雅詩蘭黛 (EL) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Companies fiscal 2007 third quarter conference call.

Today's call is being recorded and webcast.

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.

On today's call, a William Lauder, President and Chief Executive Officer, Dan Brestle, Chief Operating Officer and Rick Kunes, Executive Vice President and Chief Financial Officer.

We hope that many of you attended our recent analyst and investor day or participated via the web.

Since we didn't have time during that event for a full presentation on Hair Care, Dan will review that segment of our business after William's remarks.

Dan will also be available for the Q&A session.

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

And I'll turn the call over to William.

Thank you, Dennis.

Good morning, everyone.

I'm pleased you've joined us to discuss our third quarter results.

During the period, we continued to achieve solid sales gains, up 7%, due to improvement in most product categories and healthy growth in many key countries.

Diluted earnings per share from continuing countries.

Diluted earnings per share from continuing operations were $0.45 in line with our projections, Rick will go into further detail later.

Our third quarter performance tracked our expectations.

There were, of course, certain highlights, developments and product introductions that would I like to bring to your attention.

Let me begin with a broad overview.

As we have stressed, we are truly a global company.

More than half of our sales were generated outside the U.S.

during the quarter.

We saw the strongest growth in Europe, the Middle East and Africa, up 13% in local currency, followed by Asia-Pacific.

In terms of product categories, Hair Care showed the biggest improvement followed by Skin Care, then Makeup.

Both Estee Lauder and Clinique, our two core brands, grew on a global basis fueled by sharply higher foreign sales overall, which more than offset weakness in the U.S.

Our high growth brands, M.A.C., Bobbi Brown, Jo Malone and Aveda continue to grow in virtually all regions, in many cases with large double-digit increases.

You may recall that one of our long-term goals is to position our brands and offerings to best optimize our portfolio.

To that end, we've rolled out brands developed desirable and effective products and created promotions geared to different markets, customs and cultures.

In the third quarter, demand for the Estee Lauder brand was particularly strong in Russia, China and Hong Kong, as well as in the U.K.

We believe the brand still has more untapped potential in the U.K particularly from the upscale Re-Nutriv franchise, which we expect to boost sales.

Estee Lauder was ranked number two at retail in prestige distribution in the fast-growing Asia-Pacific market.

Shipments to the region rose double digits with the bulk of business in Skin Care.

Clinique continued its turnaround in Japan and enjoyed healthy gains in central Europe, Russia, Nordic and Hong Kong.

U.S.

sales associated with its spring gift with purchase promotion were approximately flat with last year, which is moderately encouraging after some declines.

We believe consumers found the editor's choice gift appealing, so we plan on repeating it with some variations in the fall.

Clinique is also enjoying success in All About Eyes Rich, a new line extension that's exceeding our sales forecasts.

We believe this product holds the potential to become a critical component of our Skin Care portfolio for years to come.

And other skin care introductions, Continuous Rescue, also got off to a strong start.

Bobbi Brown is showing terrific momentum, both in the U.S.

and abroad.

Bobbi has become more visible to generate brand awareness and reach new consumers.

Her recent publicity efforts included a television satellite tour to promote her latest book, Bobbi Brown living beauty.

She appeared on many major media outlets and in nearly every major women's magazine.

The book has sold well, creating interest in her and the brand.

As you may know, Bobbi is a beauty editor and a frequent guest on the "Today" show, which hopefully transforms viewers into consumers.

Additionally, for the first time in the U.S., the brand was sold on TV.

Bobbi Brown herself appeared on QVC and offered her trademark beauty tips along with compelling product.

The inventory sold out in 45 minutes, making it the largest single-hour cosmetics launch in the network's 20-year history.

Thanks to the huge success, Bobbi plans to return to the airwaves for another segment this summer.

We are pursuing a measured expansion of Jo Malone's freestanding stores in order to grow the brand methodically.

In France, we are opening a store in Cannes next week in time for the upcoming celebrity-studded film festival.

Other retail locations are planned for Paris and Lyon as well as the GUM department store in Moscow, its first store in Russia.

Let me turn to distribution.

We had great success in Travel Retail, one of the highest margin channels.

Sales rose a solid double digits in the quarter, with favorable results across all regions.

Several factors are fueling the growth.

Airline passenger traffic remains healthy and is growing, aided by sharp increases in Chinese travelers.

Construction of airport terminals is booming.

Moreover, the amount of retail space inside them is expanding, including more stores for arriving passengers, who can shop while waiting for their luggage.

In addition, we are seeing improvements in the appearance and management of airport stores.

We have launched nine brands in the channel since 2005 and introduced many exclusive products and collections that have been well received.

Overall, we believe there is a lot of untapped potential in the travel retail arena.

Just 30% of global travelers step foot in airport stores and only 10% of all travelers make a purchases.

The ban on carrying liquids onto planes hasn't affected us to any material degree and, although this is a distribution channel subject to risk, we are optimistic about the growth potential assuming international relations remain stable.

We've continued to expand geographically, another of our mandates, making more brands and products available in emerging as well as established locales.

On a recent note, Argus has expanded in the French Pharmacy channel, Estee Lauder unveiled an elegant shop in Hanoi and Aveda launched a lifestyle salon and spa in Madrid.

We have previously discussed, with our strategic modernization initiative, which we expect will streamline and integrate our business processes.

Aveda will be the first operating unit to implement the new system when it goes live next week.

This is a major component of our goal to make our operations more efficient and achieve cost excellence.

I hope to be able to discuss Aveda's success with the project during our next call.

Now, I will turn the floor over to Dan Brestle who will discuss our Hair Care business.

Dan?

Thank you, William.

Today I want to take just a few minutes to describe some of our opportunities in hair care.

Our hair care business is showing consistently strong gains and we believe has good growth potential.

This quarter, sales rose 21% and operating income was up over 50%.

Hair Care is the largest segment of the global beauty industry, with approximately $34 billion per year in manufacturer sales.

Although much of these sales are happening en masse, the Salon channel continues to show promise, because the fastest-growing categories are hair color and styling products, which benefit from the the expertise of a hair stylist.

Salons are significant channel for the Hair Care in the U.S., representing 31% of the $8.5 billion business.

The figure for the top five western European countries is just a bit less, while Asia, a bit more, with Japan accounting for half of that region.

Our strategy is to focus on the top tier of these salons.

Those with favorable demographics, a discerning brand selection and premium pricing.

Premium retail resonates with premium salon services.

While Hair Care represents a substantial portion of the global beauty business, it's only 5% of our business, so there is opportunity for us on many levels.

Over 95% of our Hair Care business is done through Aveda and Bumble and bumble brands.

The hair care business supports three of our key objectives.

First, to further our mission to diversify distribution by fueling growth in the Salon and Spa channels and in company-owned Aveda stores.

Second, this is a global beauty industry category that we believe holds a lot of potential in top-tier salons.

There is substantial room to expand this business on a global scale by leveraging off our historic brand building strengths.

Aveda is sold in over 25 countries, but only 20% of its sales this year will be generated outside of the U.S.

International penetration is even lower for Bumble and bumble.

Lastly, these two brands enable us to gain a foothold in the only major beauty category in which we do not have significant presence.

To illustrate our strong position in the U.S., consider this statistic.

Among the top 200 fastest-growing salons in the U.S., 71% carry Aveda and/or Bumble and bumble.

Additionally, 94 out of the 200 are Aveda concept salons, which sell Aveda exclusively.

Our strategy also results in the highest productivity per door among the salon hair care brands.

The average U.S.

salon purchases $15 ,600 per year in product.

Salons that sell Bumble and bumble purchase twice that amount and salons that sell Aveda purchased an average $48,000, more than three times the industry average.

So how do we continue to grow these brands to support our corporate imperatives?

For Aveda, we expect double-digit sales, excuse me -- double-digit growth in sales and earnings to continue through expansion in existing markets and opening new markets.

The North American business is driven by organic growth at salon and freestanding stores, acquisition of distributors, stylist's education and greater penetration of Hair Color.

Aveda is currently the number three professional spa brand in the U.S., but we want to be number one and we'll continue to pursue this channel.

The brand is feeling organic concept store growth through recruitment of new consumers, using a broad range of products and sampling, as well as a rewarding loyal customers.

Our Pure Privilege loyalty program, in which participants earn points redeemable for products or services, is competing our expectations.

Additionally, online is both a strong sales growth area and a leading source of referrals to concept salons.

The international business is driven by expansion in Japan, the recent launch in Spain, and solid growth in Italy, Germany, and the U.K.

Importantly, the brand is demonstrating similar passion abroad, as it does at home.

Stylists associated with Aveda recently won five of nine German hair dresser of the year awards.

We plan to open four concept salons in Madrid in the fourth quarter and are evaluating several other prime markets such as France and China.

Overall, Aveda plans to increase salon distribution in a controlled and deliberate manner.

A major brand equity study we conducted showed that 91% of the salon professionals and 61% of the consumers, were aware of the Aveda mission, to care for the world we live in.

And 70% of both groups found it relevant to them personally.

Many respond to the authenticity of Aveda.

The company is the largest corporate purchaser of wind energy in Minnesota, where 100% of the electrical usage at the brand's distribution center and main manufacturing plant is offset by wind energy purchases.

This year, the brand is focusing on its philanthropic efforts on clean water rights.

At Bumble and bumble, double-digit sales and profit growth is also continuing.

In the U.S., Bumble is focusing on stylists' education, connecting with network salons through regional events and hair shows.

Market research shows a very powerful support and interest in the existing network and potential new salons.

Bumble and bumble expects to expand further in the U.S.

because of this strong demand for the brand.

For Bumble and bumble, international expansion is in its infancy.

The brand is planting seeds in the form of hair shows, sampling, fashion shows and photo shoots, which generate lots of buzz.

The brand plans to substantially increase distribution in the international markets over the next several years.

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, Dan.

And is good morning, everyone.

My discussion today will focus on our results from continuing operations.

For the quarter, we reported sales of $1.69 billion, a solid 7% increase over last year's quarter.

In local currency, sales rose 5%.

Net earnings from continuing operations for the quarter increased 48% to $93.8 million compared with $63.2 million last year.

Diluted EPS rose 53% to $.45 versus $.29 last year.

This performance was as we projected on our last call.

Our prior year third quarter results included a special charge of $51.6 million equal to $.15 per share, related to our cost savings initiative.

As always, let me refer to you today's press release for the details of our net sales and operating income by product category and geographic region.

During the quarter, we began two anniversary store closures that took place in February, 2006, resulting from the consolidation of Federated in May.

We're not yet seeing the full benefit from the merger, since the performance of the May Company doors that converted to Macy's continues to lag the Federated legacy doors.

As has been the case this fiscal year, the Americas region and each of our product categories, except Hair Care, was adversely impacted by fewer department store doors resulting from the merger.

Reported skin care sales growth nearly broke the double digit mark, with a solid performance from our European and Asian businesses, while more moderate growth was reported in the Americas.

Our makeup artist brands continued to lead the Makeup category with double-digit growth worldwide.

The Europe and Asia regions each generated strong double-digit growth, fueling the increase in this category.

Fragrance sales decreased, as the category was up against a difficult comparison to the last year, when sales rose 11% in local currency.

While we enjoyed solid results from some new and recently introduced fragrances, principally in Europe, we experienced lower sales of certain existing products in the Americas.

Geographically, our international business again led our growth this quarter.

In Europe, the Middle East and Africa, despite coming off high single-digit local currency growth last year, we grew net sales of solid 13% for the quarter.

A few key businesses drove this performance, including travel retail and is our largest market in the region, the United Kingdom, which posted healthy double-digit increases.

Russia, one of our emerging markets, reported another outstanding quarter.

All countries in Asia-Pacific posted local currency sales increases, with the exception of Thailand.

The increases generally reflect a strong economic climate in the region.

Japan, our largest affiliate in the region, was up mid-single digits in the quarter.

New points of distribution in the region also added to sales growth.

In the Americas, net sales decreased.

The decline reflects weakness in our core brands in the U.S., which continue to face competitive pressures and retailer consolidation.

As I mentioned, during the quarter, we have finally reached the anniversary of store closures resulting from the Federated May merger.

There continues to be softness in the May doors that converted to Macy's, while Federated legacy doors are up nicely.

We expect this will continue to affect our sales, but ease over the remainder of our fiscal year.

As we said on the last call, there were strong orders from retailers during the middle of the second quarter which, as expected, somewhat impacted replenishment shipments this quarter.

Also contributing to the decrease was the timing and level of fragrance shipments compared to last year, in particular, certain Tommy Hilfiger products.

Moving on the gross margin, we had a 90 basis point improvement this quarter to 74.8%.

A decrease in obsolescence charges, a change in the mix of our business and favorable exchange rates all contributed to the improvement.

Our operating expenses for the quarter, as a percentage of sales, decreased to 65.5% from 66.5% last year.

The prior-year quarter included a $52 million charge related to our cost savings initiative, which was equal to approximately 330 basis points.

On an apples to apples basis, operating expenses as a percentage of sales increased.

We experienced a higher level of selling general and administrative expenses, which reflected higher demonstration and education costs of beauty advisors and makeup artists, as well as organizational costs to establish the platform on which we intend to build our pharmacy channel business in Europe.

Lower sales in the Americas, as well as incremental spending for our strategic modernization initiative, also negatively impacted our operating expense margin.

As a result, operating income rose to $156.7 million, a 190 basis point improvement in margin over the prior-year period, which was negatively impacted by the 330 basis point cost savings initiative charge.

Looking at operating results by category, Hair Care had the largest gains reflecting strong sales.

Skin Care was relatively flat as international improvements, tempered by investments in the Pharmacy channel in Europe, were offset by domestic declines.

Makeup was down, primarily due to challenges among core brands, while Fragrance decreased, reflecting the timing and level of shipments, principally certain Tommy Hilfiger products in the U.S.

By region, operating profits increased internationally but declined in the Americas.

In the Americas, operating income decreased, reflecting lower sales, coupled with spending behind strategic initiatives that are intended to drive future sales growth.

The additional spending supports both our core brands and the development of new brands in the U.S.

Partially offsetting these results were improved operating income from our Hair Care and Online businesses.

In Europe, the Middle East and Africa, Travel Retail, the U.K.

and Russia led the operating income increase.

Slightly offsetting these gains were lower results in France and Spain.

Asia-Pacific generated the highest operating income growth percentage with virtually all countries posting increases.

Gains in Hong Kong, China and Korea accounted for the majority of the increase.

The effective tax rate for the quarter was 35.4%.

Now, let me turn to our cash flow and balance sheet.

Cash flows from operating activities were $456 million for the nine months ended March 31st, 2007, compared with $476 million last year.

The change primarily reflects higher inventory levels, driven by activities in new and emerging international countries, planned promotional activities and added safety stock in anticipation of the SMI implementation at our Aveda manufacturing facility.

Accounts receivable balances were up, primarily because of the significant international sales growth.

In addition, cash flows this is year were impacted by cash payments we made related to last fiscal year's cost savings initiative.

Our day sales outstanding at March 31st, 2007, were consistent with last year at 51 days.

Inventory days were higher, at 168 days compared with 158 days last year.

The increase in inventory days reflects the reasons I just described.

During the quarter, we repurchased approximately 16 million shares of our Class A common stock for $750 million in an overnight share repurchase agreement.

All shares repurchased have been placed into treasury.

The total shares repurchased for the nine months is approximately 22.5 million shares, returning $1 billion to stockholders.

To fund the initial purchase, we borrowed approximately $700 million under our commercial paper program, supplemented by cash on hand.

This week, we issued and sold long-term notes to refinance a substantial portion of the commercial paper.

Our key return ratios continue to improve, including our return on invested capital ratio, which increased nicely during the quarter.

Year-to-date we spent $212 million for, which includes incremental spending for our company-wide systems initiative.

For the full year we continued to expect capital expenditures of approximately $290 million.

For fiscal '07, we anticipate between $675 and $700 million of cash flow from operations, depending on our working capital performance.

Now I'll update you on a few assumptions for fiscal year.

We continue to estimate sales growth of approximately 6% to 7% in constant currency.

We estimate that foreign currency translation will add 2% to our reported top line.

We continue to anticipate solid growth in all regions.

We're comfortable narrowing our full-year estimate of diluted EPS from continuing operations to between $2.15 and $2.20.

We expect improvements in gross margin to mostly offset increased operating expenses, resulting in a relatively consistent operating margin versus last year.

Our gross margin should benefit from supply chain savings, product mix and lower promotional spending.

In operating expenses, we continue to be impacted this year by planned higher levels of investment spending by new product launches and new channel initiatives, more spending on selling and training, as well as for our faster-growing and developing brands, and incremental spending related to our strategic modernization initiative and IT security enhancements.

The $30 million of savings, resulting from our cost saving initiatives of last year, will be realized and are included in our overall expectations.

At this time, we expect our effective tax rate will be approximately 35.5% for fiscal 2007.

That concludes my comments and we'll be happy to take your questions now.

The floor is now open for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Chris Ferrara with Merrill lynch.

Hey, good morning.

I wanted to ask about the spring gift with purchase program.

I guess you guys said it was flat.

Is that in the absolute or is that on a same-store basis?

You talk about the -- you have the swing in number of, I guess, same-store sales or the number of stores that it was applicable to in the quarter.

Just to get an idea what kind of traction it gained.

Chris, the number referred to is the Clinique gifts and they were flat on the same-store basis.

Our Lauder brand was somewhat less than that, but we were very encouraged with the Clinique results.

Why, just out of curiosity, with the editor's choice flowing through, why was flat good for you guys?

Your expectations weren't a little higher than that?

It's our intent and our investment against gifts to keep it flat to a little plus.

It's a strategy, we don't intend to disproportionately grow gift.

We'd like it to be in that range so our basic business will fuel future growth.

That's what we have told everyone since -- probably for four quarters now, when the gift has been a struggling vehicle for us.

Got it.

Thanks.

Your next question comes from Justin Hott with Bear Stearns.

Thanks.

First of all, the timing of the fragrance shipments, can you let us know how much that impacted you in the quarter?

There were two things related to fragrance that impacted us.

One was the 11% growth last year with a strong launch of Sean John and Amber Nude, the Estee Lauder fragrance, and the other was the border distribution of some Tommy fragrances.

And we had shipments in the third quarter of last year, which we really didn't anniversary this year.

There will be some of that is in the fourth quarter and some of it was just strong performance last year.

Rick, is there any way to quantify that?

There's, the breakdown of the (inaudible).

Maybe Dennis can give a little more color to it from some of the information that he may be able to get a hold of, if you wanted to call him later.

I don't have the numbers in front of me.

Okay.

And the other question is Hair Care.

I'm a little confused on the timing of mentioning Hair Care on this call.

We just had an analyst meeting I guess about a month ago.

And why bring up the Aveda and Bumble distribution strategy now?

I think if you recall, we actually weren't able to discuss in detail the Hair Care business at our analyst call, just because we had so much to cover.

So what we said at that time was that we would, on this call, give more a little bit more color to the Hair Care business and that's what Dan was attempting to do.

And would we call it more of a distribution strategy or a store opening strategy?

And is it going to be more new markets or U.S.

markets, just to sum up what you were saying?

I think the comment would be e, all of the above.

How do you distinguish between and store opening.

Distribution is amongst the strategy store opening.

Salons you don't own.

Well, we do not own salons.

Excuse me, Bumble and bumble --

Not Aveda salons, I'm sorry, Aveda products and non-Aveda salons.

Products in non-Aveda salons will continue to push both through Aveda and Bumble and bumble brands to expand into the right salons for these plans, so they can continue to be the leading brands in prestige salons, as well as, you heard, we're talking about -- we're focusing our efforts in expanding the Aveda brand in a number of international markets and looking very seriously at the opportunities for Bumble and bumble in a handful of markets where it doesn't already have a presence.

And one last quick question, china.

I know you gave a number saying it was up.

Can you quantify that a little further?

Strong double digits?

China was up very strong double digits.

They continue to do very well there and we're very pleased with our results.

Okay.

Thank you.

Yep.

Our next question comes from Amy Chasen with Goldman Sachs.

Hi, I just wanted to spend a little bit more time on the U.S.

sales deceleration.

Last quarter, you were able to give us some sense of how your department store business did in the U.S.

relative to the non-U.S.

department store business.

Could you help us with that this quarter?

I can give you a little bit of color on sales in the Americas and certainly, as you know, we manage the business on a full-year basis and we are expecting growth in the Americas, as I think we said during the call.

What we're seeing is is that the acquired doors, through some of the merger and acquisition activity and is our retail partners, are underperforming the legacy doors and that's certainly something that continues to affect us.

It is roughly, in its total, around 7% differential in growth rates, one versus the other.

So it's a pretty big impact this year, but we are beginning to see that start to slow down.

We did talk last quarter about the fact that we had some customer-driven sell-in last quarter, which was going to affect our replenishment in quarter three and we did see that this quarter.

We had the fragrance comp issue that we just discussed with the 11% growth last year and, generally, through many of the businesses that have either gone through some sort of merger or acquisition, we are seeing some pressure on inventories.

And I think that's one way that they're looking to help fund some of that acquisition costs, is putting a little pressure.

So that's affecting our replenishment a little bit.

So, I guess what I'm just a little bit confused about, is that the legacy doors, have their underperformance gotten worse?

Why wasn't this -- and I understand some of the timing stuff, so let's kind of strip that out, in terms of the replenishment last quarter.

Why wasn't the underperformance of these legacy doors an issue last quarter or the quarter before?

Has it gotten worse?

No, I think it's something that we've talked about on almost every call, quite honestly, and the legacy doors the ones that are doing actually pretty well.

It's the doors that have been acquired and changed their names or -- in some fashion.

Those are the ones that are showing weakness.

Okay.

So I guess if we strip out the timing issues in terms of the second quarter replenishment and the Fragrance issue, can you give us a sense of what the normalized number would have been in the quarter?

Would it have been up?

Oh, yeah.

It would have been up, certainly.

As I say, we're specking growth in the Americas region in its totality for the year.

So is it fair to say that, in the quarter, maybe the U.S.

would have been up closer to like 5%, if it weren't for are those kind of timing issues?

It's kind of hard are to say if, if, if, if.

If the nor'easter didn't come along and wipe out the entire northeast for three to four days during the Clinique gifts, perhaps their number would have been better.

You know, there's some other sarcastic comments I can make about if.

But suffice it to say, we see a material difference in sales performance and I'm not singling out any one retailer, between acquired doors and legacy doors where names have changed.

What we're seeing is, is that when a retail store name brand name has changed on the door, the local markets, where there have been changes, seem to be materially impacted in a different way in sales trend versus doors that have consistently had the same name on the door with the consumer.

We see a seven point spread in that difference across multiple different retail platforms.

That's a very significant statistical number on a single door?

And you add up the hundreds of doors that this has been affected, across number of different retailers.

That's a meaningful difference.

And it's very hard to be able to pull out hundreds of doors and say, well, if you take those away, and if you take this away, and you take that away, we would have been fine.

William, last follow-up.

Forget about department stores, if you look at your U.S.

nondepartment store business, can you give us a sense for how much that was up?

That was up double digits.

If you want to look at, if you will, Amy, non-NPD monitored doors, our business was 11%.

Amy, we -- if you look at what we would describe as specialty stores, Neiman, Saks, Nordstroms, Bloomindales, most of which are not affected at all by any type of mergers, our business was fine, absolutely fine.

In your next question comes from Bill Schmitz with Deutsche Bank.

Hi, good morning.

Hi, Bill.

Can you just talk about, you kind of look at a lot of your global competitors and it looks like there's been a pretty good acceleration in category growth this quarter.

And so they're doing kind of high single-digit organic or local currency sales growth.

Are you losing market share?

I -- bill, sometimes when we compare against our competitors you have to remember that we're very strong here in North America, which is the market that is most affected by a lot of these mergers and acquisitions sort of activities.

Our business internationally was very strong this quarter, 13% growth in Europe and 12% growth in Asia.

So we had some great results.

When you look outside of that, of where we have a very strong presence, which is North American department stores, but even outside of those in North America, are business was very strong.

So in the department stores themselves, are really what's affecting our business here in North America.

And, Bill, I think it's a pretty safe number, even though it's harder to get your hands on it, we have been seeing very consistent share expansion in the Lauder and Clinique brands, in particular, in continental Europe and the perfumery markets now for better than five years.

And we've been -- seen a consistent trend in acquisition of share both in color and treatment, in particular.

And we've been seeing this over a meaningful period much time and in fact, we can comfortably say, we've acquired a fair amount of share in Europe in a stealthy manner, because the reporting isn't the same, but we know our business is expanding at a greater rate than our competition there, because we are in the position in Europe that they are in North America, which is we are not the market leader dominating.

Instead, we have more share to acquire coming from a smaller base.

Okay, good.

And could we just spend a few minutes on Fragrance?

The strategy of focusing on the classics and getting rid of some of the sort of tertiary fly-by-night brands that had a disproportionate amount of spending.

Is that going to continue going forward and do you think that operating profit margins in Fragrance will grow pretty significantly year-over-year?

I don't know if I would use the word significant growth and operating profit margin in the same sentence with fragrance, as much as I'd say you'd see improvement, meaningful improvement.

But coming from the substantially lower operating profit base that we have in Fragrance, I think I'd be cautioned to -- putting any orders of magnitude to it.

We believe that Fragrance is both a strategic imperative for us, on a global basis, and we believe there are opportunities for us.

Specifically we're finding a greater return on investment in focusing in on certain positions, brand by brand, which offer us an opportunity versus others.

I would hate to generalize because Fragrance in particular is a highly opportunistic business.

And we would not want to rule out opportunities that may give us an opportunity to both accelerate the top line while improving the bottom line, too.

But I think if you look at our year-to-date results, you've seen some pretty nice improvement in the profitability of Fragrance.

Your next question comes from Linda Bolton Weiser with Oppenheimer.

Thanks.

Can you comment on whether the expected impact on FY '07 EPS is still negative $0.08, related to the Federated May combination?

And also, can you talk a little bit about the announcement that you're expanding the Estee Lauder brand into the Shoppers Drug Marts in Canada and how that relates, if at all, to your decision to keep Clinique brand out of the JC Penney Sephoras in the U.S.?

I would hesitate to compare Shoppers Drug Mart and its presence in Canada to the JC Penney Sephora partnership in North America and relate them to each other, because those are very different retail strategies on the retailer's part.

And our distribution decisions market by market are very different.

Shoppers Drug Mart has established itself as an alternative prestige with a section -- a significant section of its retail position in prestige cosmetics across Canada.

And there is no real equivalent in North America compared to Shoppers Drug Mart in Canada or Boots in the U.K.

The Estee Lauder and Clinique brands are probably the last two and the leading two prestige cosmetic brands in Canada, to go into Shoppers Drug Mart.

And we think that the Shoppers Drug Mart has established itself in Canada in a manner, which can enhance the position of both those brands there and reach a consumer who previously wasn't able -- a Shoppers Drug Mart consumer who previously wasn't able to shop for these two brands.

And regarding the impact of Federated May, yes, we still estimate it's about $0.075 to $0.08, but it becomes a little bit more, difficult and a little bit more of an estimation, because when we see the weakness in the names that have changed -- stores that have changed names, as William was describing, how much do you attribute that weakness to, to the actual consolidation and how much is something else?

But it's still, we estimate, around $0.07 to $0.08.

Okay.

Thank you.

Your next question comes from Nik Modi with UBS.

Good morning, guys.

Just two quick questions.

Can you talk about the challenges you're facing in Spain and France, just on what's going on there?

And in the second question, William, your update on what you're seeing from the niche brands in the U.S., from a competitive standpoint?

Thank you.

In Spain and France, each of those markets has different dynamics, in particular.

I'll isolate them.

In Spain, we've got two factors going on.

Number one, we have, we made a strategic decision to cut back a certain group of retailers in the shipments we were making, particularly in the Fragrance markets and -- to a very significant degree, because we found that there was a great deal of gray market activity going on from these retailers and significant quantities of our merchandise was showing up in markets well outside of Spain, well outside of our established distribution into far greater quantities than we were comfortable with.

Secondly, we had the launch of Aveda in Spain, which had an impact on them, as well.

We are making significant investments in France in the pharmacies.

In addition to that, there's a general malaise right now in French Retail, perhaps associated with their elections, I'm not certain.

I'm not French, I can't tell you.

But it's been alleged that that's one of the impacts.

In addition, Spain is our single largest business on continental Europe, as a total country, significantly is 30% of our business is actually in a department store business with one department store who's a defective operator, they have not seen the same growth in their business as they have over the previous 10 years.

And so we're being somewhat affected by the traffic impact that is they have had.

Thank you.

And on the niche brands?

We've seen, the niche brands, you sort of put your finger on the notion of what the niche brands are.

There are certain brands, every brand is a niche brand.

Some niches are better --bigger than others.

I want to give you a flavor of what magnitudes are.

This is a wonderful statistic, which I'd like to give you an idea of.

In 2 -- calendar year 2006, Clinique sold 19,902,930 units in treatment.

If you add up the unit sales of the next six brands combined, in the department store arena, they didn't even sell 19, 786,000.

So one brand, Clinique, sold more combined units of treatment than the next six brands combined.

So, that's a major, major statement of presence of a brand in the channel of distribution.

We see some of the nice newer brands making an impact, but we don't see this as being a major impact.

I would never dismiss a competitor of any size and not pay attention to them.

We are paying attention to anybody and everybody.

At the same time, we're focusing our efforts on those brands of ours which we think are very strong, very powerful in connecting with consumers and focusing on those efforts to continue to bring those consumers back to our brands, which we know they love.

Your next question comes from Filippe Goossens with Credit Suisse.

Yes, good morning, gentlemen.

William, if I have my numbers correct, the current family ownership is about 81 million shares of Estee Lauder.

If I then look at the number of shares outstanding in 2001 versus what I expect to be outstanding at the end of 2007, the effective family ownership has actually gone up from 34 to 41%.

Can you just share with us what your long-term strategy has given this kind of upwards slope, in terms of family ownership?

And also what your short-term view is, particularly now with the stock being down about 6%, would you be a buyer of the stock today?

And my second question, basically is kind of also related to the debt capacity here.

You've talked about a pipeline of acquisitions that you're looking at, during the analyst meeting a little bit earlier this year.

Yet we have not seen any activity from you yet.

This one competitor based in Paris seems to continue to be very aggressive.

Is it because you don't see the right opportunities?

Or your parameters somewhat different from that one competitor?

Thanks very much, William.

Phillippe, let me address the second question first.

We are constantly looking and evaluating numbers of different acquisition opportunities and we feel privileged that most opportunities that are available in our space do come our way, at some point.

And I'm certain that those who are shopping them are also offering them to a number of our competitors.

And each of us has a different view about what we're willing to spend and we believe that, if we spend the right amount of money for the right strategic fit within our parameters, we will, we will be effective in leveraging our acquisitions.

To date, in the last 13 years, which is really the broad history of our acquisition programs, we've had a tremendous number of successes and only one or two acquisitions, which we are perhaps not as proud as we'd like to be.

So, I'd like to say that you should be proud of the fact that we're very disciplined with our shareholders money and spending it correctly for the right strategic acquisitions.

And a lot of time, we have been at the table but pulled back, because we just decided this was too rich a price to give us a good return on our investment over the short to medium term or the long term.

And we'll continue to focus on those disciplines and that doesn't mean we're not in the game, but I'm certainly not driven to make an acquisition for the sake of making an acquisition.

They have to be the right strategic fit for our company.

And we will spend our assets wisely in the right strategic positions.

As far as the second position, I'm not exactly familiar with the numbers as you cite and you look at and perhaps you can call Dennis later.

He can give you a better flavor of it.

But I can tell you that our family is totally committed to this business.

We are -- this is represents the vast majority of our personal wealth and will continue to do so and we're highly motivated to making sure that it increases.

I have been a net buyer, as much as I can possibly be.

Most of my options exercised have been buys and holds, and in addition, there have been a handful of family members of mine who, for their own personal reasons, have decided to sell.

And whenever I can and to the extent that my bankers allow me to, I have been buying the shares and I'm glad to say that has been probably one much my best, if not my best, personal investments to date over the last four years and I would be -- continue to do so.

Your next question comes from Alice Longley with Buckingham Research.

Hi.

If I look at the first nine months of the year, is it fair to say that maybe the operating profits in the Americas is below plan and operating profits offshore is above your original plan?

I think that's fair to say, Alice, yes.

But, you know, we do the best we can to make sure that we deliver what we intended at the beginning of the year.

As you know, we've taken our guidance up for the year on our last call and we've taken up the floor, if you will, of our existing higher guidance on this call.

So, we're sort of happy with the results so far and what we're anticipating for the year.

And just focusing on the Americas, if the profits here to date are somewhat below your original expectations, is that because of share loss being worse than you thought or is it because of the new Macy's stores being disappointing?

Well, I don't think it's just the Macy's stores, but it's any store had a name change.

But I think of anything that's affecting us, it's that weakness that we see in those acquired doors, there's no question bit.

We're also make some investments in new brands in North America and we are spending some money on things that we have talked about and a lot of that is focused here, related to some IT initiatives and some strategies around that.

Your next question comes from Lauren Lieberman with Lehman Brothers.

Thanks.

Just a couple of questions.

First was -- Rick actually you just mentioned new brands in North America and there was a portion in the script where that was mentioned, as well, as being a growth avenue.

Are these new brands that we don't know about yet or brands that are within the portfolio that just haven't been fully developed?

They're brands that are in our portfolio now that are being developed, yes.

Okay.

So can you tell us a little bit about M.A.C.'s performance in the U.S.

this quarter?

And then also, was there a deterioration at all in core brand performance?

I understand what you're saying about department stores and the gap in performance, but the reality is, it seems like there was less Estee and Clinique sold in the U.S.

than there was either last quarter or this quarter last year, despite some refocusing on these brands and rethinking of how to communicate better with consumers over the last 12 months.

So are there strategies that you've put into place that aren't really working yet?

Or are there signs that things are getting better and we just can't see it yet?

Well, yeah.

I'll answer, if you will -- the M.A.C.

question I think was one of your questions and how was our growth?

And year-to-date in North America, our business is up double digit.

On a global basis, it's up very strong double digits.

I mean, obviously, a brand can't grow at the pace that M.A.C.

has been growing in North America forever.

So that's what -- that's a part of our plan.

We -- we,re fully aware of that.

I'm sorry, what was M.A.C.

this quarter?

You said double digit year-to-date.

What about this quarter in the U.S.?

Year-to-date this quarter in the U.S.

was up, was in mid single-digit range.

Okay.

So, M.A.C., we're quite happy with its performance quite honestly.

It's a very successful brand for us.

I'd like, Lauren, to just comment on a couple things.

We keep hitting the difference between the legacy doors and the acquired doors and the impact that has on Lauder and Clinique because they're the brands that were in every one of the stores affected.

This manifests itself in three ways.

First of all, the consumer acceptance.

And you guys have read as much as we have about the Marshall Fields customer and the acceptance of Macy's, et cetera.

But it really has hit us in two other areas.

One has been capital.

The other has been analyst turnover that William talked about at the conference we had.

And inventories.

And, you know, everyone has a lot on their plate.

We are confident that both Lauder and Clinique are positioned quite nicely for now and going forward.

We think that the Clinique gift with purchase was very positive and the Clinique brand is going to show some nice gains.

Lauder was disappointing with their gift with purchase, but their basic business is good.

I think once we clear this out, and you have to understand the turbulence of the market, all these brands are selling their product on different dates.

Mother's Day shifts, the shifts of all the gift dates.

Next year, we'll have a level playing field.

We'll be anniversarying all of the dates of all the gifts and I think we'll be in a much better place to talk about the business, whether it's a weakness of the brand or the weakness of the distribution channel.

Your next question comes from Connie Maneaty with Prudential Equity Group.

Good morning.

At the analyst meeting you talked about the 60,000 women who are the interface between your products and the consumer and how the turnover is, I think you said, 75%.

But that still this was an area of strategic investment.

At that meeting, you weren't quite sure what the strategies for investing in this really transient group were going to be.

So I was wondering if you had an update on that and how you would be measuring the productivity of those invested dollars?

Let me get just comment.

It purely is not a -- necessarily an investment.

It's not about the dollars.

The turnover at the point of sales are life blood, which is our beauty advisers.

There's a lot of things going on, a lot of tactical things that both our field forcer and our retail partners are doing.

And it's just not a matter of looking at salaries or throwing more money at the problem, it's how do we make this a career for people and keep them more engaged?

And given time, we could list a dozen different initiatives that both Lauder and Clinique and our smaller brands are doing to keep people in their jobs and keep them more engaged in selling cosmetics.

All of our stores have recognized the issue, they've all recognized it as a result of the turbulence in the marketplace and they're fully behind solving this problem.

So we're getting great support from everyone from Belt to Dillard's to Macy's.

It's a nationwide effort.

And it's just beginning.

And initially we see some numbers coming down, but not enough to report on.

The financial impact of that, we won't be able to measure until all of the programs are in and we see which ones are the most successful and which ones we're going to continue to invest in.

What's the time frame on getting the programs in?

And would you guess that the turnover at the acquired stores might be higher than the legacy stores and that might also be a reason for their underperformance?

To answer your first question, most of the programs will be installed by the middle of the summer.

And which ones take effect, which ones satisfy the problems, we'll evaluate.

And I'm not guessing, I know that the turnover in the acquired doors is significantly higher than the turnover in the legacy doors.

You have hundreds of stores where people are changing benefit programs, changing salary programs and it's taking its toll.

We have time for one more question.

And that comes from Javier Escalante with Morgan Stanley.

Thank you for taking my question.

Could you talk about the programs to which you are allocating increased spending?

In particular, could you tell us how much the advertising grow in the quarter for the overall company and in the U.S.?

And whether because of the weak U.S.

sales, do you think that you need to dial it up even further or change the mix in spending or accelerate expansion in new channels?

If you can comment on that, first, on where you are increasing the spending, how much did advertising grow, both overall company and the U.S., and whether you think that this is the right level or you need to increase it further or is an issue of the success of the program itself?

Thank you.

Javier, let me just give you a flavor, if you will, on what our focus and strategy is going to be.

Each of our brands has a different mix of how they allocate their moneys towards their consumer.

If you realize that, overall, each brand only has four different places where it spends its money towards it consumer.

First, is cost of goods and the quality of the product which they have.

Second, would be selling expense, advertising and promotion.

Those are really the four places where each brand chooses to allocate its money to its brand.

Each brand spends a good deal of money on the quality of its product.

As you know, our total cost of goods number, what it is.

They don't have much choice.

We really say you must deliver the highest quality product possible.

So the real discretionary spending by brand is allocated between and among selling, advertising and promotion.

And each brand has a different ratio of how it allocates it.

It's not a fixed number and it's generally a general number.

The global A&P number is 7%.

That's all brands, all markets, and our goal is to increase that number.

But quite honestly, if you look at a brand be like M.A.C., they devote the vast majority of their selling, advertising and promotion moneys into selling expense.

As a brand like a M.A.C.

-- and Bobbi Brown is very similar.

They both do not have a meaningful advertising program, but they allocate they allocate those monies that might otherwise be spent in national advertising or other forms of advertising into selling expense.

So as they become a portion of -- a higher portion of the total business, the ratio, if you will, between after advertising and promotion and selling expense shifts.

So while the absolute dollars in one line or another may change, what you really have to look at is how each brand allocates its moneys.

One of the things we're looking at, in particular, for those brands with a share of voice is, what ways are we communicating with the consumer?

Print and the different forms, radio, television, online.

And allocating our media spends accordingly to where we see consumers responding.

There's no fixed number by brand, there's no fixed number by -- around the world nor is there a fixed number by marketplace because each brand, each market is very different.

For example, commuting media, as generally defined in North America, is radio because most Americans are driving to work and they have their radios on.

In Japan commuting media isn't radio, because nobody drives to work in Japan, they ride the subways.

So commuting media in Japan would be print advertising in subways and other place that is that consumer may see.

That's just an example and a flavor of it.

Certain markets, however, are highly penetrated with online consumers who respond very strongly.

Other markets have very low penetration online, so we wouldn't allocate those moneys in the same way.

The influence of national advertising in fashion and beauty books versus other more local media, whether it's newspaper or local weekly magazines are different market by market.

So we allocate those moneys very locally by brand, as well as some strategic broad initiatives across the world.

But there's no one general rule.

And just to understand if I got your response is that advertising spending on a global basis, either print or subways or radio or TV, was up 7% is what you said in the, in your response?

Yes.

Our global spending was grew by 7%.

And that means that basically the selling and spending part, meaning what it goes into the counters and because of the increasing freestanding stores is what is driving the bulk of the spending, is that correct assumption?

What you're speaking of is on a different line called selling expense.

That one is growing faster and that is growing faster for the reasons that William mentioned, which is our M.A.C.

brands, Bobbi Brown brands, those that rely on that selling vehicle as really a driver of the business.

And those businesses are growing quite fast.

They're investing more money in there.

Let me just finish this.

This is an important point.

The core essence of our success in the prestige arena is having that expert for the brand in the store when the consumer responds to the advertising.

If we have the most brilliant advertising in the world, but that consumer comes into the store and is there isn't an expert for the brand to help her find the right product, it's a variation on the analogy, if a tree falls in the forest and there's nobody there to hear it, did it make a noise?

So any moneys we spend in advertising must be complemented by the level of service that we're able to offer that consumer in-store to be able for us to complete that sale.

And ultimately that's the key in the circle in driving our success.

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 participation and wish you all a good day.