雅詩蘭黛 (EL) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Companies fiscal 2008 year-end conference call.

Today's call is being recorded and webcast.

For opening remarks and instructions, 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.

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

Also on today's call is Dan Brestle, our Vice Chairman and President of North America.

Dan 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'll find factors that could cause actual results to differ materially from these forward-looking statements.

I'll turn the call over to William now.

Thank you, Dennis.

Good morning and thank you for joining our fiscal 2008 year-end conference call.

In our remarks this morning, I will highlight some of last year's accomplishments and several initiatives planned for fiscal 2009.

Fabrizio will discuss the Company's evolving strategy and Rick will provide the financial results.

To begin, as you saw in this morning's release, our fiscal 2008 reported sales grew 12% to $7.9 billion.

Diluted net earnings per share were $2.40, at the top of the range we had forecasted since the beginning of the fiscal year.

We're proud of the Company's solid sales and earnings growth, particularly in light of the tough economic climate in the US and some other large markets.

Among other factors our healthy growth underscores the execution of our diversification strategy which cuts across categories, continents and channels.

As you know, we measure the Company's performance by our four product categories and three geographic regions.

We succeeded on all fronts with higher sales in every category, in every region, in every category within every region.

Continuing a trend of several years, the bulk of the gains came from our vibrant international business which fueled momentum and more than compensated for slower US growth.

In fact, 59% of our total sales were generated outside the United States.

This compares to 54% in fiscal 2007.

We expect that number to rise steadily in coming years as our international business remains the focus of our growth story.

Fast growing, emerging markets contributed the sharpest gains, investments we made in China and Russian continue to pay off nicely.

Sales in both countries exceeded $100 million for the first time, a threshold which gives us greater scale and visibility.

Our sales in India are small but growing and we are sewing seeds for future returns which we expect will eventually be sizable.

Estee Lauder and Clinique opened stores in India, increasing the numbers of brands we sell there to six.

Other developing areas, including the Middle East, South Africa and eastern Europe contributed excellent growth.

While we gain momentum in developing countries, we also solidified our positions in established markets.

Several of our larger affiliates turned in healthy results.

In the UK, our local currency sales grew 10%, triple the pace of the Prestige cosmetics industry leading to increased share.

Our sales in Japan climbed mid-single digits reaching their highest level ever.

Makeup sales in Japan advanced nicely with a standout performance by M-A-C and skin care growth accelerated over last year.

There were many more achievements in fiscal 2008.

We hit several major milestones.

Sales exceeded $1 billion for the first time in Asia Pacific.

The European region in the makeup category also scaled new heights, each surpassing $3 billion in sales, a first for both.

skin care wasn't far behind.

We aggressively pursued new distribution opportunities including Direct Response TV, a fast growing channel for beauty.

Clinique, Ojon, Origins and Tri-Aktiline launched on Direct Response TV in various countries and viewers responded enthusiastically.

In the United States, Clinique's inaugural show on QVC broke sales records.

Travel retail had another stellar year.

As a Company, our share widened to make us the number two player.

Our double-digit sales increase was the second best in the past decade.

Another rapidly growing channel, e-Commerce, again had impressive sales, thanks to several new international brand sites and strong demand on retailer sites.

The Company's best selling products were La Mer face and eye creams, which are among our most expensive offerings but in limited distribution, creating demand online.

As for our portfolio, our biggest brands delivered positive results.

Global sales of the Estee Lauder brand grew nicely, up mid-single digits in local currency, fueled by several strong franchises including [Renutra], Idealist and Cyber White Ex.

The brand's business outside the US has grown so rapidly in recent years, thanks to being regionally relevant, it now accounts for two-thirds of its sales.

Russia, greater China, eastern Europe and the Middle East were among the best performers.

In total, the brands international business grew high single digits, posting growth in every category.

In addition, the Estee Lauder brands US business is stabilizing due to several innovative efforts.

A point of sale program called Signature Services trains beauty advisors to offer advice, quick touch-ups and samples.

That helps drive sales.

In this economy, consumers are focused on value and as a result, the brand enjoyed a strong gift program in the spring.

The brand's premium [Renutra] line also was robust and skin care was the best selling and highest growth category.

Clinique grew similarly on a global basis with healthy improvement in Russia, China, Korea and the UK.

Its business outside the US is now 65% of global sales.

It's North American gift promotion showed good increases over the prior year with notable gains at Macy's and Dillard's.

Clinique also introduced three innovative skin care lines to treat acne, redness and hyperpigmentation.

These launches were extremely successful because they met the specific needs of consumers, M-A-C's global sales rose double-digits and in a milestone, surpassed $1 billion.

It remains the leading US Prestige makeup brand.

Our portfolio grew with the acquisition of Ojon, a naturally derived wild crafted brand of hair and skin care projects.

Ojon strengthened our position in alternative channels including QVC, Sephora and Ulta.

During the year, Ojon launched on QVC in Germany and its product sold out so quickly, the last show was postponed.

Beauty Bank, our entrepreneurial division, launched an international business in a unique way.

It took its best selling product, Tri-Aktiline and sold it through a diverse distribution network including specialty stores, pharmacies, TV and online.

Beauty Bank's international sales soared from virtually nothing to more than 30% of its total business.

Select products are now available in 44 countries.

Beauty Bank will anniversary the international Tri-Aktiline launches this year with another distinctive treatment item.

To further hone our strategies, we bolstered our management expertise by bringing in Fabrizio Freda.

Having spent two decades at Procter & Gamble, Fabrizio brings valuable consumer products experience, financial discipline and an outsider's objectivity.

That perspective has been extremely helpful to me in assessing the Company's strengths to plan for its future.

He will talk more about those plans in a few minutes.

Turning now to fiscal 2009, we have set our financial goals to again achieve solid sales and earnings growth.

We believe we can sustain momentum in our international business, further capitalize on emerging markets and enhance profits by allocating greater resources to high growth, high margin brands.

As we have noted many times, it is our international operations which now reach over 140 countries and territories that will lead our growth.

We expect to generate higher sales by improving like door results, launching brands into new markets and cities and opening more points of distribution.

We expect Asia Pacific to be the highest growth region.

China's strong momentum will remain a major economic engine for the entire area.

In addition, we will keep pursuing new distribution opportunities.

For example, Lab Series plans to sell on TV in Korea, Tri-Aktiline expects to launch in three countries through pharmacy chains, and new retailers are in talks to enter Vietnam, providing expansion potential for our brands.

In Europe, the Middle East and Africa, we anticipate growth, but remain cautious about the environment in western Europe.

Recently, we have seen weakening economies and consumer spending in the UK, Spain, Germany and Italy.

We will continue to carefully monitor the economic climate and our businesses.

However, emerging markets, particularly Russia, Turkey and eastern Europe present exciting growth opportunities.

Further expansion of Beauty Bank and niche brands should add incremental growth.

Bobbi Brown, which is on a hot streak in the region, expects to open in Russia, Hungary in the (inaudible) countries in the first half of the year.

Dispute headwinds in the US, our industry and our business in particular is not as volatile as some others.

In fact, Prestige beauty has remained a relatively bright spot.

Total US Prestige beauty sales in the last quarter grew 4% according to NPD, with skin care up 8% and makeup up 3%.

We have seen a similar trend in our domestic free standing stores where sales rose 7%.

That's one reason why we are cautiously optimistic that we can grow in these uncertain times.

We expect the Estee Lauder and Clinique brands to generate improvements in the US this year thanks to compelling products and marketing as well as point-of-sale enhancements.

This is encouraging for both brands and the payoff for many operational and product improvements implemented in the past couple of years.

In distribution, the Company is pursuing channels that create retail excitement, are brand relevant and enhance our image and message.

For example, Bobbi Brown has opened five free standing stores in Asia Pacific and two in the US.

The stores, called The Studio, provide an intimate shopping experience and personal services including makeup lessons and parties.

Retail locations in Japan and the Middle East are slated to open this fiscal year.

Coming off our successes on Direct Response TV, we have planned to take advantage of further opportunities and experiment with different TV formats.

With our service orientation, the model works well because it allows us to explain and demonstrate products in depth.

Clinique's strategic collaboration with Allergan to distribute a new line of products from doctors' offices will launch in the fall.

The skin care collection, called Clinique Medical, will be used to compliment in office aesthetic procedures.

We believe this will promote greater awareness and an enhanced authority for the entire Clinique brand.

Travel retail, an important distribution network for the Company, is expected to begin deliver healthy double-digit results, even though the number of international passengers is growing at a slower pace than last year.

Passenger traffic may contract further because of struggling economies, fewer flights and higher fares.

Nonetheless, the travel retail beauty category has done well.

Our brands have outperformed the channel and we will bring more brands to airport shops.

Also boosting our outlook is the expected surge of travelers from Asia and emerging markets.

Makeup, skin care and exclusive products will be the focus of travel retails offerings.

One of the newest exclusives is Estee Lauder's Super Flight Creme, a moisturizer and eye cream packaged in a clear kit.

The product, aimed at frequent travelers, complies with security regulations and relieves the dryness that occurs during flights.

In January, Estee Lauder will launch a travel exclusive moisturizing lipstick.

Expanding our portfolio, last month Beauty Bank launched Eyes By Design, a unique collection of makeup, skin care, tools and how to's specifically for the eye area.

The brand is sold exclusively on HSN and HSN.com.

Eyes By Design adds another exciting brand and gives us further experience in Direct Response TV.

This is our first brand sold on HSN which reaches 90 million homes.

We recently took a minority stake in Forest Essentials, a Prestige Indian beauty brand rooted in ancient traditions.

This incubator investment should give us a better understanding of Indian consumers and help identify retailing opportunities.

Forest Essentials is sold in free standing stores and high end hotels and spas across India.

The Estee Lauder brand garnered huge attention with the launch of its new fragrance, Sensuous, which we expect to lift sales throughout the brand.

With a powerful marketing campaign using all four of the brands' models, the fragrance has generated great press and attention for the brand.

Sensuous will roll out to international markets throughout the year.

Clinique anticipates strong international growth again this year, led by Asia, travel retail and Russia and also on the strength of skin care.

To keep its product portfolio fresh, it will launch crossover products that combine the best of skin care with the best of makeup, injecting news into both categories.

Among our four categories, we plan to devote the most resources to skin care where we can bring innovative advancements and technology to the high growth premium anti-aging segment.

We are leaders in product innovation.

The Estee Lauder brand recently unveiled Turbo Lash, a battery powered vibrating mascara creating a new and exciting delivery system.

In line with current trends, several brands have added mineral makeup to their product lines, M-A-C's mineralized franchise which includes face, cheek and eye products is expected to be as big this year as some of our smaller brands.

Besides M-A-C, four other brands, Prescriptives, American Beauty, Aveda and Origins have launched mineral makeup to capitalize on consumer demand.

As you know, we have been analyzing our fragrance business to improve profitability.

We have established task forces to determine a course of action and relative time frame to implement changes.

In the meantime, we have scaled back the number of fragrance launches and shifted some production to a plant in eastern Europe which is closer to the largest market for fragrances, saving on manufacturing and distribution costs.

Touching on operations, the SMI roll-out is on track.

The North American financial backbone and UK Manufacturing are next in line to flip the switch in November.

I'm pleased to report that Aveda, our first business unit to implement SMI, continues to adapt well.

It reported service levels of 99% in the fourth quarter.

In closing, I want to take note of the hard work and dedication of our thousands of employees around the world who contributed to making fiscal 2008 an excellent year in the face of external challenges.

We are determined this year, as always, to build on our successes and reinforce our position as the worldwide leader in luxury beauty.

Now Fabrizio will tell you more about how we will leverage the Company's superior strength and achieve our goals.

Fabrizio?

Thank you, William.

Good morning, everyone.

I am pleased to talk to you in broad terms about next phase of the Company strategy.

We are still working on some of the specific operational details and we'll begin discussing those with you at a later date, most likely before the end of the calendar year.

For now, I would like to talk with general observation and address broad topics that we plan to incorporate in our strategy.

Since William and I last spoke with you, we have finalized our fiscal 2009 trend and have been refining our long-term strategy, along with our senior management team.

I'm confident the areas we plan to focus on will accomplish our goals of reaching higher level of achievements, greater profitability and increased shareholder value.

In fiscal 2009, we will put in place the necessary capabilities, skills and operational changes to carry out our strategy and reap the benefits we expect over the next few years.

The Company's five strategic imperatives remain valid and relevant, but we will sharpen the focus to better position us for the days ahead.

Under (inaudible) chapter and the primary catalyst that will drive us forward is the premise that we must price right.

We need to invest forcefully and confidently behind the global opportunities that will provide the biggest payoff by brand, category region and channel.

We expect to reallocate resources to our most promising opportunities.

For example, our business in emerging markets, which includes China, Vietnam, eastern Europe, Russia, the Middle East, India, Latin America, among others, rose 35% this year and exceeded 9% of our total sales.

If we focus our investment on opportunities with the greatest near term payback, we can accelerate growth.

We will also move some brands and categories to the fast track to maximize their potential.

We want big returns.

Another key area of our focus is underperforming assets, including brands, categories and channels.

We are working to improve their growth and profitability to a level we are seeking that support our objectives.

This is a challenging and necessary part for the Company overall growth and requires a strict timetable to show improvements.

This Company has been built on growth, and that mandate serves as well.

Sales have increased every year for 60-plus years.

That's a remarkable accomplishment.

Our plan is still to grow, but to grow more strategically and brilliantly, even in today's challenging and highly competitive environment.

However, we cannot longer grow attaining costs.

There is little point in growing just for the sake of getting bigger with the added saves top margins.

The Company goal is to deliver sustainable, profitable growth year after year after year.

We fully recognize the opportunity for savings, and we must push them from many directions in new ways and with greater force.

Sustained cost savings and discipline in our brands, affiliates and corporate departments are another focus of our attention.

As I said on last quarter conference call, stronger financial discipline has to become an integral part of our culture and a companywide priority.

As part of that effort, we are committed to reducing inventories and streamlining the number of SKUs, among other initiatives.

In addition, the Company is exploring ways to become a more integrated organization.

Where brands corporate, share ideas, seek synergies and exchange resources.

Our 29 brands play for the same team and need to share common goals.

As always, the consumer will remain top mind in our business model.

We will use more research to better understand brand by brand exactly who the consumer is, what she wants and where she shops.

Additional insights should help direct our research and innovation and show us how to reach her more efficiently and effectively.

The business outside the United States comprises nearly 60% of the Company sales, we need to adjust our perspective to think globally throughout all aspects of our operations.

This is particularly important in R&D.

A greater portion of our new products needs an international flavor to be more relevant in local markets.

We must generate new product ideas with an eye towards Asia and European consumers.

Our senior management has embraced this ambitious strategy which will impact to varying degrees every department, every country, every employee.

We realize that each success will require strong links between the goal and the execution.

We will better communicate our priority and intentions to employees at every level across divisions and functions so we all speak a common language.

Moreover, an action plan will demand greater accountability.

We are looking at key metrics to track our progress and measure performance.

As part of this, the Company will work to better align its compensation structure to achieve its performance objective.

Accelerated change can be good when it is well thought out and properly executed.

I'm extremely confident the road map we are designing will be a huge success.

What makes this Company special is its entrepreneurial spirit and rival creativity, amazing brand building capabilities and worldwide reach.

We expect to layer on a stronger strategic focus, investment priorities, better accountability and improved communications, making the Company an unsurpassed force in the world of luxury beauty, a world which we believe holds great promise.

Now I will turn the floor over to Rick, who will discuss the financial results.

Rick?

Thank you, Fabrizio.

From a financial perspective, we had a very good year.

Sales grew 8% over last year in local currency, right in the middle of our range.

The weak dollar added four percentage points of growth resulting in a reported sales growth of 12% to $7.9 billion.

Net earnings for the year rose 5% to $473.8 million compared with $449.2 million last year.

Diluted EPS was $2.40, 11% above the $2.16 reported last year.

Last August, we projected full-year EPS between $2.28 and $2.40.

During the year, we raised the floor of that range by $0.06 and our actual performance came in at the top end of our guidance.

Achieving this goal while many consumers faced higher fuel cost, inflation and mortgage worries is gratifying.

In skin care, sales were led by double-digit growth in Europe and Asia, where new products and emerging markets aided the category.

Skin care sales in the Americas rose mid-single digits on strength from La Mer and new products from Clinique and Estee Lauder.

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

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

Our fragrance business grew with more profitable European sales contributing almost 70% of the increase.

In hair care, salon expansion, new product introductions and the acquisition of Ojon and an Aveda distributor led to double-digit sales gains.

By region, Asia Pacific led the growth, rising 15% in local currency.

Every country in the region grew.

China jumped 41%, fueled by robust Prestige beauty growth, expanded distribution and share gains.

Hong Kong, which benefits from the influx of mainland tourists, rose almost as fast.

Korea increased over 15% by -- while Japan rose a healthy 5%.

Strong double-digit growth was also seen in Malaysia.

In Europe the Middle East and Africa, local currency sales jumped 12%, growth was broad based with only Spain reporting a modest decline.

Once again, our travel retail business grew rapidly.

Its 19% sales gains was fueled by industry growth and the continued expansion of our brands and products.

The UK rose 10%, driven by strong double-digit growth in our developing e-commerce business, the launch of Tri-Aktiline in boots, great results from our makeup artist brands and terrific momentum at Jo Malone.

Travel retail and UK affiliate represented 44% of our reported sales in the region this year.

Among our developing markets in the region, Russia grew 40%, Turkey rose almost 30% and our eastern Europe and Middle East regions each grew more than 20%.

Sales growth in the Americas reflected solid results in Canada, Latin America and the inclusion of sales from the Ojon brand acquired last July.

Sales in alternative channels, including the internet, select -- self-select outlets, Company owned retail stores, salons, Sephora, Kohl's and Direct Response TV grew swiftly this year.

Altogether, sales in the Americas, outside of department stores, rose almost 16%, mitigating our 2% retail decline in the US department stores and allowed a 4% sales growth in our Americas business in a tough economic environment.

Gross margin held steady at 74.8%.

We were able to keep cost contained through operating efficiencies despite higher prices for components and energy.

Favorable exchange rates of 10 basis points and a decrease in the level of timing and promotions of 20 basis points offset an increase in obsolescence charges, unfavorable mix of business and organizational costs of 10 basis points each.

Operating expenses as a percentage of sales rose 40 basis points to 64.5%.

Higher IT investment, which includes our SMI program, added about 30 basis points.

Organizational streamlining costs and amortization related to acquisitions added 10 basis points each.

A charge to reflect the diminished value of a (inaudible) promissory note and convertible preferred stock added 20 basis points.

Partially offsetting these items are the prior year charges relating to the pharmacy channel of 40 basis points.

During our analyst day last year, we indicated that savings from our programs would be allocated back into business building activities.

Indirect procurement savings were used to fund new brand development, expansion in Russia, Brazil and India, the Clinique experience program, acceleration of the opening of new M-A-C stores and Euro Vision.

Total advertising and promotional spending, including the amounts reflected in both cost of sales and operating expenses, rose 10% to $2.03 billion, compared with $1.84 billion a year ago.

Operating and income rose 8% to $810.7 million compared to last year.

By category, skin care profits grew on the strength of the La Mer brand, the successful expansion of Tri-Aktiline, improvements in our core brands outside the US and the absence of pharmacy realignment costs incurred in the prior year.

Makeup results also rose on international growth, partially offset by costs for the expansion of M-A-C and lower results from some core brands in the US.

Fragrance operating income rose on profitable international growth, partially offset by spending in support of designer initiatives.

Hair care results declined, reflecting investments to support growth and distribution and higher amortization of intangibles from recent acquisitions.

By region, operating profit decreased in the Americas but grew substantially elsewhere.

In Asia Pacific, operating income increased dramatically on the strength of across the board sales growth.

The largest increases were generated in Japan, Hong Kong, China, Australia and Korea.

China's sharp improvement off a small base is encouraging, although operating margins are still below the corporate average.

In Europe, the Middle East and Africa, operating results jumped, primarily reflecting improvements in travel retail, the United Kingdom, Italy, the Balkans and Spain.

These campaigns were partially offset by spending in support of our continued expansion in Russia and India.

Results in the Americas declined due to the increased investment in technology and infrastructure, the softness in our US department store and hair care business I just discussed, as well as costs for organizational changes and the impairment of certain financial instruments.

Net interest expense rose to $66.8 million this year versus $38.9 million in fiscal 2007, the main driver of the increase is higher average debt balances from financing our accelerated share repurchase towards the end of last fiscal year.

The effective tax rate for the year was 34.9%.

Moving to operating cash flow for the year ended June 30, 2008, operating cash flow increased 4% to $690 million compared with $662 million last year.

The increase primarily reflects higher income, partially offset by the levels of accounts payable and receivable balances.

Our day sales outstanding rose three days to 47 this year.

Domestically, day sales outstanding were flat for the year.

However, global base rose due to the increased waiting of our international business which carries longer terms.

Inventory days increased to 180 days compared with 176 days last year, due to additional inventory from the inclusion of Ojon and to support new business in emerging markets, foreign currency translation and from the expected growth of our business in the coming months.

As Fabrizio mentioned, we are developing the capabilities and the incentives to reduce inventories and SKUs in the years to come.

Our goal is to increase inventory turns from twice to three times per year over the course of the next several years.

During the year, we repurchased approximately three million shares of our Class A common stocks for $130 million.

Since the program started 10 years ago, we have repurchased 64 million shares for $2.5 billion and we have 24 million shares remaining in our current authorization.

We also returned another $107 million to shareholders in dividends last year, including a 10% dividend increase.

We will continue to return cash to shareholders through opportunistic share repurchases and/or dividends.

For the year, we spent $358 million for capital expenditures, which included incremental spending for counters and our companywide systems initiative.

For fiscal '09, we expect to generate approximately $775 million of cash flow from operations and to use approximately $370 million for capital expenditures.

Our return on invested capital ratio declined this year to 18.9% after rising in each of the past five years.

The investment in SMI, higher inventory levels and currency were the main factors.

While anticipated, we plan to reverse this direction in the coming years.

Now, we'll discuss a few assumptions for the coming fiscal year.

In March of 2007, we outlined our strategic and financial outlook for the next few.

As reminder, we laid out expectations for our annual sales growth of 6% to 8% and EPS growth from 10% to 12% for the three-year period through 2010.

For the year, we once again expect strong international sales growth led by Asia.

As William mentioned, we are cautious on western Europe where we see several markets showing signs of weakness.

We do expect the developing markets and travel retail to be more buoyant.

Domestically, we expect a continuation of the challenging retail environment.

On a global basis, taking into account the uncertainties I just mentioned, we forecast constant currency sales growth for '09 of between 6% and 8% with a slightly negative foreign exchange impact on reported results.

We expect gross margin to improve about 40 to 60 basis points for the fiscal year with select price increases, supply chain savings, product mix and lower promotional spending more than offsetting inflationary pressures.

Operating expenses as a percentage of sales should increase between 10 and 30 basis points due to ongoing IT investments and additional stock based compensation which are offsetting cost savings.

We are making every effort to drive growth more profitably by reducing costs and reallocating the savings back into the most promising, most profitable areas of the business.

As a result, our fiscal '09 operating margin is expected to expand between 20 and 50 basis points.

At this time, we estimate our effective tax rate will be approximately 35.5%.

Diluted EPS for fiscal 2009 is forecasted to be between $2.57 and $2.72.

Looking at our first quarter, we expect sales growth for the quarter of 9% to 11% in local currency and positive foreign exchange could add about 1% to growth.

EPS for the three months is expected to come in between $0.18 and $0.25, reflecting relatively higher IT and advertising and promotional spending.

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

The floor is now open for questions.

(OPERATOR INSTRUCTIONS) We will limit each person to one question and a related follow-up.

Time permitting, we will return to you for additional questions.

Our first question today comes from Wendy Nicholson from Citi Investment.

First of all, with the rapid growth in the US outside the department stores, I'm wondering maybe William, what your relationship with companies like Federated is like now.

Are they upset that you're growing so rapidly outside the US?

Does that make it less of a strategic benefit that you're so big in that channel?

If you could start with that, that would be great.

Wendy, our relationships with our core retailers like Federated are excellent.

We have regular meetings with top management as well as most of our brand management meets regularly with senior principal managers of these companies.

They are strategically important to us in the -- in our success on a going forward basis and we believe equally as important, our brands are strategically important to their success in the cosmetics category.

We continue to remain in a leadership position of being one of the largest, if not the largest suppliers to these key retailers and we are both collectively, the prestige department stores with whom we do business and the Estee Lauder companies brands that do business in these stores, strategically and meaningfully important to each other on a number of different levels, so --

They're not feeling disenfranchised that you're so rowing out -- I'm wondering whether there's a profitability shift in terms of your sales in those stores.

Are they trying to extract another sort of pound of flesh from you.

Let me ask Dan to give you more detail than I can.

No, Wendy, they're really not.

Our international growth is fine with them and they, in fact, have not seen us take our eye off the ball domestically.

I think they think that we are aggressive as we have always been in trying to help both of us through this very difficult time.

They would be more concerned if our growth was coming from alternate change within their selling regions, but that's not the case.

But -- wait a minute.

Now I'm very confused, because I wasn't actually talking about the international growth.

I was talking about the 16% growth that you mentioned in the US outside of the US department stores so --

No.

I don't think so, because some it's made up in channels they don't participate in, such as the hair categories and they have -- we have discussed with them our activities on QVC and how we are sharing in the results of that.

I would think that they would consider us as aggressive with their business as ever and have not registered any major concerns concerning our growth.

None at all.

Wendy, as long as we are focused and paying attention to growing in our core business, which is our prestige brands in department stores, where we grow and how we grow elsewhere is less their concern, so long as we are paying good attention to them and we continue to focus on our growth in their category -- in their stores.

Okay.

Okay.

And then just as a follow-up to that, the advertising spending up another 10% this year, obviously it's fueling great growth internationally and that's a wonderful thing, but maybe Fabrizio, could you talk about that advertising number, and I know you guys have made a shift to sort of consolidate your advertising agencies and whether that number, you think, is the right number for the long term long term or is there a chance that there are some efficiencies that are realized and that number comes down to 23, 22, 21 and kind of more in line when some of the other companies we see?

I know it's a different industry, but I think you get the point.

Yes, no, definitely we are going to look for efficiencies and rate of return on investment improvements also in year of advertising.

I cannot quote a specific number at this point, where we are aiming at because obviously, the number will need to come by brand by category and based also on what we learn on the various efficiencies we are working on.

Definitely this is an important area of efficiency that will be passed of our region term plan.

Okay.

Thank you.

Your next question comes from the line of Alice Longley with Buckingham Research.

Hi.

Good morning.

Can you tell us at this point what percentage of sales derived from travel, retail.

Is it up to 9% yet?

And does that segment still generate three times the operating margin of the corporation?

Alice, the travel retail business represents about 8% of our total sales, and it is slightly greater than 20% of our profits.

Okay.

And then another question, in SG&A, the selling ratio, I think it has been about 21% of sales in fiscal '07.

Did that ratio go up this year?

The ratio as a percentage of sales went up slightly, but that's because of the growth of the brands that really rely on the selling model, Bobbi Brown and MAC in particular, that rely on the selling model to drive their sales.

So it's just a mix of brands, if you will, that's driving that.

And I should expect that ratio to continue to go up, then, is that correct?

We certainly hope so, because we're very happy with those brands and we want them to grow quickly, so the greater they become a percentage of our business, that ratio will continue to increase slightly.

Okay.

Great.

My last we have is the UK.

Should we expect that to continue to grow in local currencies this coming year, or will the slowdown in the markets there turn that to a negative?

No, no.

We expect growth in the UK, but certainly less growth than we have been experiencing.

We were -- we grew, as you remember, double digits a couple of years ago.

I mentioned that we grew 10% last year.

We'll probably see the high single digit this year, mid to --

Okay.

Thank you.

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

Can you guys just extrapolate a little bit more on how you're going to change the incentive compensation structure, because right now, I think something like 95% of CEU and CEU comp is sales and EPS, and so obviously it doesn't have any consideration for operating margin or ROIC, and then I have a follow-up.

I think, Bill, the details of how the compensation plan is going to change, we're not prepared to talk to at the moment, but I think that the point that Fabrizio is making is that we intend to align that compensation plan throughout the organization to be tied to achieving our strategic objectives, and that's really the key, if you will.

Today there is, in effect, sometimes an incentive at some levels in the company to achieve their objectives, but that may not fit into the total picture of the company.

So when Fabrizio mentioned aligning the company, everybody understanding the strategy, everybody getting on board with the strategy and then supplementing that by having a compensation plan tied to it, that's where we're headed.

Okay, great.

And then just on the US operating profit for the quarter, can you sort of put some numbers behind how much the stepped up IT and then some of the financial write offs were that impacted those margins?

I mentioned financial write offs were about 20 basis points of spending.

I mentioned that the IT was about 30 basis points.

For the whole company?

For the whole company, yes.

Okay.

Got you.

And then, can we assume analyst's day is going to happen in December?

I see you sort of hinted at that?

Is that the intention now?

Analysts day?

At the moment --

We're certainly discussing it but you will certainly be the first to know when we have a date.

And will that be the mother load in terms of long-term strategic plan?

You know what, Bill, I hope you have faith in us when we have -- we call everyone together to discuss what our strategic focus is, that there will be a substantial amount of substance that you will appreciate what we have to talk to you about.

Okay.

Great.

Thanks so much.

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

Yes, thank you very much.

As you went through your comments and talked about some of the growth on the business, there's obviously a lot of distribution gains and so, if we can match that up with Fabrizio's comment about profitable growth and tell us a little bit about how you're assessing the opportunities as you look to push distribution forward, given the extra costs associated with that, given the higher receivables and inventories you're carrying.

So are you putting that level of precision analysis to work on these new distribution gains, or is it simply, look, given where the margins are in North America, any of these distribution gains tend to be accretive to margins anyway, so we don't need to have that level of focus in place now?

No.

There's an extraordinary amount of discipline in this, John, and it goes a number of different levels.

First of all it's a brand by brand decision.

Secondly, it's been a channel by channel decision and each of the brands has their own dynamics within each channel as well as the total brands performance, say in North America, and these brands are focused on expanding their distribution and the primary focus is, we want to make sure we are bringing our brands to the consumers where they would like to shop for our brands and brands like ours.

That's the primary screen we're looking at and then the secondary screen, of course, which is very important, is, is this profitable growth,?

Is this expanded distribution profitable and incremental to the company?

In the cases where it's not, we are not likely to expand and in the cases where it is, we are.

In most cases, the expanded distribution beyond our corner -- our core distribution tends to be as profitable, if not more profitable, for each brand and therefore for the company than the core distribution, In the handful of singular cases where they are not, usually it's because of the strategic value of this expansion that we would pursue it.

Okay.

So can you tell us currently which metrics are you using there?

Is it more of a straight operating profit or can you figure out the return, the ROIC on these individual doors as you look to push them out at sort of what metrics are you using now and how do you see that progressing going forward?

We are primarily focused on operating profit but more and more so, we're putting an ROIC screen to it also.

Okay, great.

Thank you.

Your next question comes from the line of Laura Leiberman with Lehman Brothers.

Good morning.

Fabrizio, I felt like in your comments there was a lot of discussion about places where you'll reinvest fast track businesses, categories, channels, et cetera, to get greater growth and that that's really what this company is about, and I -- I think there are a lot of people outside the company that still look at the operating margins and are very, very focused on the margin percentage, and I was wondering if you could just comment on sort of your thought process at this point on whether the bias is more towards driving earnings growth through greater top line or if margin percentage is going to be a key part of the strategy going forward.

Yes.

Definitely margin percentage is going to be a key part of the strategy forwards.

We are finalizing a strategy with the goal of driving profit margin, and that's obviously important link of the balance, because as I said, we are a growth company, a very successful growth company, and we need to try the right balance between now delivering an increased speed margin improvements, but without diluting our ability to grow.

And that's the balance we are looking for.

That's why this is taking some time.

And importantly in the company we have some excellent capability to drive growth, brand management, capability, creativity, ability to win in distribution, in-store excellence.

Our capabilities in the area of integrating operation and commercial, our capability in the area of cost management, our capability in the area of financial discipline needs upgrade, and so we want to make sure that we will upgrade this capability and be able to deliver margin improvements and continue growth at the same time, and that's the key priority.

As part of this, I want to say that definitely the -- what will drive the margin performance is on one side, is all this work of putting priority on higher return opportunity for growth.

This will remain a big area of driving performance.

So will be consistent with growth.

Example, we have some brands like Clinique, MAC, La Mer, Bobbi Brown and others which are very important brands, very profitable brands, and driving more of these brands will be very accretive to our profit margin performance per se.

At the same time we have categories which are very accretive to profit margin like skin care, we have regions where they are finally many of the new channels are designed to be accretive to profit margin.

At the same time, our work on underperforming assets will obviously generate the resources to improve margin on one side.

but also better invest on these accretive margin brands in the long term.

And finally, the new financial discipline I referred to would really -- will work a lot to eliminate non-value added costs out of the system.

Wonderful.

Thanks so much.

Your next question comes from the line of Ali Dibadj with Sanford Bernstein.

Hey, how are you.

Good.

A couple of questions.

One is, a lot of the comments that Fabrizio made in the prepared remarks and just now are about -- it looks like SG&A reduction and focusing on SG&A.

Yet your next year's SG&A would suggest from some of the comments, Rick, that you gave that it's going to go up.

So how do you link those two together?

I think you link them, Ali, by realizing that what Fabrizio was talking about is our strategy over the next several years, and that strategy is still in the final development stages, if you will, and when we're ready to discuss it, we certainly intend to do so.

Our fiscal '09 numbers are based on our business as it exists today, and I think what needs to be realized is that '09 is in a sense a transition year from focusing on some of the things that we do well certainly, but also transitioning to focus on some of the areas that Fabrizio was mentioning as far as looking for opportunities for improvement, but they don't happen instantaneously.

Okay.

So along those lines in terms of transition as you mentioned, one of the things you did mention was improving your inventory days which are roughly six months now.

What's your confidence that you can do that without taking a large charge of some sort?

As far as the quality of the inventory we hold, Ali, that quality is fine.

So in other words, there's not a lot of excess inventory that's going to be thrown out.

What we have to do is do better at some areas that we can do immediately, manage our SKUs and we're developing some tools and capabilities around better management of SKU, stronger link, if you will, of the compensation of our people as we discussed earlier to inventory performance targets, forecasting improvements, those things are underway now and will help us improve our inventory position and eventually, the big improvement does come from the implementation and roll-out of SAP.

So slow -- or measured reduction rather than a big one-time reduction and see what happens?

That's what I gather from what you just said?

Yes, absolutely.

You won't see us take a substantial charge to throw out a lot of inventory.

That's not going to happen.

Okay.

And last question just around this transition piece, fragrance margins looked much better here.

Can you just elaborate a little bit more than what you had said and what you had written about what's really, really driving some of that?

Yes.

It's pretty clear from our side, I think I had mentioned that we grew internationally and our international fragrance business makes a very decent profit.

So the fact that we focused more of our resources towards international and grew that business as opposed to possibly taking some resources from the US and reallocating them, that's where that profitability came from.

But it's still a long ways -- still a long ways to go.

We also had some good results from travel retail on the fragrance category.

Those are two separate things.

So when you say growing internationally, that's not including travel retail?

Yes, it's both.

It's the travel retail growth as well as the international affiliate business growth.

How much of travel retail growth is distribution increases versus constant growth?

That, I don't know, but travel retail distribution growth is not tremendous, quite honestly.

It's marginal.

Yes, it's marginal.

Yes, I mean terminal 5, we -- you all heard about terminal 5 in Heathrow opening, but its opening was not exactly as auspicious as anybody would have liked, so, and that was probably the single most significant new distribution opening and travel retail in the year.

Thanks very much.

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

Good morning.

I understand that there's not going to be a large charge related to inventory, but as you look at the -- how the company will change over time, do you anticipate that there would be a restructuring charge per se?

I think, Connie, it's a little bit premature.

As we finalize our plans, we'll certainly, if there is anything with that, we would certainly let you know about it, but right now, we're not in a position to talk about our long-term strategy and what that entails.

Okay.

Also, you've got the healthiest gross margin, I think any of us have seen in this industry, but have you quantified what sort of gross margin improvement there could be from leaner inventories?

It is -- it was actually built in, Connie, to our original savings from the SAP program of about $83 million that we expected as that is fully implemented, but there are certainly opportunities that will -- that will manifest themselves in improved gross margin by being better at what we do, by being more efficient in our supply chain, by having less points of distribution, therefore less inventory, therefore, you know, a more efficient and less waste in the process.

So there are opportunities in gross margin, as well as we'll improve our category mix, which will drive down the value of the cost of goods, if you will, of what we sell by increasing our focus on skin care and makeup.

That's helpful.

Thanks.

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

Good morning, everyone.

Just a housekeeping question to get started from Rick, if I may.

Rick, the North American department store channel, what is that now as a percentage of overall company revenues?

Is it less than 33% today?

Yes.

Yes, it's less than 33.

Filippe, I don't know the exact number at year end, but it's getting close to 30.

Two questions, if I may, for William.

William, last week Beiersdorf made the comment that in 2009, they would have to take significant price increases as a result of the raw materials price situation.

Is there a significant difference by somebody like Beiersdorf which is perhaps more focused on the mass channel, why they are being much more impacted than somebody like yourselves, a prestige player.

Filippe, I would not say we're not being impact by the strong growth in commodity pricing in a number of different categories.

We have been successfully able to offset a great deal of that channel with other cost savings in a number of different areas, but we are looking very seriously at selected price increases in certain key areas and categories where we think it's both prudent and smart to both preserve gross margins as well as where we think the consumer will accept the price increases because of the circumstances.

Okay.

And my second question, William, is just kind of focusing a little bit more on the mindset of the consumer, both in North America and western Europe.

Over the last few days, we've picked up from some retailers in the US, whether it was Nordstrom, whether it was Macy's, whether it was Sak's that the cosmetics and the beauty categories were actually one of their better performing categories, which was very good to hear.

Does that mean that we might kind of be close to seeing a floor in terms of how the consumer is behaving?

Europe, on the other hand, when we listened into the earnings call from HBC, companies like Colgate, Procter & Gamble, et cetera, they were clearly starting to see, their category at least, moving more in a direction of flat to slightly negative.

Are you seeing in the European markets also a clear distinction or a clear bifurcation between how the prestige customer is behaving in this certain environment versus the mass?

Thanks very much, William.

Filippe, that's a very good question.

I think certainly, when it comes to North America, the North American consumer, we're pleased that prestige beauty continues to be the leading categories with our retailers and seems to be doing better and leaving the store in the growth, and we're comfortable with that with our position.

When it comes to Europe, I believe what you say is true, and perhaps I'll ask Fabrizio to comment more because he was most recently there and has a better understanding, I think, than I do.

Yes.

No, in Europe there is obviously a decline in this moment of consumer interest, consumer demands in general.

That's why we say we are cautious about how the demand will evolve.

This is a pretty recent acceleration of development.

We have seen these accelerating as of June in some of the markets, and so it's very difficult to predict how it will go.

In terms of your question, if the mass market compares to the luxury goods, how they are behaving, I can only tell you that the department store I discussed with in Europe in the last weeks, they were seeing actually the prestige business and the beauty prestige business behaving better than other categories like we have seen here in US.

So I could expect similar situation where probably the mass market or other categories will be impacted more than the prestige beauty care.

However, also prestige beauty care is being impacted by in this moment, a lower consumer demand.

Great.

Thank you very much.

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

Hey, guys, I'm sorry if you guys have elaborated more on this already and I just missed it, but the US margin in the quarter was a market deceleration in year-over-year trend, and I know there were some sort of one-offs, but I was wondering if you can talk about that and perhaps if that relates to any kind of change in the spending formula around surviving in a very difficult environment like what we're seeing.

Just a little color on that would be great.

Chris, there's not -- you're right, there were some one-off items that affected us.

In particular, there is a weakness in the US department store business and that certainly affects the profitability of the region even though we're growing in other channels outside of US department stores.

When that big a piece of our business is having some difficulties, it affects our profitability.

In addition, there were some organizational costs that we had.

We wrote that -- I mentioned there were some (inaudible) notes and preferred stock where we took a charge in anticipation of a lower value related to the sale of that business.

There was some issues, not issues but in operations, we took some expenses related to changes in organization there.

So there's a few of those that are one-off that are in there.

We're spending most of our GIS and IT spending around the SMI project and other areas in North America at the moment, so it's focused here, so that affects the region more so than it does the rest of the world.

So those are the factors that really affected our quarter and year for North America.

And then, I guess in Europe on the other side of the equation, Europe had a huge acceleration in margins and I guess, how much of is that is attributable to mix and how much of it is just that the a year-ago quarter obviously was a very heavy spend quarter?

There was some one-time charges -- there were some charges around the pharmacy channel last year that I think we referenced in our call last year in the fourth quarter and we referenced it this year as one of the offsetting benefits, if you will, to this year's performance.

That was all in Europe.

In addition, our travel retail business grew 20% overall, and that's highly profitable.

So that's a wonderful growth, 16%, I guess it was.

That's a wonderful growth for the TRD business in this fiscal year.

So a little bit of it is the mix of our business, travel retail growing quickly, our skin care business in particular doing very well in Europe.

Eastern Europe and emerging markets, I mentioned a growth rate in Russia, in Turkey, in the Middle East being very fast and those are a profitable business for us.

So it's -- I mean, those are the factors that really benefited us in Europe.

In those developing market businesses, those are margin accretive in Europe?

It depends on the market, but the Middle East business certainly is, Greece business is, Turkey business is becoming quite profitable.

We also -- our business in Russia is more profitable than it is in China, quite honestly.

That one is becoming quite a good contributor.

So all of those were very accretive to our results.

Thanks.

Your next question comes from the line of Nik Modi with UBS.

Good morning, everyone.

Good morning.

Just a couple of quick questions.

William, in terms of overhead costs, can you just give us some perspective of how big of a number of that is, as a percentage of sales and how it's been trending over the past year or so, and then the second question is, you briefly touched on the fragrance opportunity, but just wondered if there's any early insights you've garnered from your study so far.

Thanks.

Let me answer the second part first, which is, we mentioned in our last call the in-depth look we're taking at the fragrance business and the activities we're doing.

We have formed a very active task force, and they are going after every single aspect of the fragrance business, leaving no corner or stone unturned or unlooked at, and there are a number of different areas we see both for opportunities for expense reduction as well as better operating efficiency and performance.

This will be a continuous process.

It will be an ongoing activity that will go on for a -- for the foreseeable future, until we achieve our objectives.

And we will not rest until we achieve those objectives, and I'm going to ask Rick to answer the first part of your question about overheads and -- overheads and other costs.

Yes.

I'm not exactly sure what you were referring to, so I can mention that in the -- our operating expense pool, if you will, about 50% of that spending is related to people.

So that's one big piece of spending, if that's what you're after.

If you look at it by category, there's a little over 20% in selling expense, mid-20s or low 20s actually percentage in advertising and promotional expense.

The rest is in G&A distribution and other costs.

So I'm not exactly sure what you mean other than that.

No.

I was looking for the people number.

So you hit it.

And Rick, how has that been trending over the past few years, just that portion, the people portion?

Relatively flat, relatively flat.

Okay.

Thank you.

Your next question comes from the line of David Maris with Balyasny.

Hi, it's David Maris with Balyasny.

Just a question on the inventory builds for new products, including the acquisitions.

Another way of addressing it, since you mentioned that the inventory increase is due in part to preparing for sales promotions, would you expect the -- this to decrease in the subsequent quarters?

Yes, I think what I referenced was the growth that we're anticipating next year, and we did say that our comparable currency basis, our sales were going to grow 9% to 11% in the first quarter, so that's relatively strong and obviously to support that sales growth, we're producing inventory and have it in our warehouses at the end of this fiscal year, so that's what I was referencing on that particular comment.

Thank you.

As a reminder (OPERATOR INSTRUCTIONS) Your next question comes from the line of Bill Schmitz with Deutsche Bank.

Sorry for the follow-up.

When you guys talked about some of those country sales growth numbers, are those local currency or with the FX benefit?

Those are all local currency.

Oh, okay.

Got you, great.

That's all I had.

Thank you.

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

Just a question about management responsibility, since you had some fairly high profile departures during the quarter.

I just wanted to know kind of who -- how you were reallocating responsibility for Cedric and Phillip's responsibilities?

Cedric is -- Cedric Prouve is still with our company and still the leader with our international business.

We had two senior departures of executives and their responsibilities have largely been allocated to Fabrizio.

And some that -- Dan has picked up some of the responsibilities that Patrick had, but Fabrizio has picked up the rest.

Okay.

Thanks.

Your next question comes from the line of Connie Maneaty with BMO Capital Market.

Good morning again.

As I'm looking at the way 2009 is going to play out, could you describe what's happening in the first quarter, such that earnings would be flat in what appears to be the easiest comparison of the year and then secondly, last year's second quarter, the December quarter had -- I guess it was a shift in shipments for Christmas, or I forget what it was, but something on that order.

Does that suggest that the earnings growth is going to be this year much more back half loaded than front half?

Yes.

First, Connie, to start with, as you know, and we've said many, many times, we run our business on an annual basis, and our marketing plans, our promotional plans fall where they may, that we feel gives us the best competitive advantage against the marketplace.

So in our first quarter, what we see is slightly higher advertising and promotional spending in this quarter than we did last year, and a weighting of some of the GIS spending or the IT spending that we're doing is a little bit more heavily weighted in the first quarter as well.

But the growth numbers are at -- the range that's out there is flat to up several percentage.

So, let's see how the quarter unfolds.

But we look at it on a full-year basis, on a full-year basis we think that we have a business which is pretty good for next year.

And if I could ask just one more.

As you look at the profitability of the segments, to outsiders it appears that the greatest opportunity is in fragrance, but is that the case?

I mean, has there been such structural change and damage to that category that you have better margin potential, say in skin care?

I think, Connie, you've almost answered your question.

We believe that the healthiest margin, most sustainable margin and the longest term growth, sales growth with a very healthy margin is in the skin care category, followed by the makeup category.

For us, obviously, the fragrance category is the most challenged.

You see the opportunity as in a differential between the way some of our competitors run their fragrance business, the way we run our fragrance business, and we do see an opportunity for us to improve our fragrance margins and performance.

However, sectorly the fragrance category is a far more challenged category than the skin care and makeup categories where we focus our strengths and expertise.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Carol Lintz with Pioneer Investment.

Nice quarter.

Could you talk a little bit more about your hair care business?

It's been a focus of other conference calls, but I'm just wondering kind of how you see the business developing as an important part of Estee Lauder's portfolio going forward, especially in light of the current performance, which is a little bit softer than I had expected.

Well, we have two primary hair care businesses in the professionals category, which is Aveda and Bumble and Bumble, and we recently added a new brand, Ojon.

Let me make a distinction between Aveda and Bumble and Bumble, which are primarily distributed in professional hair care salons where they get 90% plus of their sales from North America and Ojon, which is primary a retail brand sold in a number of different retail channels where the majority of their product are hair care but they do also sell treatment products too.

In our two professional brands, Aveda and Bumble and Bumble, we continue to have some success with the brand.

We've had a couple of challenges which I believe we talked about in the text of our conversation, but we continue to see these as very viable, significant, healthy business and the leaders of that professional salon category.

The largest penetration of which is in North America as a percent of total sales.

We see growth opportunities for these brands in international.

However, the professional salon business in that model is not as big in the total outside of North America as they are in North America.

So we are cautiously investing in international where we see the growth opportunities for each of these brands.

The Ojon brand, being more retail oriented, primarily in some alternative distribution, we continue to see great opportunity for this brand and that brand is also expanding internationally in a couple of unique ways, for example the QVC in the UK and Germany, as examples, and we think there will continue to be opportunities for brands like this.

Thank you.

And I just have one other question, which is in the segment detail, when you break out operating income for the United States, can I expect that any of the like heavy lifting that you're doing in terms of headquarters changing, the expenses of that are falling into that line?

You touched on this in answer to an earlier question, I know, but if you could just perhaps give a little bit of the scale, like is there, I don't know, is it $2 million or $20 million that perhaps lands in the US because of the headquarters being in New York?

What I can tell you is that the headquarters expense, the general management of running the global company is allocated on a regional basis, and what I can also say is that that process is probably not perfect ,and that's certainly because this is our headquarters, there is a greater percentage of that expense that resides on North America than it does within the rest of the world, but there is an allocation process, we do it as fairly and as accurately as we can, but just naturally, I think I would anticipate more expenses residing on this side of the ocean than in the other regions of the world.

Thank you.

And once again, congratulations.

Thank you.

Thank you.

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

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That concludes today's Estee Lauder conference call.

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

Thank you.