雅詩蘭黛 (EL) 2007 Q4 法說會逐字稿

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

Today's call is being recorded and webcast.

For opening remarks and introductions I would now like to turn the call over to the Vice President of Investor Relations, Mr.

Dennis D'Andrea.

Please go ahead, sir.

Good morning and thank you for taking the time to join us today for our year end conference call.

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

Dan Brestle, our Chief Operating Officer is also here, and he will 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 will find factors that could cause actual results to differ materially from these forward-looking statements.

I will turn the call over to William now.

Thank you, Dennis.

Good morning, everyone.

I am pleased you have joined us to discuss our fiscal 2007 results and outlook for 2008.

Sales grew 9% to $7 billion in fiscal 2007.

Diluted net earnings per share was $2.16, within our upwardly revised range.

Rick will provide the financial details later in the call.

We made significant strides towards our goals in fiscal 2007.

Let me recap some of the achievements and milestones of this past year.

The Company's sales topped $7 billion for the first time, adding $1 billion to our top line over the past two years.

Sales increased in all geographic regions and product categories.

Our international business, everything outside the United States, continues to grow rapidly.

International represented 51% of our sales in fiscal 2006, increasing to 54% in fiscal 2007.

This is a trend we expect to continue.

Many emerging markets rang up sharply higher sales including Russia, eastern Europe, China, Latin America, and the Middle East.

Despite the impact of large retailer consolidations, U.S.

sales rose 3%.

Many of our brands showed good growth with five of our fastest growing brands posting double-digit sales increases in virtually all regions.

Sales of the Estee Lauder and Clinique brands grew on a global basis.

Early in the year, we bought the remaining equity interest in Bumble and Bumble and towards the end of the fiscal year, we laid the groundwork for the acquisition of Ojon an exciting hair care and skin care company.

We completed the purchase of Ojon on July 31, 2007.

We made progress on other fronts as well.

We expanded our presence in new distribution channels for certain brands including QVC for Bobbie Brown in the U.S and U.K., and Shopper's Drugmart for Clinique in Canada, freestanding Coach stores in the U.S.

for the Coach fragrance and a larger number of French pharmacies for Origins.

Behind the scenes in operations, our strategic modernization initiative or SMI launched Innovata in May, our first implementation of the SAP information system.

We created a new business model and management structure for the European region and implemented the first phase of our plan.

And the Company repurchased 22.5 million shares and raised the dividend 25%, returning a total of $1.1 billion to shareholders.

As you can see the Company made substantial strides operationally, financially and strategically, and we advanced our five strategic imperatives.

Although we had notable achievements, the year was not without challenges.

Fiscal 2007 marked a first full year with approximately 100 fewer U.S.

department store doors due to industry mergers.

While closed doors resulting from the mergers affected our results, we saw a much greater impact in our business due to difficulties in acquired doors.

This is something that retail analysts should be well aware of.

We also faced retailer consolidations in other parts of the world.

We effectively managed through the turbulence, increased overall sales by healthy percentage, and found opportunities for diversification.

In the U.S., slower department store sales were offset by growth in other channels including e-commerce, salons, and freestanding stores.

Turning to fiscal 2008, we've said it before, but it bears repeating, we are not a domestic company with a small international presence.

We are a global enterprise, with more than half of our sales generated outside the United States.

Going forward, we believe the international business will provide even greater growth.

Our largest brands, Estee Lauder and Clinique, do business in more than 135 countries and territories.

We have 25 other brands at different stages of development making their way around the globe, some faster than others, and they will continue to enter additional countries each year.

Emerging markets are increasing in importance.

Sales generated in Eastern Europe, the Middle East, Latin America, Turkey, India and China represented approximately 4% of our total sales five years ago.

Today those countries account for nearly 8% of sales and have been expanding at a pace of more than 20% compounded annually.

We will invest this year to grow international distribution, and that effort will be centered on these dynamic emerging markets.

We expect to continue realizing terrific performance in these markets thanks to increases in disposable income and a demand for aspirational brands which the Estee Lauder brand personifies.

With our portfolio of highly coveted brands and products, we believe we're in a strong position to benefit from these market dynamics.

Sales in Russia during the past few years significantly outperformed our original expectations.

They've grown so fast that this year our sales generated in Russia are expected to approach those in China.

Estee Lauder, Clinique, Aramis and designer fragrances represent the bulk of sales in Russia.

Jo Malone launched in July and Bobbi Brown plans to enter later this year.

We're now well penetrated in the largest Chinese urban areas.

As such we're now moving our brands into other well populated cities.

For example, the Estee Lauder brand opened two counters this year in [Arumshi], a city of approximately 1.5 million people in western China near Kazakhstan.

Momentum in China is running at a strong double-digit pace led by the aspirational Estee Lauder brand, which is the most widely available of our eight brands in China.

It is sold in 86 stores in 32 cities.

This year both Estee Lauder and Clinique anticipate strong double-digit growth.

At this stage the other brick markets, Brazil and India, are small in comparison, but the but we recently established affiliates in both countries and expect demand, particularly from makeup, to swell in the coming years.

As you know, we have MAC stores in India which have exceeded our expect expectations, and we're planning to launch more brands there to take advantage of the growth opportunities.

Aramis and DKNY are expect to launch in India this summer followed by Clinique in the fall.

Prestige distribution has been slow to develop but once it takes off we're optimistic India could be another booming market for us.

This past year we had stronger sales results among many of our developed markets including our two largest foreign countries, Japan and the U.K.

Our business in Japan was up mid single digits in local currency.

The rise was due to a healthy economy, a turnaround by Clinique, which is the fastest growing prestige brand among the top five in Japan and solid improvement from several other brands.

Our outlook for the Japan remains positive.

We anticipate a strong sustainable business environment, improved consumer spending, and a greater focus on cosmetics in department stores.

This past fiscal year sales in the U.K., our largest market in Europe rose a healthy 10% in logical currency.

Our online business in the U.K.

offers seven brands and is growing at double-digit rates.

This fiscal year additional resources are being committed aggressively to this area to leverage our expertise, expand the offerings and stay ahead of the competition.

We expect good growth in the U.K.

this year but our outlook is somewhat cautious due to rising interest rates and merger activity in the retail sector.

Travel retail has been a bright spot and shows no signs of low slowing.

The key factor, passenger traffic, is on the upswing.

In addition, improved retail stores, accelerated internet preordering capabilities, greater distribution of exclusives and continued rollout of new brands point to robust improvement barring any unforeseen circumstances.

In fiscal '08, our Beauty Bank division has a busy slate of product introductions and will begin to enter international markets.

For example, a new anti-paging product from the Good Skin brand, Tri-Aktiline, has been a huge hit at Kohl's since its January launch.

It has sold more than six time the volume we expected.

As a result, Good Skin plans to roll it out to many international markets.

In September it will go on sale exclusively in Sephora across Europe, backed by a substantial media campaign, and 850 doors of Shopper's Drugmart in Canada.

Beauty Bank continues to look for the right opportunities with international retailers for its other brands.

Although our most rapid growth will come from overseas, we're taking action to improve in the largest individual market, the U.S.

However, we expect progress to be slow because of continued softness in department stores.

We anticipate that the tough retail climate in department stores will last for at least the first half of your fiscal year.

However, we remain committed to the channel.

Department stores have unique offerings of designers and brands, and we firmly believe they will remain the Cornerstone of U.S.

prestige distribution.

That said, we also note that we now generate approximately 34% of our net sales in North American prestige department stores down from 46% five years ago.

Despite the difficult environment, we maintain a leading share of prestige cosmetic sales in that channel with far more brands than any competitor and nearly 2.5 times the sales.

Our brands are continuously working to create excitement in the channel and have teamed up with Macy's, Dillard's, Nordstrom's and other key department store groups to develop compelling marketing and launch plans throughout the coming year.

Our two big brands are taking different approaches to say boost sales as part of an ongoing effort to optimized our portfolio, and we anticipate positive sales trends in the U.S.

this year.

The Estee Lauder brand is focusing on product and its core consumers.

It is streamlining its offerings, redesigning, repackaging and bringing back classic cosmetics and architecture such as gold fluted cases for its signature lipstick.

It will continue to segment the Re-Nutriv line into more of a luxury skin care brand.

Estee Lauder is the clear global leader in the anti-aging segment and will promote the revitalized advanced night repair franchise as a mainstay of individualized skin care regimens.

One of the most talked about new ventures is Erin Lauder's private collection Tuberose Gardenia fragrance.

Taking on the role of brand ambassador, Erin is updating the Estee Lauder brand with her chic style and modern appeal while at the same time honoring our founder's legacy.

Although it is in limited distribution in high-end specialty stores, private collection has garnered immense publicity and attention for the Estee Lauder brand.

Clinique is taking a different tact.

It plans to drive sales by focusing on its dermatological heritage, which seems even more relevant today than when it launched 30 years ago and on the service component of the shopping experience.

In a pilot program in 50 doors, Clinique is redesigning the counter space and creating separate diagnostic areas.

Importantly, Clinique is striving to go enhance a career path for its consultants to reduce the high turnover prevalent in the industry.

Clinique plans to establish an accreditation program for consultants that will provide financial incentives and greater job satisfaction.

If the pilot is successful, we'll roll it out to more locations.

Further optimizing our portfolio, we recently acquired the Ojon Corporation.

We believe the young company is a terrific fit with several of our strategic objectives.

Ojon markets hair scare and skin care products from wild crafted ingredients collected by indigenous communities.

It gives us more depth primarily in hair care, a category we want to strengthen.

It broadens our distribution on QVC and in specialty retailing and it bolsters our natural product offerings.

In one fell swoop, we have gained expertise and a greater presence in several key areas.

Ojon products are in limited distribution overseas and we believe the brand will resonate with consumers globally.

With an ever-growing portfolio, it is imperative we are disciplined and take action to turn around our diverse -- or divest brands that aren't performing to their full potential.

We pledged to do this when we laid out our strategic imperatives two years ago.

Last week we sold the Rodan + Fields brand back to the doctors who created it.

The brand didn't develop as quickly as we had hoped.

Going forward Rodan + Fields plans to transition into a direct-selling business model that is better suited for the brand but not consistent with our strategies.

We felt it was more prudent to focus our resources in other business opportunities.

We still believe the professional skin care segment is a viable business and will continue to explore other options in that area.

Turning to go our operations, one of the Company's major investment this is year will be the continued rollout of SMI, the largest capital project in our history.

Our experience in Aveda will help us as we continue to bring SMI online and implement disciplines throughout the Company.

Another area that will require significant expenditure is our global information technology infrastructure, which supports SMI, an increasingly complex regulatory environment and the growing demands of the business.

In terms of diversifying distribution, we have our pulse in some of the most innovative channels being explored by the beauty industry.

We expect continued success and rapid growth in e-commerce, which is our fastest-growing channel and a highly profitable one.

We will add brand e-commerce sites in China, Korea, Taiwan, Russia and India.

With the success we've had with retailer partner sites in the U.S., we're pursuing similar arrangements internationally.

Thanks to the success of Bobbi Brown's first appearance on QVC, she is scheduled for additional shows.

Ojon will also provide further experience selling through direct response television, one of the fastest-growing beauty channels.

Origins is forging ahead in the burgeoning European pharmacy channel and plans to open in approximately 100 additional locations this is year, primarily in France and Greece.

Sales of our new Mustang men's fragrance in Sears, Kohl's, and JC Penney exceeded our expectations, and we're optimistic it will do well during the fall and holiday seasons.

Several brands are pursuing alternative U.S.

distribution with independent niche retailers such as Space NK and Blue Mercury, which offer carefully edited selections of high-end beauty brands and in some cases spa services.

Underpinning everything we just discuss and had a reason for our consistent above industry sales growth, is the continued product innovation consumers have come to expect from us.

Major launched this is year include Origins organic collection of skin, body and hair products that meet USDA standards, Clinique's Zero Gravity repair wear lift and Sean John's Unforgivable For Women scent.

We believe our competitive advantage is a brilliant partnership between our product and brand visionaries and our superior research and development teams.

Their testing and assortment of natural ingredients from mushrooms to minerals and herbs to plants and applying the latest science to study aging, understanding skin and advancing cosmetics into the next frontier.

Before I turn the floor over to Rick to talk about the financials, let me say that the strong results for the past fiscal year are due to the continued passion, drive and commitment to growth of our many dedicated employees around the world who are helping our Company remain the preeminent prestige beauty leader in the global marketplace.

We believe we're poised for solid sales and profit expansion in fiscal '08 as we build on our prior successes and advance our objectives in all corners of the world.

To meet the demands of an evolving global marketplace, we must invest in our distribution infrastructure, our people and technology.

The coming year is likely to provide us challenges as well as opportunities, particularly in the U.S., and we intend to meet them head on.

Rick.

Thank you, William, and good morning, everyone.

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

For the fourth quarter, we reported 10% sales growth and EPS of $0.45 compared with $0.23 in the prior year quarter.

As William noted for the full fiscal year, the Company achieved record sales of $7.04 billion, a 9% increase over last fiscal year.

In local currency sales rose 7%.

Reported net earnings from continuing operations for the year were $448.7 million compared with $324.5 million last year.

Last year's results included special charges of approximately $58 million after tax for our cost savings initiative and a $35 million special tax charge, primarily for the settlement of audit issues with the international revenue service.

Fiscal 2007 diluted EPS from continuing operations were $2.16 versus $1.49 for the 12 months of last year.

Full fiscal year 2006 reported results included $0.43 of special charges I just mentioned.

Our original 2007 full year EPS projections that we made in August of 2006 was $2.00 to $2.10.

During the year we increased our full year estimate twice, and our actual performance came in within our $2.15 to $2.20 range.

Once again, let me refer to you our press release for details of our net sales and operating income by product category and geographic region.

For the the full year we had a across the board sales increases for all product categories reporting sales growth in every geographic region.

In skin care, sales were led by double-digit reported growth from our Europe and Asia businesses where we benefited from several product introductions by Estee Lauder and Clinique.

Skin care sales in the Americas increased moderately with most of the region's growth coming from our online and Lemar businesses.

In the makeup category, our makeup artist brands contributed the majority of the increase with continued outstanding double-digit sales growth.

These brands had higher sales in almost every country in which they sell.

Several new products from certain other brands helped lift the category as well.

Our Franklin's business was up for the year with sales in Europe contributing approximately 90% of the increase, owing to new fragrance offerings such as the success of the DKNY Red Delicious fragrance and Pure White Linen from Estee Lauder.

In hair care, salon expansion, new product introductions and programs, as well as the acquisition of a distributor all led to solid double-digit sales gains.

When we look at our geographic results for the year, the low single digit sales growth in Americas reflected strong sales gains in our makeup artist lines, hair care products and internet business.

Overall solid growth in Canada and Latin America, as well as strong double-digit growth from our Sean John Unforgivable fragrance, were positive factors.

Almost all developing brands posted increases while we continue to experience lower sales in our core brands, reflecting retailer consolidations and competitive pressures, in some cases from our own brands.

While the closing of doors as part of the retailer consolidations negatively impacted our business, the lagging performance on acquired doors had an even greater effect on our results.

We had a very good year in Europe, the Middle East and Africa posting double-digit local currency sales gains.

Almost all countries were up.

Despite the liquid ban that created some minor disruptions in the beginning of the fiscal year, our travel retail business rebounded handsomely generating double-digit gains.

Established countries such as the U.K.

and South Africa also recorded strong double-digit growth while sales in Russia, one of our emerging markets, grew almost 70%.

During the year, we established an affiliate in Turkey which contributed incremental sales.

Asia Pacific also had strong local currency sales gains with every country recording increases except Thailand.

Several of our businesses including those in China, Hong Kong, Korea, Australia and Singapore posted strong double-digit sales increases.

In local currency Japan which is our largest Asian market, had mid-single digit sales gains this year.

This is the largest increase in Japan net sales in over eight years.

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

Contributing to the increase was a change in the mix of our business, favorable exchange rates, and less promotional activities.

Decreased obsolescence charges also contributed positively.

Operating expenses as a percentage of sales for the full year decreased to 64.1% from 64.3% last year.

The prior year results included a $92 million charge related to our cost savings, which was equal to 140 basis points.

We invested heavily particularly in the fourth quarter to drive growth, acquire market share and expand geographically, especially in the Europe and Asia regions.

Incremental spending for our strategic modernization initiative as well as higher stock-based compensation expense also negatively impacted our operating expense margin.

In addition, in fiscal 2007, we reported approximately $30 million of expenses to build our pharmacy channel business related to organizational costs, streamlining the distribution of goods, and the impairment of goodwill and other intangible assets.

For the fiscal year total advertising and promotional spending including the amounts reflected in both cost of sales and operating expenses was $1.92 billion compared with $1.79 billion last fiscal year.

All combined operating income rose to $749.9 million, a 110 basis point improvement in margin over the prior year.

Looking at operating profits by category, hair care posted a solid increase owing to strong sales gains.

Skin care declined slightly reflecting the $30 million of additional expenses I just mentioned.

In addition, our international skin care results improved but were partially offset by challenges in certain core brands in the U.S.

Makeup increased primarily due to gains from our makeup artist brands.

Continued challenges among core brands partially offset these increases.

Fragrance operating income was up for the year led by our international business, while domestically operating income increased but was tempered by spending behind new and developing brands.

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

The decline in the Americas was primarily because of additional spending behind strategic initiatives for our core brands and the development of new brands along with the weak performance at doors acquired in retailer consolidations.

Strong operating income gains were realized from our makeup artist brands and our hair care, internet and Canadian businesses.

In Europe, the Middle East and Africa, operating income increased compared with last year primarily due to improved results in travel retail, the U.K., Russia, and Germany.

Partially offsetting these increases were lower results in France, due to the rebalancing of inventory levels at certain retailers and strategic investments behind our field salesforce.

In addition, the region incurred expenses related to our pharmacy channel that I discussed previously.

Our business in Asia Pacific generated strong operating income.

All but one country achieved gains with the largest increases coming from Hong Kong, China, Australia and Korea.

China reported operating income this year, compared to an operating loss last year, as we begin to see positive results from our investments in that market.

Regarding our net interest expense, we reported $38.9 million this year versus $23.8 million last year.

The increase is primarily due to higher average debt balances resulting from financing our accelerated share repurchases, coupled with higher average interest rates.

The effective tax rate for the year was 35.9%.

Our net cash flows from operating activities for the fiscal year ended June 30, 2007, was $667 million compared with $727 million last year.

The change primarily reflects higher inventory levels driven by significant growth in new and emerging international countries, increased regulatory requirements, and added safety stock related to 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 for this year were impacted by cash payments we made related to last fiscal year's cost savings.

Inventory as of June 30, 2007, was $856 million compared with $766 million last June.

Inventory days were higher at 176 days compared with 166 days last year.

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

We will continue our efforts to reduce inventory days.

However, we are not expecting significant improvements in inventory levels until our SMI project is more broadly implemented.

Our day sales outstanding at June 30, 2007, were 44 days compared with 43 days last year, due to the higher mix of sales outside of North America which naturally carry longer trading terms.

During the year, we repurchased approximately 22.5 million shares of our Class A common stock for $1 billion and also returned another $104 million to stock holders in dividends including a 25% dividend increase.

We will continue to aggressively buy back our stock under the right conditions and return cash to our shareholders.

Our key return ratios continue to improve, including our return on invested capital ratio which increased to 21.3% at the end of the year.

We spent $312 million for capital expenditures which included incremental spending for our company-wide systems initiative.

In fiscal '08 we anticipate approximately $700 million of cash flow from operations.

We expect capital expenditures of approximately $340 million in fiscal '08.

Let me now update you on a few more assumptions for fiscal 2008.

This past March, we held an Investor Day where we discussed our strategic and financial outlook for the next few years.

As a reminder, we laid out our expectations for annual sales growth of 6 to 8% and EPS growth of 10 to 12% for the three-year period.

Please remember, as you've heard us say many times, we run our business on an annual basis.

Also, bear in mind the historical volatility in our quarters and the comparisons they'll create with fiscal 2008 quarters.

For the year we anticipate strong international sales growth and more moderate growth domestically driven by the market conditions, strategies and programs William discussed.

Our forecasted sales growth for the fiscal year is approximately 7 to 9% above the range we described in our Investor Day.

We expect foreign currency for the full year to be minimal.

While this is strong sales growth, we continue to be impacted by the performance of U.S.

department stores.

We anticipate this trend to continue at least through the first half of our fiscal '08.

We expect gross margin to improve about 10 to 30 basis points for the fiscal year with supply chain savings, product mix and lower promotional spending providing most of the benefits.

We anticipate operating expense as a percentage of sales to increase between 20 and 30 basis points.

As I indicated at our Investor Day, we are focused on reducing costs across the Company while at the same time reallocating savings back into the business to drive consistent top and bottom line growth every year.

As we've done historically, we will take advantage of market conditions around the world and invest for growth and market share especially in Asia and Europe.

Our planned spending covers multiple brands in multiple channels across multiple countries.

While all brands do not develop equally and do not require the same level of investment, we nonetheless need to build upon each brand's potential.

We plan to spend more this fiscal year for our faster-growing and developing brands to continue the momentum they achieved in fiscal '07.

While emerging markets represent long-term opportunities and produce high sales growth, their entrance and expansion requires higher initial investment which impacts near-term profitability.

We also expect to invest more on new distribution channel initiatives and our IT infrastructure.

As a result of the gross and operating expense ranges, our fiscal '08 reported operating margin is expected to range between a 10 basis point improvement to a 20 basis point decline.

At this time we estimate our effective tax rate will be approximately 36%.

Our reported diluted EPS for fiscal 2008 is forecasted between $2.28 and $2.40.

Looking at our first quarter, we expect EPS for the three months ended September 30, 2007, to be between $0.05 and $0.11.

Our forecasted sales growth for the first fiscal quarter is approximately 5 to 7% in local currency.

The positive impact of foreign exchange should be less than 1%.

Our top line growth in fiscal '08's first quarter will be impacted by the retailer calendar shift which affects the ordering patterns of the retailers compared with last year's first quarter.

This shift will benefit us in the second quarter.

While the sales will shift, our spending patterns remain the same and we expect to continue the aggressive investment spending in Q1 of fiscal '08 that we started in Q4 of fiscal '07.

That conclude my comments for today and we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) Our first question today comes from Ali Dibadj with Sanford Bernstein.

Limited to one question, I have a bunch of them but just limited to one question, I understand not to think about your business on a quarterly basis, but really want to understand what's going on in Q1 specifically to have such a low and kind of wide range.

And in particular, how does that tie to your overall annual range, if we want to think about it that way, because that would suggest a really enormous separation given the difficult comps on top line, but an enormous acceleration towards the back half of the year.

Can you just elaborate on that a little bit, please?

Sure.

There is a couple of things.

I mentioned the retailer calendar shift which is the effect of the 445 retailer calendar, and there is a week's worth of sales that shift into our second quarter out of the first quarter.

In addition, we are anticipating a weaker first half of our fiscal year in the U.S.

in particular related to the U.S.

department store business, and I think you heard some of that recently from them.

So that is going to affect our shipments in particular in the first quarter somewhat, which is when most of our Christmas business goes out and as they expect a weaker Christmas obviously it impacts us somewhat.

We do have quite a bit of launch activity in the first quarter, and we are investing quite heavily internationally, in particular to take advantage of what we see as opportunities in emerging international markets.

When you look year-over-year, does it -- you point out the fact that that means that the back half would be somewhat exceptional as far as growth, and you will recall that we just reported very high spending in the fourth quarter of this year, so obviously that means some relatively easy comps in next fiscal year, but we do run our business on an annual basis.

Our new products launch when they launch.

We spend our money as we think is in the best interest of the Company for the long-term, and we don't really worry about quarters as much as possibly some of -- some of you people do.

Okay.

If I were to follow up or a related follow up to that, even looking kind of longer term here, some of the indications to me are a little more worrisome.

And it sounds like you are not worried.

Frankly I am a little bit, particularly around skin care and makeup, margins this quarter were down a lot.

Sales were lower than at least we expected.

The troubles you're mentions in your core brands, particularly Clinique and Estee Lauder sounds like may have been shrinking in the U.S.

These things aren't -- don't make me feel comfortable with an acceleration.

Again, thinking about the quarters but at least an acceleration in the back half of the year, and I am not comfortable yet and I'm just trying to figure out what makes you confident in that?

Regarding skin care, you will recall I mentioned about some costs we incurred in the -- related to pharmacy channel distribution which is all skin care.

Those were -- the majority of that expense was recorded in the fourth quarter of this fiscal year, so that's what depressed the skin care results in the fourth quarter.

Regarding makeup, if you look back at our results last year, we had tremendous growth in the operating margin in the fourth quarter of last year, so it was up against somewhat more difficult comp, but I think if you look at our year-over-year results, they're still pretty good.

And then what about kind of SMI and Aveda, any implications there going forward?

How can we extrapolate from that if at all, and if so, what could we expect the impact of that to be on your back half of next year numbers?

Well, we will begin to see some benefits in Aveda in the back half of next fiscal year, but simultaneously with that, we have three locations that we'll be implementing SAP, so the result is that we are in a net expense base condition if you will for next fiscal year related to SMI.

The implementation in Aveda went pretty well.

I think the words that we use is better than we expected and not quite as good as we hoped for, but the number, we're up and running in Aveda.

We really have no major disruptions with our business, so we're pretty happy with that.

But the other implication is around inventory levels, and that is that we understand now that we need to build inventory levels as a safety stock.

We did that with Aveda, and it worked very well for us, and now that we start to have multiple locations coming onstream, as they come on stream we build inventories in anticipation of that, and as that goes forward, it is going to really put some upward pressure on our inventory levels in addition to just regulatory changes which are requiring special variance for selected markets, so those are the implications of SAP.

Our next question comes from the line of Amy Chasen with Goldman Sachs.

Just a question for William.

If I remember, I think it was one or two quarters ago you said you were stepping up your spending.

I think it was in the third quarter after having a really good second quarter, and it sort of sounded like you were doing that on an experimental basis to kind of see what was going to work and what wasn't going to work.

Now we're hearing that you're stepping up spending meaningfully this year.

Can you talk about what you learned from that third quarter increase and what sort of incremental here relative to your original expectations when you had your analyst meeting in March?

Well, there's a number of different things, Amy, where we've increased our spending.

I think we're focusing our efforts in a number -- in a few areas.

Our largest investments in both the fourth quarter of -- starting in the third quarter and really going into the fourth quarter of last year and again into the first quarter of this year, is our investments in our international markets both in emerging markets and as well as more established markets in western Europe and Asia, where we're seeing tremendous momentum -- tremendous sales momentum in a number of our different brands.

Probably that's absorbing a substantial portion of our increased spending over norm.

In addition, what we're focusing in on North America is we're really focusing in on our established brands in North America to reallocate their spending between and amongst different lines and their advertising and promotion lines to both improve their effectiveness and efficiencies as well as to use different new media tools which we see give them a greater response per dollar spent than many of their more traditional forms but can only absorb so much of the actual spending itself.

Let me just -- on the incremental spending in the developing and emerging markets, if you're still going to achieve your longer term goal of sort of compound annual 10 to 12% EPS growth, that suggests suggests that spending slows down in the out years, and yet from what I am hearing, this opportunity is not going to go away.

You are going to want to continue to spend against those things, so should you be reevaluating your long-term EPS goals?

It is Rick.

I think that if you look at the guidance we've given, our EPS range is a growth of between 6% and 11%, so the range, the guidance we gave is still reflected within the -- our analyst day presentation guidelines as well, but what we're seeing is the softness in the U.S.

that we talked about on our conference call, and we are seeing an opportunity to invest in these emerging markets, the growth rate is 20%, but they require some investment to maintain and take advantage of that growth and keep that momentum going.

Our sales growth is higher than we had forecasted back in March for over the next three years, we're saying 7 to 9%.

Back then we said 6 to 8%.

We still believe in growth as a viable model for us.

If we were to grow at the average rate of the cosmetic market on a worldwide basis at 4%, we would have to have a profitability improvement of 50 basis points to equal that, but you could argue that where would we -- where would the Company be better off in the future, having greater sales on a greater market share and more power in the marketplace to continue the longevity of our business model or would we be better off having a slower growth business and more profitable, and you both get to the same place on the bottom line, but we think we would have a healthier company long-term based on a higher growth model.

Amy, I would add one point to Rick's points which is that our continued investment in these emerging markets, the investment is related to their emerging profitability.

As these markets become more sustainably profitable on their own, the net effective investments above the normative rate of profits they bring in basically starts to change.

For example, Rick mentioned in his commentary that China is now becoming a profitable market.

The effective net investment we're putting into that market declines because it is able to finance itself more.

As these markets become more meaningfully profitable, that net effective investment declines, but we still try to maintain the growth momentum we're getting from these markets.

Our next question comes from the line of Alice Longley with Buckingham Capital.

Hi.

Good morning.

Your comment about the first half you said it would be weaker, and does that mean the first half, putting the first and second quarter together, might be down EPS?

We only talk about the full year, and we give you just a look at sales and EPS for the quarter because we want to focus on our full year results, so we're not going to really talk about the first half, but the weakness that we're talking about in the first half is related to the U.S.

department store business and primarily driven by the -- those acquired doors through all our retail partners that are out there.

I think you mentioned Christmas briefly and something about weaker Christmas.

Did you mean that a weaker Christmas could hurt more or have expectations by retailers already come down for Christmas reflecting concerns about the environment?

What I was referring to is the fact that a lot of our Christmas shipments go out in our first quarter, and as the U.S.

department store business is looking at a somewhat of a weaker, at least in their minds, a weaker Christmas season this year, it affects their ordering and our shipments to them in our first fiscal quarter.

Our next question comes from the line of Filippe Goossens with Credit Suisse.

Good morning, gentlemen, two-part question on Europe if I may.

If I look at the fragrance category, obviously a nice improvement year-over-year, also good performance in Europe.

William, in the past you had mentioned that you were weakly positioned in Europe as it relates to fragrance given that you did not have the right brands.

Did anything change this quarter that did allow you to perform well on the fragrance side.

And on the second part of the question with regard to Europe is the $30 million in expenses, Rick, for realignment and goodwill in the pharmacy channel, is there more that you need to do there that could result in additional expenses in fiscal '08?

Thanks very much.

I will answer that first part of your question, Filippe about the fragrance business in Europe.

The primary driver of the fragrance performance in our European region as reported came from our continued success in the travel retail arena which is reported through our European region.

We do not, have not yet materially changed the portfolio mix of our brands that would give us a stronger competitive position in the domestic markets in Europe, but the portfolio of brands we do have performed better on a profit basis in Europe than they do in North America.

I will let Rick answer the second part of the question.

Filippe, the $30 million we spent was around organizational changes, around the repurchase of some distributor businesses, and also an impairment of goodwill and intangibles, and it is really around the Darphin brand where we decide to do take a slightly different direction with that brand quite honestly and it's affected our business plan going forward and so that's why the goodwill impairment.

But we don't anticipate anything more.

We think that we've set a foundation in place.

If we see an opportunity, by the way, to further enhance that business, we certainly will take advantage of that, but for now anything around the expenses that I just described we think those are over with.

Our next question comes from the line of Linda Bolton Weiser with Oppenheimer.

I was wondering if you could give us some insight, a little bit more detail on U.S.

sales performance.

I believe you said it was up 3.

Can you tell us what department store sales were in performance and also the alternative channel, and also did growth in the U.S.

exceed your expectations -- your internal expectations in the quarter?

Let me take a look -- shot at it Linda.

The department store business is basically flat, and most of our increases are coming from other parts of the Americas and other channels.

We talked about the internet business.

We talked about the hair business.

We've been living with the department store challenges for awhile.

It is running where we expect.

It has been beat to death I think in the paper the last couple days with Macy's which reflects basically the department store business.

They think it is going to be soft right through the first half of this year.

We concur with that.

The things that they're talking about as far as coming back with the home business, that won't have a major effect on us.

It doesn't have the foot traffic that a healthy ready-to-wear business does, so we're very pessimistic about that first half.

Our own stores performed quite well.

They were up 13, for the year, so everything surrounding the department store business was doing well there for -- the total was up right where we expected it to be.

Our next question comes from the line of Bill Schmitz with Deutsche Bank.

Hi.

Good morning.

Good morning, Bill.

Can you just talk about where some of these costs are coming from?

Is this costs to sort of support the Clinique initiative, less turnover, the department store base, are they demanding more services from you?

What kind of stuff are you spending it on?

If you look at your ad spending, it was up (inaudible) sales for the year.

Our ad spending was up in line with sales for the year.

With a little bit softer growth in the Lauder and Clinique brands on a global base than the rest of our business as a percentage of sales for those businesses we're investing fairly heavily in them.

Our intention is to defend our market share in the United States.

We are the market leader.

We to want maintain that position, but at the same time understanding that there is some softness here, we want to take advantage of our opportunities internationally, so we are spending quite heavily in emerging markets.

As we mentioned we are spending quite heavily to roll out our brands internationally, the ones that are not fully distributed there, and we're also spending on new channel initiatives.

The internet is a great channel for us.

We're opening internet retail sites in I want to say a half dozen locations in fiscal '08 around the world, and we're also spending in some other initiatives, so in the pharmacy channel which William mentioned I think, we're opening 100 doors for Origins in Europe next year.

So we're taking -- we're being prudent, we think, in where we spend our money, and we're spending it where we think our longer term opportunity is, which is internationally, but at the same time we're not going to let our market share erode in the United States.

Got you.

And then can you just tell us what the sort of nonrecurring sort of restructuring related charges were in the quarter?

I know you said there was some goodwill writedowns on Rodan + Fields.

I imagine there was some -- also some goodwill or loss of a sale of the Rodan + Fields business?

Rodan + Fields was relatively small, Bill, but there was a small piece of that.

The number that I was referring to was the Darphin business, and that was around some organizational changes.

We repurchased some distributor businesses and also because we changed our business model -- our plan a little bit we had a goodwill impairment related to that acquisition as well.

Our next question comes from the line of Justin Hott with Bear Stearns.

Hello?

Hello.

Thanks.

William, can you comment a little bit on the U.S.

consumer?

I think some previous comments have been -- there was concern that they were on sort of a short string toward losing their demand for products because of high gas prices.

Do you think that's affected you?

I am just wondering how much of this weakness is department stores and how much is consumer and how much you think it might be spreading?

Well, I think, Justin, anything that you've read over the last few weeks would lead you to imply that there would appear to be some weakening consumer confidence at the moment because of some of the turmoil that they're seeing in the market place.

Where does that manifest itself?

Our consumer being a higher end consumer is less impacted by increasing gas prices than perhaps a lower end consumer, but our consumer probably may also feel somewhat more disproportionately affected by the implication of mortgage activity that may or may not impact their home refinancing and spending patterns.

When we look at the pyramid of retailers with whom we do business starting at the tippy top with Neiman Marcus, Sax Fifth Avenue, Bloomingdale's, Nordstrom, Macy's, what you see is the higher in the pyramid you go the stronger the sales results and those are consumers with a higher income level.

As you go further down that economic pyramid it may be wider, but that's where you're seeing more of a consumer confidence impact.

Those are more directly affected.

I would expect that over the the next six to nine months depending on the perceptions the consumer has about their own personal wealth, I am just going to make a hypothetical.

This is not coming from any base of expertise.

There is a far larger portion of the middle class consumer today who has their retirement savings wrapped up in 401(k)s which are tied to market performance than perhaps were previously.

Do they perceive themselves to be richer today and well off today and have money to spend today in a different way than they did a year ago, that's a good open question which far more expert opinions on the economy can make whether I can.

But I think right now it is pretty safe to say there is a certain level of consumer confidence that we should count on.

I am not certain it is as strong as perhaps we've seen over the last four or five years.

By no means is there any implication that there is a tremendous malaise.

I will say, however, Justin, that is offset by very strong consumer confidence and demand outside of the United States we're seeing both in western Europe, established Asia, as well as the emerging markets we talked about.

And in many cases especially for the Estee Lauder and Clinique brands which are well distributed in these markets, those increases are more than offsetting the consumer confidence issues in North America.

What I am really just trying to figure out is do you feel in the U.S.

you're in the right channels for growth and your model doesn't really need tweaking there.

As a comment Dan made before, we're seeing some really good strength in retail sales year-on-year in our alternative channels of distribution, and we're continuing to pursue those options where we get a good meaningful return on our investment.

The simple fact of the matter is that our established base network in the department store market where the consumer has come to expect to see our brands in this channel is tremendously strong.

Both the capital investment and return on investment through alternatives takes some time to develop, and we continue to find ways to invest in those on a brand-by-brand basis where we get both a strong connection with the consumer and a return on our investment.

Those include retail stores in a number of different areas for a number of different brands internet which Rick mentioned before which continues to be our fastest growing channel of distribution at a tremendously profitable rate and we continue to get good returns on our investment there, as well as certain of our brands continue to have a good presence on alternative channel if you will you can generically call them DirecTV, be they QVC, HSN or other forms of reaching out to the consumer which does have an impact on traditional four-walled retail also.

What we're really finding, and this is research driven and others is that the consumer has become somewhat agnostic about where she consumes information about a brand and perhaps buys a brand.

But what we're finding consistently is that, what she learns about a brand, however she learns about the brand, she is more likely to find the brand in a retail environment where she wants to try the product.

Consistently still today our internet sites, the number one section of the sites clicked on is the store locator site.

So while we have tremendous business on the internet, and we're doing very well, we still find as many consumers want to know whether she can see it and touch it, and we believe that she is actually going to stores to find it or at least try to find the locations where she can find our brands.

Our next question comes from the line of Lauren Lieberman with Lehman Brothers.

Thanks.

I just wanted to catch up a little bit maybe on some of the reinvestments you've been making in both Clinique and Estee Lauder in the U.S., in particular some of the efforts to improve retention rates of the people working at the counters in the stores, and then also just some of the general reinvestments in the brands, the brand image and so on because usually we get a bit of an update on that on the calls.

Let me give you an update on the Clinique because I saw the first installation.

We have a program called 360 which really diagnosing skin back at premium level in Clinique with new mirrors and a new training techniques for the consultants.

If you look at the historic business model, we encourage turnover.

A person came to a counter, she was a consultant or she was the counter manager.

She had to leave the counter to grow.

The theory that Clinique is going to now is going through a level of certification where a consultant starts and then through proficiency she advances with salary increases to various levels so that she can have a career, a growth in advancement and compensation and stay at the same counter.

That program rolled out with the Dillard organization with Dallas last week.

I think the official launch is next week.

We're doing with with Macy's East I believe in Boston.

If successful we'll roll it around the country.

If requires a tremendous investment in salaries, and a tremendous investment in capital, neither of which are advertising, and that's the type of things that Clinique is glad Clinique is going after.

Our next question comes from the line of Chris Ferrara with Merrill Lynch.

Hi, guys, I just want to understand on the '08 outlook, so sales are higher than what your longer term outlook is at 7 to 9 with little currency in there and EPS unless we assume the absolute high-end EPS is obviously lower than what the long-term range is, so how does that mesh?

Is it because you're seeing a slowdown in the U.S.

and you're accelerating international with incremental investment relative to where you thought you were going to be or is it because international just is better than you expected anyway and there are further demand-building investments in defense expenses in the U.S.?

How do I think about that?

I think the way to look at it, Chris, is with the slowdown in the U.S., which we believe is a temporary thing, we say it will last through the first half of the year, we're not going in and making dramatic changes to our normal spending that we would incur, so we are not going in and reducing our people buying the counter or changing our national advertising program, so that certainly has its share of the impact on our profitability.

Looking at international, William mentioned in his comments again about those -- about some of our emerging markets and the growth of -- compounded growth rate of 20% and going from 4% to 8% of our overall business.

Those mathematically push down a little bit on our profitability, but we think they're great opportunities for growth.

That's what we're sort of focusing on is taking advantage of opportunities we see around the world.

We are being somewhat prudent in our outlook with the U.S., but we think that's appropriate under the current conditions that we have, and we'll see how the year unfolds, but I think that the guidance that we have given is a reasonable guidance based on the conditions that we see out there and we're quite hopeful that we'll achieve results that are within that range certainly.

Is your demand building spending that's hitting the international markets higher than what you thought it was going to be at analyst day or even three months ago?

I think it is fair to say that we are accelerating our spending in particular in the first half of the year for international, not so much three months ago but a little bit longer than that.

When we first did our analyst conference call, it was at that time that we started to think we would accelerate our spending into the back half of the year.

We've seen that that has led to some success.

We had a 10% growth rate in the fourth quarter, and we're forecasting a higher growth rate next year, and we'll continue in that spending into the first quarter at least.

Our next question comes from the line of Connie Maneaty with BMO Capital Markets.

Good morning.

As we look at inventories on an annual basis, they're higher now than they've been at any time in the last five years in terms of days outstanding.

And even when inventories were at about 150 days I remember comments that you were looking for ways to reduce it or maybe reign it in.

When do you see that you will get to that sort of improvement?

Is it a year out?

Do you have to -- when do you hit the inflection point on SAP where you can sort of ease up on the inventory build?

Well, we are continue to go work on inventory, Connie.

I don't want to mislead anyone along those lines, but we're seeing is that there's two things that are working in a sense against us.

One is we do understand the need to build safety stock as we roll out SAP.

The main locations, most of the major locations for us will be implemented by the end of our fiscal 2010, and so we should certainly begin to see some fairly significant improvements by that time.

But we do have new market growth as well that we're -- is affecting our inventory.

We have a new market in Turkey, the fast growth in Russia, in China, in Brazil, and the build-up with Aveda as I say for the SAP implementation, so we have a lot of things that are adding inventory to us while at the same time we improve our processes and practices around our normal business.

And in addition, we also have the regulatory issue, and that is that as more and more regulations are being specific to markets, either European market or Japan or China or whatever, they all have their own special labeling requirements and/or ingredient requirements which require us to carry special variance of some of our SKUs to be sold in those market places, so those things work against us, while at the same time as I say we try to improve our basic inventory performance.

If I could just follow up with that, what new countries or categories will you implement SAP in in fiscal '08, and secondly, with the sluggishness of the U.S.

market right now, are inventory levels appropriate within your portfolio and at the trade or is there a backup somewhere?

Yes.

There are appropriate in the trade, but as they slow down it sort of pushes back and puts inventory in our house, so regarding the U.S., I think that's the answer for that.

The new markets we're going to open an affiliate in Europe.

We're going to -- one of our manufacturing facilities in Europe is going to implement SAP, and here in the U.S.

we're going to put in a financial backbone, so those are three initiatives in fiscal '08 that we're working on related to SAP.

Your next question comes from the line of Neely Tamminga with Piper Jaffray.

Good morning.

Just had a clarification question on your guidance for Q1 and the full year.

I get the sense obviously that you guys are having a little bit lighter reorders because of maybe your U.S.

retailers.

Just wanting to know if the guidance also is including an uptick in some of your GWP and PWP programs for holiday to kind of meet the consumer with where she's at this season?

Is that how we should be thinking about margin then, also for the the full year, Rick, if you could speak to a little about the operating margin, and I get the one-timey events that occurred in Q4, but should we be looking for skin care and makeup to actually be up on operating margins for next year?

Thanks.

Let me take the first part of that.

We are increasing our spend in the quality of our both gift with purchase and purchase with purchases.

We think we were -- we've lost some opportunity last year.

We've run out of some gifts sooner than we wanted to, so between our gift sets, we are increasing both our allocations for Christmas and our promotional activity.

We're going very aggressively after the business in November/December.

Regarding operating margin, if you look at our overall guidance, we're saying our operating margin is essentially relatively flat year-over-year, and so that would indicate that, if you will, whatever happens within the individual product categories, they'll be more or less comparable to the year before.

Thank you.

Good luck.

Our next question comes from the the line of Jason Gere with A.G.

Edwards.

Good morning.

Just a quick question.

You're talking about the level of investment, I guess accelerating over this year and operating margins potentially being down I think 10 or 20 basis points.

Can you I guess put into framework the magnitude of maybe the cost-cutting initiatives you have in place, whether or not you think that there is more down the road you can accelerate that would be able to reinvest back into the business, but at the same point be able to still keep your margins up modestly as you anticipated?

We certainly have cost savings initiatives that we're working on, and I I think we previously described some of our efforts within the indirect procurement area in particular which is beginning to pay quite honestly some pretty good benefits for us.

We are reinvesting that money as you correctly point out to take advantage of opportunities that we see.

We would anticipate that opportunity to continue to expand.

We anticipate the regionalization will provide opportunities to drive growth and have a more efficient organizational structure.

We do anticipate as you know $80 million a year of savings from SAP which will begin to swing over from a net expense basis which it will be in '08 to a positive basis sometime either in the latter part of '09 and certainly into '10 as more and more locations come on stream, so we're optimistic about that.

We are investing heavily to achieve those savings, but we do know they're coming.

And I guess when restructurings have been in vogue for probably the last couple of years, is this something that I guess with the magnitude of spending maybe being a bit more aggressive over the next couple years, the investments abroad, is this something you would circle back to and maybe be even a bit more aggressive than what you just described?

I think it is fair to say that cost-cutting initiatives are not something we turn on and turn off based on the current trend of a business.

It is a constant discipline that we're forcing and that occasionally we push the accelerator even more, but we really want to continually keep the pressure up to continue to maximize our spending effectiveness and efficiency so we can drive as much more spending as we can towards the consumer which we hope will generate top line results.

That's our primary focus.

When we continue to see the opportunities where we can, reduce our spending where it is not effective and efficient, we will.

Our next question comes from the line of John Faucher with JPMorgan.

Yes, good morning.

Following up on that last comment, reducing spending where you see the need to do that, it seems as though the markets that are growing slower get more spending, the markets that is are growing faster get more spending, so can you walk us through how the spending would slow and what the areas would be and give us some examples of where that's happening, because it seems as though everyone just looks at the increases and we don't really see much of an end in sight in terms of the incremental spending that gets added what seems to be every year?

And then can you talk about the 2007 incremental spending and give us some specific examples in terms of saying whether it was the counter training, what have you, this is going away over the next couple of years?

I think, John, the best way to look at it is look at our allocation of spending based on where our growth patterns are.

It is safe to say in a broad macro basis that we are over investing in our growth -- in our strong growth markets and underinvesting in our more well established markets.

Using the more traditional business school model, we're milking our more established markets for the profit and investing those in the stronger growth markets.

If you had the pleasure of sitting with us in our budget sessions you would hear all of our business units complaining the other guy is getting more spending and they're not getting enough spending and it is a typical pattern we all live with.

And the fact of the matter is what we're trying to do is allocate the spending across regions, across categories, and across brands where we see the greatest long-term return on investment so that we can drive both the top line growth as well the bottom line growth in profit.

Relatively based on performance those are a key criteria.

The demands we put in our business units is is that you have got to perform on a good return on investment to maintain that investment in a year-on-year basis but oftentimes we're taking that investment and reallocating it either within a market to a brand where we see we get a better return, within a region from one market to another or within from brand to brand on a global basis.

John, just to pick up on something that William just mentioned about a return, if I look at our return on invested capital ratio where we ended about 21.3, that was 170 basis points improvement on the year before.

And we are investing.

We're investing for growth.

And we believe that drives profitability, and I think that's a very good indicator of the performance of our company if you look back over the last several years.

So we go into next year, our sales growth is pretty strong considering the weaknesses that I think is pretty common knowledge that we foresee here in the U.S.

We're still forecasting 7 to 9% local currency growth on a global basis, and those are pretty good numbers.

We have to spend to achieve those numbers, but at the same time we think that helps drive value for the Company.

Our next question comes from the line of Amy Chasen with Goldman Sachs.

Yeah, you partially answered this question, but not fully.

In the the fourth quarter your Americas sales were actually really strong, they accelerated quite a bit.

In prior quarters you've been able to break down for us kind of how much Mexico, Canada, were up relative to the core U.S.

business.

Can you kind of walk us through that analysis?

I don't have the numbers in front of me, Amy, but you are correct in that Mexico, Canada, and most of the other countries that are within the Americas region grew quite nicely in addition to our internet business, our hair care salon business, our retail stores.

So everything other than a department stores, the sales growth was pretty solid and department stores in its totality was relatively flat.

I guess what I am not clear then is that you keep talking about how concerned you are in the first half about continued weakness in department stores.

That part I understand.

Are you expecting all of these other areas, Mexico, Canada, internet, so on to slow down?

We certainly hope not.

That's want our plan, and that's not built into our models.

Again, when you start to -- go back to one of the earlier questions about the macro trends and the consumer confidence, there is a potential that there may be some short fall because of those macro trends, perhaps in North America, and United States alone, perhaps also in Canada, Mexico and other markets, but we're generally looking at the department store business in the U.S.

probably being the primary flat place, and we're continue to go look at the other sectors of our business, the other channels, to be up more meaningfully.

I am sorry.

Are you looking for department stores to be flat in the first half or to be down because again I just don't understand again how good the fourth quarter Americas trends were?

You know, if you look for the year results, Amy, our Americas business grew by 3%, and next year the numbers are going to grow probably mid single, low to mid single-digit kind of growth numbers overall in the Americas region, but we anticipate that to be slightly slower in the first half and a little stronger the second half.

Why, though?

That's what I am not clear on.

Why?

Yep.

Why slower in the first half?

I think we know that we looked at our department store business which is obviously the bulk of that business, and we'll probably come out of the first half department store somewhere low single digit, maybe flat.

We hope that we -- when we start anniversarying this and get through especially our largest customer starts bringing that old May Company back into the stores in the spring and starts putting the promotional packages together that they're used to seeing it is going to help our business.

We'll have anniversaried all of the dates that have moved around now for the last couple of seasons, so we think the spring will start coming back to what we would look at normal trends.

If you take out what we all refer to the acquired doors and look at the base business, the Lauder and Clinique businesses were actually very good in '07, but when you added in the acquired doors, it certainly brought the whole numbers down.

We think we're being prudently conservative in our forecast for the U.S.

business in the first half of next year.

There are some macro issues at work as well, which consumer confidence I don't think is the strongest at the moment, and how long will that last, last, we're not positive of, and as William was alluding to, it is probably better for other experts than us, but we see some weakness, and we wanted to make sure that we are cautious in our outlook for the first half of the year in the U.S.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the the line of Lauren Lieberman with Lehman Brothers.

Thanks.

This has probably already been asked, but should we be thinking about '08 then as somewhat of a quote, unquote transition year -- because top line still will be fine, just arguably back half loaded, but with this ongoing step-up in spending, particularly the new emerging markets, should we start to see margin expansion and meaningful margin expansion in '09?

We haven't come off of your three-year guidance that we gave in March, gross sales 6 to 8% and EPS 10 to 12% over the next three years.

As I mentioned earlier I think our EPS -- our sales growth is higher.

Our range of EPS certainly gets us to that kind of number, and we're going to work very hard during the year to achieve the highest profitability that we can.

We just think that under the current conditions, we want to be somewhat cautious.

So we'll see how the year unfolds, but we're not -- we're certainly not tossing in the towel on next fiscal year by any means, and we intend to achieve these objectives we layout for the next three years.

Right.

I am not even suggesting that about '08.

I am just now taken your comments on '08 as a given.

You're being conservative, to be concerned about places you're stepping up investment because you see opportunity, but as I fast forward and I look out into '09, would you be expecting to get a material payback on some of these investments that you're getting that either comes in the form of staffed even faster revenue growth, more margin, more profit, something so that beyond the difficult macro environment in '08, we can think about a payback on the spending that you're going to be doing?

Yes.

We would certainly anticipate obviously a payback on our investment, and we would anticipate achieving a three-year objectives we laid out for ourselves.

That's what we're doing.

We're thinking we're doing that appropriately given the conditions in this first year of that three-year plan by our plans that we've laid out, and we would anticipate obviously some improvement going forward.

Okay.

Thanks.

(OPERATOR INSTRUCTIONS)Our next question comes from the line of April Scee with Banc of America Securities.

Just hoping you can give us more clarity on the $30 million charge.

In particular, how has your direction with Darphin changed and why and what's the implication for the pharmacy channel in Europe.

Because it sounds like still expanding there that the Origins product is still going into those doors.

How should we be thinking about that channel going forward?

Thanks.

April we still see the pharmacy channel in Europe offers us long-term opportunities going forward.

They are both demographic trends which are lending to this both because of the aging population and the need to be going to pharmacy and secondly the orientation towards skin care and we think there are a number of things attractive, continue to be attractive both about the channel as well as the brands we have in the channel and potential for other brands we might have in the channel.

Specific to the current environment and Darphin brand, I think Rick mentioned that there were a number of different factors which went into this, not the the least of which was a management change in direction as well as some distributorship adjustments.

And what we're trying to do is focus this brand in a manner that can give us a better performance in its focus and it is somewhat of a change in its strategy and model.

which we think will give us a better return on investment in the long-term in the region.

Okay.

But your long-term outlook for Darphin, is it going to be a bigger brand than you thought or is it going to be a smaller brand than you thought?

And same question for the pharmacy channel.

The -- is it going to be a bigger brand than we thought?

It's going to be the brand we thought.

I would say that the strategy from the management that was pursued the last couple years was not as effective as we would like in a number of different ways, which is why that management is no long in place and we've changed that management because we think that there is a better way that they can be more effective both in top line sales as well as profitability.

As well as the channel itself, we continue to have a great deal of confidence in the opportunity that the channel offers us both for the Darphin brand, the Origins brand and other brands in our portfolio or other brands we may look to acquire to put into that channel.

Okay.

Thank you.

That concludes today's question-and-answer session.

If you were unable to join for the entire call, a playback will be available at 12:00 noon eastern time today through August 26th.

To hear a recording of the call, please dial 800-642-1687, pass code number 5614429.

That concludes today's Estee Lauder conference call.

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