receivables, our DSOs was 4 -- was 54 days at March 31, 2005, compared with 50 days last year.

As I mentioned earlier, we received $40 million of customer payments in the first week of April.

Our key return ratios continue the improvement we have experienced for the last two years.

Let me now update you on a few assumptions for fiscal 2005.

For the full year, as William said, we anticipate reported sales growth of approximately 8.5 to 9%, which includes a benefit of about 2.5 percentage points from foreign exchange.

We expect gross margin to improve about 20 basis points for the fiscal year, with supply chain savings providing most of the benefits.

Slightly offsetting the improvements will be the impact of BeautyBank and product mix, including new products.

We anticipate operating expenses to improve approximately 10 basis points for the full year.

This is primarily due to increasing our investment in business building spending -- advertising, sampling and merchandising -- by over 100 basis points, offset by tight cost controls in non-business building activities and the benefit of the end of the international royalty payments.

Operating margin is expected to increase approximately 30 basis points.

And for the full year, we now anticipate diluted earnings per share of between $1.87 and $1.90.

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

[OPERATOR INSTRUCTIONS].

Ann Gillin, Lehman Brothers.

Thanks.

I'm very confused about the inventory, I guess, and working capital in general.

This is isn't the first quarter, it's actually the second sequential quarter where we've seen this rise.

Given gross margins that you typically print, particularly on inventory levels, it just seems like those numbers are starting to get a way, and, perhaps, suggest a less optimistic outlook than you're giving us for topline, in particular, going forward.

Ann, I think in the last two quarters we've seen and we've taken down our sales growth guidance slightly.

We went from -- coming into the year at 7 to 8%, where last call we said between 6 and around 7%, rather.

In this call, we said between 6 and 6.5%.

So our sales are slowing down.

That's -- that is really what's generating that blip in inventory.

For us --

But, Rick, my concern is actually that inventories are continuing to rise and that we're actually -- they, perhaps, are more of a leading indicator of what to expect for FY '06 in terms of sales growth for FY '06.

No, I think our -- the inventory growth that you see now is a result of the sales not coming through this year as much as we had hoped they would be.

But it takes us time.

I mean, to your point, it takes us time.

Because our supply chain is a little bit longer than other consumer products companies, it takes us longer to work those inventory levels down, so when the sales slow down, our inventory goes up, and it takes us a period of time to work that through.

Okay.

Can you, at least at this point, discuss what you'll do about the inventory levels given the more cautionary comments about consolidation by your customers?

It just seems like those inventory levels could rise even more if you're in the position of having to buy back inventory from them.

Well, we're using our projects to begin to adjust our production forecast going forward on -- based what we assume that's happening.

So obviously, we're adjusting our production forecast to react to, number one, the sales slow down that we've seen now, and number two, to react to what we anticipate maybe some returns that come as a result of retailer consolidation.

But those retailer consolidations are really not anticipated to even begin before calendar 2006, probably at the earliest, and probably cover a period of -- throughout fiscal -- I'm sorry, throughout calendar 2006 so, it's going to be sort of spread out over -- over partially next year and the year thereafter.

And is the interpretation that it's negative near-term, more positive long-term what you were trying to relay in prepared remarks, William?

It's hard to exactly -- to project for sure, Ann, but I think it's safe to assume that there is negative near-term and it will probably be marginal if you realize that the universe of stores covered is approximately 132 out of a population of 2,200 in North America.

And of those 132, it's very hard to speculate as how many actually will no longer continue to operate as ongoing businesses in which we do business.

It may be two, it may be none, it may be 132.

We really don't know.

There have been no plans shared by any retailer now as to what those plans might be, and we don't expect that they actually will be announcing any material plans on specific locations for quite some time.

Okay.

Thank you.

Wendy Nicholson, Smith Barney.

Hi.

Could you talk about the delays in the launches, I guess, primarily in Japan?

What caused that?

I mean, that sounds like pretty straight-forward execution stuff.

Wendy, this is Dan Brestle.

In Japan, it was pretty straight-forward execution stuff in that particular case, which is the Cyber White we talked about.

We had an ingredient put in -- an new -- an ingredient we've used before and putting it in the material, the plastic that we're using in the tube had an adverse reaction, and it happened late in the process and we couldn't recoup.

When you're dealing with whitening-type product, you have a limited window.

So it's not a matter of if we're three weeks late or four weeks late we can recoup it.

When you missed the whitening season, you missed it, and it was purely a -- an executional problem that we missed.

And was that the primary delay in launches, or were there others around the world we haven't heard about.

Well, that was the primarily delay.

We've had it launch again in a seasonal sun product with Clinique, all which of were tied into specific selling periods.

They're the ones that hurt you the most.

You can't miss the selling period, but the Cyber White was probably the one that was most damaging, especially to the Asian business.

And your expectations for that business had been so big that it's actually a material miss where sales are shifted from the third to the fourth quarter?

Oh, yes.

It was a material miss.

It affected the whole program.

It was the lead -- it was the lead product in a host of four products, five products.

And, Wendy, those sales, as I think William mentioned in his comments, when you miss that initial sale, certainly you -- obviously you reintroduce the product, but you lose some of the momentum related to that sale, so some of those sales, unfortunately, we've lost forever at this point.

Okay.

And just looking at sort of all the initiatives on the Lauder brand, can you give us a sense of -- it sounds like an awful lot of money now being directed towards the Lauder brand, but this is coming on top of years, it seems, where significant resources have been put into that brand with advertising, with new products, and yet they haven't really worked.

So I guess, what confidence should we have, with respect to the Lauder brand, that this isn't -- the hiring of Thia and Andrea and Tom -- isn't just putting good money after bad.

Well, certainly, the introduction of fresh talent -- leadership talent in the brand is -- I won't characterize as putting good money after bad, as much as it is to say these are all very talented, very experienced, capable executives in our industry whom we have a great deal of confidence in to re-energize the brand's goals and objectives, as well as to refocus their efforts on those programs and activities which can give us some of the best results.

We are confident that a brand of this size, a brand of this strong following, its authority and leadership in so many different categories has -- still has a very strong following, significant share, and still generates on an industry basis, a relatively outsized return on investment compared to its peer competitors.

So, we still expect this is -- this brand to continue to be successful.

By the application and energizing of -- with talent, especially in, for example, when we mentioned Tom Ford.

It's really one of the first times that we've introduced into the Estee Lauder brand, the authorship of one of the leading creative thinkers in the fashion and beauty world for this leading brand, and we expect that's going to have significant impact.

And have you done kind of market research analysis?

I mean, I know people who know Gucci and Yves Saint Laurent know who Tom Ford is, but does the average woman in -- the average woman in the country, has she heard of Tom Ford before?

Does the brand -- is the Tom Ford brand going to matter?

You know what?

We -- research -- the research that we've done gives us great confidence in a number of different ways.

First and foremost, the core passionate beauty consumer, for whom Estee Lauder is one of their key passions, is very aware as to who Tom Ford is, and that is a primary objective.

The secondary objective is is that when Tom Ford came to Gucci, he was -- nobody knew who he was.

And pretty soon, the recognition of Tom Ford for Gucci was tremendous, and we certainly expect, given his creative talents and abilities, the following he has in many of the different fashion and media circles for whom he is a rock star, we expect that those same impacts -- we will have the same impacts, first, on core consumers, borrowing a page from the recent political season that passed.

Our -- for our first and foremost goal is to activate and stimulate our core, and secondly, to pull along those who will follow those who are the most core consumers.

Fare enough, thank you.

John Faucher, J.P. Morgan.

Yes, good morning, everyone.

Can you talk -- you talked about tightening expense controls.

It seems as though we've heard that before, and there always seems to be a healthy amount of scepticism in terms of what's different this time.

So can you walk through in terms what you've put in place to more effectively tighten some of the expenses right now?

Sure, John.

I think, and we've talked about this before, but when you look at what we have done over the last couple of years and continue to do now, we have taken a great deal of expenses out of things that do not grow the business.

So out of general and administrative costs, out of distribution costs, out of selling costs.

We have invested quite a bit of that into increased advertising, merchandising and sampling expenses, so, for this year, we talked about a hundred-basis point increase in advertising, merchandising and sampling expense, but obviously, basically flat on the operating income number for the year, so we've taken other operating expenses out.

I mean, we've done -- and we've talked about some of the programs, and there are no specific one big silver bullet to any of this stuff, but -- from indirect purchasing, from negotiating rates with hotels and meetings, where, by the way, we spend a great deal of money, renegotiating office supply contracts, renegotiating delivery contracts for Federal Express and UPS.

I mean, there's a host of programs that are underway, John, and a lot of people's bonus opportunities are tied into those.

So there's a lot of people working very hard on this, and they're creating, quite honestly, quite a bit of funds for investment in the long-term growth and health of the Company.

Okay.

Thank you.

You're welcome.

Amy Chasen, Goldman Sachs.

I just wanted to understand again the sales shortfall.

How much of that was due to these new -- the execution issues on these new products versus just overall weakness in the economy as relative to your expectations?

Amy, it's hard to really put a finger on one rather -- verses the other.

It's safe to say that these sales shortfalls certainly did not help the situation.

As we mentioned, there are some of our stronger markets, which have had significant velocity like the UK, for example, have seen a slow-down, and the result being that is also -- does have an impact, so it's very difficult to say there's only one factor.

There's a series of factors, of which the production and missed deadlines was an issue, but certainly by no means, the only issue.

I guess what I'm having a hard time with is that in the quarter, your sales were up 8.2%.

I was looking for 9.

So we're talking about less than a percent, and yet, relative to the estimates, the EPS numbers was so much worse.

The operating profit was so much worse.

Where is the disconnect?

Well, I think one of the things you have to be careful about in any one quarter-to-quarter period is there's a substantial portion in any one quarter of operating expenses that is attributable to business in the succeeding quarter.

So you would -- it's very difficult for to you match up exactly sales in the quarter to expenses related in that quarter's business.

Because we're always working, if you will.

The cycle time is somewhat off so your spending certainly in the back half of any quarter is related to business in the following quarter as opposed to that current quarter.

So be careful about making exact matchups.

For example, right now, our manufacturing facilities are gearing up quite aggressively and preparing for Christmas of this year.

Hard to believe we're entering the summer season and we're thinking about snowflakes and Santa Claus.

But the fact of the matte is is in order to meet the deadlines, that's exactly what we're doing.

So we're spending today in the back end of the fiscal quarter in the acquisition of materials and inventory for the manufacturer of merchandise that starts in the summer time, that's shipped in the fall, that's sold in Christmas time.

So to relate expenses in any one period to the sales in that period is not necessarily an exact analogy.

Another key thing, which I don't want you to forget, is that, sadly, one of the most frustrating acts of any management is when sales fall off, the spending associated with that is very difficult to exact the pain of a dollar-for-dollar match, and you can't really do that.

And secondly, we managed our business and you had a quarter's estimate.

That's your estimate, not our estimate.

How much were the -- how much was the operating profit, or the EPS off, relative to your expectation?

For the quarter?

Yes.

A little, Amy, but not a tremendous amount.

We said last quarter that significantly all of the profit growth in the second half would come in -- would come towards the -- in the fourth quarter.

So, really, I mean, we were not terribly off of our numbers, but we're off a little bit.

We had guidance out there for the year of $1.88 to $1.93.

We have revised that guidance and tightened the range for $1.87 to $1.90, but still if we fall within the middle of that rage, as an example, we'll be within the guidance that we started the year with.

When do you first know that the sales were coming in below expectations?

Here in the U.S., as you know, we see sell-through information on a weekly basis.

So we start to see that fairly early in the quarter.

Internationally, it's not quite as transparent, because we don't get that information quite as quickly.

Okay, and my last question is, can you tell us -- it sounds like BeautyBank had more of a contribution to the U.S. this quarter than in prior quarters, where you've said it's been very minimal.

Can you give us some idea of what the contribution to the U.S. sales growth was?

Overall -- overall on a consolidated dated basis, Amy, the number is around 1% in the quarter for the total growth.

The total company?

The total company, yes.

And for the year, it's a little bit under 1%.

And as far as the P&L impact, again, it's adding about 10 basis points to our cost-of-sales, adding about 10 basis points to our operating income, and it's more or less a breakeven at the NOP line -- or operating income line.

And have you seen an improvement in just the tone of that business since you've expanded the distribution?

Yes, in fact, very interestingly, the first wave of stores we opened in the fall of 2004 were the stores, if you will, and their less core markets, not necessarily the midwestern markets, but their less core markets in the northeast and California, for example.

The second wave of stores were in their core markets, the more established developed markets.

Most primarily in the midwest, upper midwest.

And we were seeing a very significant difference.

In fact, the significant -- most significant difference is that obviously we learned along the way, between the first wave and the second wave, stores of similar volumes were getting far higher penetration of cosmetic sales in the second wave and first wave, showing us the actual opportunity we have overall, and increased productivity.

Generally, as we begin to better refine our media mix and how we generate and stimulate sales and awareness for these brands in these stores.

Okay, thank you.

Linda Bolton Weiser, Oppenheimer.

Thanks.

Can you just kind of clarify a little bit in terms of the shift in the spending being higher in the third fiscal quarter rather than the fourth, given that sales are kind of slow and you're below your expectations, and given that you do have some new product introductions planned for the further quarter, can you explain exactly why the spending still won't be very heavy in the fourth quarter?

I think the first point, Linda, is what we had mentioned on the last conference call where a gift that was supposed to ship at the end of the second quarter actually ended up shipping early in the third quarter.

So that was -- that was, well, I think, 6 or $7 million of spending that kind of moved from one quarter to the other.

It was one of the reasons that we exceeded the guidance that we have given in the first half last time.

In addition, that -- you're right.

There are new product launches scheduled for the fourth quarter, but the level of activity that's happened in the third quarter and the shift of the Easter holiday from the second week in April into the third week of March affected the spending pattern.

We knew about it, which is why we gave guidance saying that substantially all of the profit improvement would come in the fourth quarter.

Last call.

So it was not -- to the earlier comments, and when I was answering Amy, it was not totally unexpected, and we're really not terribly different than where we thought we would be in this quarter.

Okay.

And secondly, just a question on the agreement with Tom Ford.

I think, William, you said that you expected this to make a significant impact on the Estee Lauder brand, and I guess I'm confused about why one of the phases where Tom Ford will develop a completely separate line under his own name, why that would have anything to do with the Estee Lauder brands.

Well, let's really talk about the two phases.

As Tom Ford develops Tom Ford the brand overall, not just in the beauty category, but other categories also, we will begin to develop the Tom Ford brand.

The expectations is though over the next 18 to 24 months, the primary impact of our activity will be with Tom Ford for Estee Lauder.

So, you're right.

Will Tom Ford the brand have an impact -- the Tom Ford -- for Tom Ford brand a year hence, plus, have an impact on the Estee Lauder brand?

Perhaps not as much, but in the ensuing 18 to 24 months, we expect that the Tom Ford for Estee Lauder brand will have a more significant impact.

Additionally, understand that Estee Lauder the brand is in distribution in over 120 countries around the world.

Many of those are highly-developed fashion-oriented markets for whom Tom Ford is a very much a very attractive, appealing leader; and the network of the Estee Lauder brand will allow the Tom Ford brand, in the beauty category, to get out there in a way that the Tom Ford brand itself, as we build the brand in a more normal fashion, more conservative fashion, if you will, might not be exposed to.

Okay.

And just one more question about the inventory issue.

I recall when you had this problem kind of pre 9/11 and then post 9/11 a couple of years ago.

When you were working down the inventory level for many quarters, it was really hurting you margin performance quite a bit.

Are you figuring that effect into your guidance now?

And also, can you comment on how your inventory levels are in the channel?

Well, our inventory levels in the channel, we start with that one, are pretty close to where they were that last year.

I mean, there's very little change in that, and so we haven't seen any change in that level of inventory.

As far as working down our inventories, it takes us a little while to do that, but the magnitude of this issue is nothing like we faced after 9/11.

So we're not really anticipating any tremendous impact on our margins, per se, but it will take us -- it will take us time to work through the supply chain.

I think if you went back in time and looked at the inventory, you first saw a reduction in raw materials that worked its way through finished goods, it took us a couple of quarters -- two to three quarters to get back to a normal level.

But, it takes a little time, because our supply chain is longer than some other industries.

But you have to remember, we produced in just a few locations, we distribute to 130 markets around the world.

We generate tremendous gross margins as a result of that, but it also causes us to carry a little more inventory and have a little bit longer supply chain.

And just one final thing, did you mention how much travel retail was up in the quarter?

We can.

It's about plus 15 in the quarter.

15%?

Yes.

Okay.

Great.

Thanks a lot.

You're welcome.

Connie Maneaty, Prudential.

Hi.

Good morning.

I have questions on the fragrance business.

I think there's something pretty basic I don't understand.

If the fragrance sales came in a little bit higher than expected in the quarter, what is the weakness that concerns you going forward?

Well, Connie, I think the biggest issue is really a sector of weakness in the entire category.

This has been a long-term issue, which I think we've discussed a number of times before.

It is not an issue that I think is going away soon on a global basis.

As you know, there are three primary regions, if you want to call it that, for which the fragrance business is significant.

Europe, travel retail and North America, and it's not insignificant to see the channel shift in existing distribution in prestige fragrance in two of these channels, primarily Europe and North America, and while we have enjoyed very great success recently with the launch of DKNY Be Delicious and a number of other launches, which are giving us some nice results, the fact of the matter is is that this broad macro shift that's going on that gives us some long-term concern.

How far below your expectations is Beyond Paradise?

Well, the fact of the matter is is when we launched Beyond Paradise, it was well above our expectations and was a tremendous success.

What's happened is, and really disappoints us is, that the return of that -- the anniversary of that business a year later and the return of those consumers we had -- would have expected to come back for the brand is not nearly where we would have expected it to be.

So, despite that, we're still seeing fragrance strength overall, but the disappointment for us is is that this brand in particular is not at the level we would have expected it to be.

Do you have financial hurdles and things like that whereby, if Beyond Paradise doesn't recover, you might discontinue it or something like that?

Well, discontinuing a brand that did over $50 million and now is only doing less than that, you kind of wonder.

There's still plenty of happy customers out there, just not nearly as many as you like.

It takes an awful lot for us to kill a brand that has a loyal following of consumers.

I'll just give you an example.

When I was the President of Clinique back in 1998, there was a brand -- a fragrance brand we had launched a few years earlier called Wrappings.

Wrappings was expected to be success.

It really wasn't so successful.

It was costing us inventory, and we decided, You know, maybe if this brand really doesn't survive, let's cancel it.

The human cry from loyal consumers who loved this brand was tremendous, and it quickly shot up in one month's period of time to being the number one consumer complaint in the corporation when we discontinued this product.

Rather than bring it back and ask retailers to carry it full time, instead what we did was we made it available once a year during the Christmas period of time in special gift sets and other programs, and you know what?

It does pretty nicely.

The fact of the matter is is that there are products like this for whom there's a passionate following.

It may not be so significant to be considered in the top 10 in the world in fragrances, but still is significance relative to the overall business.

Okay.

If I could just ask one more question on Tom Ford.

What is your expect -- I mean Tom Ford for Estee Lauder's going to sell for a period of two years.

Why only two years, and how will that have a positive impact on the rest of the Estee Lauder brand?

Well, two pieces to it; why only two years, I refer back to my comment earlier.

As Tom Ford is building the Tom Ford brand, we're concerned, as well as he's concerned that we don't create a confusion.

Is it Tom Ford?

Is it Estee Lauder?

So as the Tom Ford brand itself begins to create its own identity as a brand, as an image, as a total iconic idea across multiple categories in fashion, the expectation is is we want to continue to re-enforce that branding image in a number of -- in our category, in the beauty category as well as to re-enforce what's going on in other categories, in the total Tom Ford brand.

The second piece of it is, Why the expectation?

Well, first and foremost, Tom Ford is one of a very few of true fashion visionaries in the industry on a global basis.

He has an extraordinarily loyal following, as I mentioned earlier, with a core passionate consumer in this category; and to associate a leading icon like this with a brand like Estee Lauder is a really wonderful combination for the two of us.

It takes advantage of a number of different factors.

Like I mentioned earlier, the Estee Lauder brand has one of the single best reputations as a beauty authority around the world.

Secondly, we, in the Estee Lauder Companies, have a unique skill set compared to most of our competitive bases.

Where we are more skilled and believe we're more skilled in brand building than most of the competitors.

So it really brings the best of both of our skill sets together along with Tom Ford's tremendous reputation and visionary ideas.

I guess I just don't understand the benefit to the Estee Lauder brand once his name isn't associated with it.

Well, for two years' time, we've associated Tom Ford with the Estee Lauder brand, and that consumer has come to associate this brand with a leadership and authority in creativity, we certainly expect the momentum will continue.

Okay.

Thanks.

Martha Brantley [ph], Deutsche Bank.

It's Bill Schmitz, actually.

What's the vitality rate?

You used to give that number out, so percentage of sales from products launched in the last three or five years, kind of pick the number.

That number is pretty consistent, in the low 30%.

Okay, so it hasn't changed recently?

No.

Looked at another way, you could say that in any given year, it's about 18 to 20% or so of our sales.

Okay, great.

And then you used to tell us what the average age of the Estee Lauder -- you said this once years ago, what the average age of the Estee Lauder customer was, and I think it was somewhere along the lines of 44 or 45.

Has that number changed at all?

It's gone down a little bit, actually.

Part of our effort with the Beyond Paradise launch was to aim to a younger consumer, and it brought that number down by about 2 years.

And, in fact, what is that does is it brings the number somewhere slightly below the average age of the consumer shopping in our traditional channel of distribution in the department store.

Okay.

Great.

Thanks.

And then have you ever thought about changing the advertising model in the department stores?

When you created it --

-- [inaudible - overlapping speakers] the advertising model is a mix between television, radio, ROP, direct mail.

Co-op.

Co-op.

We are constantly adjusting that, and in fact, if you look at it brand-by-brand, each brand has a different mix in its -- different media mix.

For example, the Estee Lauder brand does have a significant portion of its advertising in television where the Clinique brand has minimal or no television advertising relative to the size of the Estee Lauder brand.

Clinique is heavier into radio and direct mail and co-op.

So each brand mixes and matches its media message, given the relevance for the brand and the history of the brand, and we're constantly adjusting that based on the emphasis or re-emphasis of the retailers and their strategies and also what we're finding is working more effectively.

How do you analyze that and change accordingly and things like that?

Well, we worked very closely with the retailer in trying to, as scientifically as possible, analyze the awareness that we get from the response to consumers.

It is, unfortunately, an inexact science.

One can sarcastically say 50% of your advertising, the message doesn't get received.

The problem is, we don't know which 50% of the message isn't received.

And the goal is to try to understand and analyze that the best anecdote you can get is the advertising message you put out there.

What kind of response did you get?

How many consumers come in and say, I saw this on.

I heard about this when.

This is what the best thing is.

The single most effective media -- communications vehicle we have in the world is consumers telling other consumers the products they love.

Single most effective -- Mrs. Estee Lauder was famous for her quote: "There's three great ways to communicate with a consumer: Telephone, telegraph, and tell a woman."

Tell a woman is the single most effective today.

Great.

Thanks very much.

Chris Ferrara, Merrill Lynch.

I'm sorry if you guys addressed this already.

But I think you said this quarter was only slightly disappointing on the EPS side, relative to your estimates.

Is that what you guys said?

That's correct, Jim.

So that means that Q4, really, there's no change to your internal outlook for Q4.

Is that --?

That's also correct.

But the -- but sales are coming down.

Sales are lighter than what you would have expected.

Sales are coming down.

But obviously, Chris, we look to adjust our operating expense base when sales start to slow down as well.

So.

So where is that lever, I guess, in operating expense, and what does it mean for the year to come?

I mean, will you continue to do that to maintain an EPS growth that's going to satisfy the marketplace as you get to -- as you move into '06?

How do you sort of think about that, and when do you expect sales to recover?

Well, we always have, and I'm sure all companies have, a certain amount of discretionary spending which we use when we see opportunities to take advantage of different business opportunities that present themselves.

So I mean, those are the types of flexibility that we have.

You ask about how we're going to continue to manage that going forward.

I think we've done a very successful job of that over the last several years, and we'll continue to do so.

It's a careful balance between investing to build the business over the long-term and trying to reach your financial objectives as well.

So, I mean, it's a process that we've done very well at over the last several years, and it's one that we'll continue to do at.

And by the way, one that we feel, quite honestly, we're not doing too bad a job at this year.

But, 15 to 17% EPS growth is a pretty solid number.

Sure, no -- agreed.

I just -- I'm just thinking on a forward-looking basis and you know where sales are.

I mean, you guys traditionally have not really seemed to have a lot of leeway on the SG&A side of the business.

And I'm just trying to get comfort with what you might have as you get into '06, or whether spending ramps up because you're not satisfied with the 6% sales growth rate.

We'll usually discuss those things in our August conference call, so we'll certainly give a lot more guidance at that point.

Chris, if I can also add one thing is it has been our mantra for a long time, and will continue to be our mantra, that the more spending we can drive out of expenses which are not visible to the consumer so we can push them into visible expenses, advertising, sampling and selling expenses to drive our topline, that's our goal.

And we're continually putting pressure on so many different areas of our business to make sure we are pushing down those invisible expenses.

Of course, there are many different factors which push against that, and our goal is to make sure that we are not pushing a stone up the hill, and we seem to have accomplished over the long term a great deal of these objectives.

But we're never done.

And we can never be done.

It's a continual improvement.

Got it.

Is there a secular change to either prestige or your own business that would indicate that you'd -- the level of spending to support the business would just be higher in the next couple years?

I mean, is the cost of doing business in the prestige, or just for you guys given the relative strength of the brand now, has that changed at all, you think?

Well. there's a theoretical aspect that is as a pie itself -- as the universe itself does not expand at the same rate, the cost of market share acquisition becomes more expensive.

You see that in a number of different consumer sectors, not just in our sector alone.

And to a certain extent on a regional basis, you are seeing that as the pie is not expanding in the more mature markets, the cost of each share of acquisition becomes slightly more expensive.

The hope is is that our strategy of having continually-new faster-growing brands makes that cost of acquisition of share on the broad basis slightly less expensive than perhaps our competitors, who do not have this pipeline of new brands and innovation at the same rate.

But also, our emphasis on new emerging markets such as China, India and other markets which are growing at an outside rate, investing in those which are growing outsized to the total global market, we hope again that it allows our global share to grow at a slightly higher rate, perhaps, than the norm, because we're putting an emphasis on those markets which continue to expand and establish a more aspirational business.

Thank you.

Wendy Nicholson, Smith Barney.

My question just has to do on the expansion, possibly, of some of the underperforming fragrance lines into more popular distribution, and has that started?

How big a deal do you think that can be?

When does that start, and can you give us some sense of what to look for from that?

Well, this is a constant balancing back and forth in the -- the use of popular distribution for brands, underperforming brands.

Generally what we find, Wendy, is that it's a general rule that brands that are performing decently in the existing established distribution tend to perform well also in popular.

Brands that begin to lose momentum in existing established distribution, perhaps trailing a month -- a few months or seasons later, they also begin to be -- to struggle some in popular distribution, so we have very careful about that.

Also in addition, some brands are more relevant than others for their success in popular.

And we want to be careful not to jam the pipe with inventory into this market.

That being said, on a broad basis and over the total industry, it is not insignificant the contribution that popular distribution makes to the overall piece of the fragrance business and our ability to spend primarily against the established distribution for prestige.

And who do you use as a distributor to get into those popular distribution channels?

We have a number of different contacts in that world, but we use one or two companies who have more [inaudible] contacts in the popular world.

I don't believe they actually disclose who their customers are, so I think it's probably out of respect we don't disclose whom we do business with.

Okay, fine.

Thanks.

Connie Maneaty, Prudential.

Hi.

Just two quick things.

On the receivables that were paid in April, were these receivables paid to you on time, or is there some issue with some of your customers?

It was a cyclical timing of their payment schedule, so it actually went beyond our -- the end of the quarter, and that's why we received dual on the first quarter.

So I mean, we had two things that affected our receivables this quarter.

One was the shipment of BeautyBank, which went out in march, so that obviously an unusual amount sales, all of which were basically oustanding receivables, and as well as this $40 million payment for some of our major customers that I mentioned in the first week of April.

So this 40 million, they're paying you -- they're on time with their payments, it was just a timing issue?

Yes, they're on time with their payments.

It's just the timing of their check-cutting cycle, if you will.

Okay.

And then I have a question on -- I know this comes up periodically, but if you have an internal budget for the quarter and the results that we've seen today are pretty much in line with what you thought you were going to do, how can you give guidance on a six-month basis such that the perception of the market is so different than how you see the Company?

It's hard for us to respond, in a sense, to that question, Connie.

I mean, we gave guidance for the second half and for the full-year.

We always tighten that guidance as we finish our third quarter, because we only have several weeks to go for the remainder of the year, quite honestly.

We've tightened that guidance more towards the lower end of our range versus the higher end of the range, really driven by the the fact that we've also taken our sales slightly down towards the bottom end of the rage.

So, I mean the logic -- the logic flows relatively nicely for us.

It's hard for us to explain or comment on a consensus number that's out of line with what we thought was going to happen.

I think If I can make an observation, I'll go back to last year at this same period of time last year, when we were having the same conversation and we, again -- last year if I recall correctly, we tightened our range for you with six weeks or so to go in the quarter.

We have a little more than six weeks, excuse me.

With a few more weeks left to go in the quarter.

We tightened our range in guidance last year and I believe if I'm not mistaken, there was a consensus number out there that didn't necessarily jive with what we were directing you on, and low and behold, after we did actually report the end-of-the-year results, there was shock and dismay amongst the analyst community as to how we could not agree with your consensus, but agree with what we though we were going to do.

Forgive me, we know how to run our business.

We think we know how to run our business pretty well.

Results seem to on generate that, and I'd hope you would have the confidence in our management that as we get closer to the end of a period, we think we know what we're going to do.

We reported and did exactly what we said we were going to do, but you all thought we were going to do something different.

So, I hope you understand we guide you how we think our business is going do, based on how we work within our management.

You can then make your decisions as to whether or not you agree with the way we think we're going to manage our business or not.

William, when you took over, the Company's policy was to give guidance on a six-month basis.

Since you're now -- since the call is now yours, are you still comfortable that six months is the right way to go?

I'm comfortable for the moment that six months is the right way to go.

We've looked at what the world does in the consumer product world where they guide on a yearly basis or no guidance and we've looked at going back to the quarterly basis.

The fast of the matter is is the reason we shifted to the six months basis, Connie, was because we manage our business really on the shortest horizon as a six month basis and on an annual basis.

To give guidance and manage our business on a cycle that's tighter than the way we manage our business is a disconnect, and we think the 6-month basis is a reasonable measure of being able to adjust our guidance based on how we see the trends in our business, and also, it pretty much syncs up with the way we manage our business.

Okay, that's very helpful.

Thanks.

Kathleen Reed, Stanford Financial.

Good morning.

I just have a question.

If you can just comment on the popularity of celebrity brands.

I know you said in your prepared remarks that your Beyonce brand, I think you said, was doing well and you have a Julio Iglesias one as well.

And I just wondered, are some of these popular -- or, the celebrity brands, are these cannibalizing some of your base brands and if you think the celebrity brands are still growing.

Well, in one way, shape or form, the contribution of celebrity and personalities to the growth in consumer product businesses, most especially in our category, has been something that's been rising in its influence for the better part of the last 10 years.

And every few months, you say, Well, it's going to end sometime.

Well, it's going to end sometime.

Well, in fact, it's not ending.

It continues to grow.

It continues to expand in different ways, and you really have to look at the celebrity in two different ways.

There's endorsed businesses for existing franchises, for example, Tom Ford for Estee Lauder.

Beyond -- True Star by Tommy Hilfiger with -- featuring Beyonce, or True Star for Tommy Hilfiger featuring Enrique Iglesias; or there are celebrity brands, per se, such as Donald Trump the fragrance.

But the truth of the matter is is that they're here, they have an influence and the consumer responds.

And let's be careful about one thing.

Celebrity influence is far larger in the United States than it is virtually anywhere else in the world, and we need to be careful of not being so American-centric to look just at America and see it's an influence on a global basis.

Celebrity is an influence that's very strong in North America, most particularly in the United States.

Okay.

Thank you.

Amy Chasen, Goldman Sachs.

My question's already been answered.

Thank you.

Ladies and gentlemen, 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.