雅詩蘭黛 (EL) 2011 Q2 法說會逐字稿

Good day everyone, and welcome to the Estee Lauder Companies' fiscal 2011 second quarter conference call.

Today's call is being recorded and webcast.

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

Dennis D'Andrea.

Please go ahead, sir.

Good morning everyone.

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

Also on the call is Veronique Gabai-Pinsky, Global Brand President of Aramis and Designer Fragrances, BeautyBank, and IdeaBank.

Veronique will discuss strategic progress in our ADF division.

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.

We will also discuss certain of our results in non-GAAP financial terms.

You can find a reconciliation between GAAP and non-GAAP figures in our press release and in the investor section of our website.

And I'll turn the call over to Fabrizio.

Good morning.

I'm pleased you are joining us for our fiscal 2011 second quarter conference call.

Once again, our Company had an exceptional quarter.

Sales grew 11% to $2.5 billion.

Diluted earnings per share were $1.77, up 38% versus year ago.

Both these results are before recessionary charges.

This record second quarter performance was widespread across categories, regions, and brands.

Virtually all product categories posted higher sales in every region.

And our largest brands -- Estee Lauder, Clinique, M.A.C, Aramis, and designer fragrances -- showed global double-digit growth in local currency, and led the robust sales increase.

Our results reflect success on many levels, including notable launches effective of their styling and marketing strategies, improvements to our High-Touch service model, and compelling holiday offering.

Based on our better than expected performance during the first half of this year, thanks to strong sales, a weak dollar, and improved cost control, we are comfortable raising our guidance for fiscal 2011 again.

We now estimate a range of $3.40 to $3.60 per share, an increase of $0.50.

I want to remind you that we are now one and a half years into our four-year strategy.

We made substantial progress in every quarter, bringing us closer to our financial operating goals.

We remain confident in our continuing ability to execute our brands, and as a result, we are raising our fiscal 2013 operating margin target range by another 50 basis points, to 13% to 14%.

We will continue to evaluate our margin targets as appropriate.

After fiscal 2013, we will implement the next stage of our strategic journey.

Our main mission and motivation is to reinforce our focus and our leadership in global prestige beauty.

We measure our progress by growing faster than average prestige beauty sales, which is a key strategic objective.

In the recent quarter, we succeeded in many markets gaining share in our distribution in China, the UK, Spain, Latin America, the Nordic region, among others; as well as in two major channels; travel retail and US prestige department stores.

Travel retail is a critical channel that can also contribute to building brand equity.

The growth of our business, which far exceeded the rise in travelers, was due to higher passenger traffic, converting more shoppers into buyers, and gaining share.

The biggest improvement occurred in Asia-Pacific and greater China in particular.

And in Denmark the Estee Lauder brand excelled.

In the US beauty universe, measured by NPD, which includes prestige department stores and Sephora, we expanded our share in the skin care and fragrance categories, thanks to new innovations and greater excitement at our counters, which drew more shoppers.

By brand, Clinique and M.A.C widened their lead as the top-selling brands in skin care in the cap respectively in this distribution.

Clinique's share grew by 1.7% in skin care, which is a tremendous achievement for the largest US beauty brand.

This is the second consecutive quarter in which its skin care share widened by more than 1 percentage point.

In the recent quarter, M.A.C's share in the cap expanded by 0.5%.

Skin care is a strategic priority, and our strength in this category is impressive.

Our products accounted for 21 of the top 25 skin care SKUs in the US prestige department stores, measured by NPD in the recent three-month period.

Whatever the market for China, we strive to be locally relevant, and our brands and products are resonating with consumers.

We have clearly benefited from an improvement in global economies, consumer confidence, and prestige beauty growth, especially in emerging markets.

But economic trends are not enough if you don't have the right mix of product and services.

The Estee Lauder Companies is winning because we are working smarter, creating true innovations, and connecting with the consumer.

The luxury consumer is again eager to shop, but is choosy about what she buys.

Coming out of the recession, she is favoring quality products and enduring brands.

We understand her mindset, and our innovative products deliver to their promise, offer great value, come with personalized service, and have a rich history.

We plan to accelerate our investment in our high-end brands and collections to meet the growing appetite of the luxury consumer.

Going forward, we will amplify our messages across a broader audience, and build on the strengths we have developed.

In the second half of our fiscal year, we plan to invest additional resources in global advertising, particularly across digital media.

We will focus on our most promising new initiatives and biggest launches to pull consumers to our counters.

Innovation has always been paramount, but in our new business model, less is definitely more.

Today, we are creating fewer but more successful products.

For example, Clinique launched only half as many products in the fall versus the prior year.

But those products generated almost 50% more in sales.

Clinique's biggest hit, Even Better Clinical Dark Spot Corrector, didn't even exist a year ago, but is now the brand's top SKU.

Our other brands are experiencing similar types of success.

Once we create tomorrow winners we obviously must spread the word.

We have done a great job attracting consumers with advertising and storytelling and we don't stop there.

We then leverage our High-Touch service to forge a stronger emotional connection, build consumer loyalty and encourage further purchases.

To strengthen our model we intend to invest greater resources at point of sale, including new kinds of services and merchandising as well as in consumer relationship management efforts.

We are spending aggressively in areas that we continue to drive our strong momentum and shifting cost to initiatives that should add the greatest value.

Clinique has been experimenting with different types of advertising and in the recent quarter promoted Even Better Clinical in many markets using a combination of television, print, and online.

Its first national television campaign in Italy produced unprecedented results.

While commercials in France helped make Even Better Clinical the number one prestige skin care product during 2010 in terms of units sold.

This global success was recognized by international beauty editors who awarded Clinique with the prestigious Marie Claire International Prix D'Excellence de la Beaute for 2011.

Separately, M.A.C's extraordinary award with the M.A.C AIDS Fund was honored in the Ethics category.

Innovating and updating Hi-Touch around the world to differentiate our Company is an ongoing effort.

As an example, in Hong Kong Estee Lauder opened its first beauty center providing consumers a modern environment that showcases the brand's High-Touch interactive programs and services including beauty classes and skin consultations.

In the US, Estee Lauder, debuted several beautiful skin studios in department stores.

There consumers get a personalized in-depth skin analysis that are matched with the perfect makeup shade under precise lighting conditions.

The store with the new installations have been positive in sales trends.

Clinique's latest High-Touch innovations incorporate several kinds of digital technologies at various point of sales to enhance the shopping experience.

It's the first cosmetics brand to put iPads at selected store counters.

Consumers can use them to conduct a skin care assessment then print or e-mail the customized results.

The state of the art technology offers more than 180,000 possible product combinations.

Turning to our geographies, all regions had strong growth this quarter, reflecting improved economies, our many successes and greater competencies.

Sales gains in Europe and Asia-Pacific were driven by fast-growing emerging markets, particularly China, Russia, the Middle East and Turkey.

In China, nearly all brands had double-digit growth and like-door retail sales expanded more than 20%.

In fact we enjoyed solid like-door retail sale gains in Asia-Pacific overall.

In North America, our brands continued setting the pace for the entire prestige beauty industry and we did well across key channels including department stores, specialty chains, online and freestanding stores.

In Latin America we are making greater investments in organizational capability and store openings which contributed to improved results this quarter.

Our emphasis on skin care continued to pay off as sales rose 14%, the most of any of our categories.

Although we have focused on growing this category in Asia, we are pleased that skin care was particularly strong in Europe and travel retail as well.

To further benefit this category we have high expectations for a new skin care product Origins will launch next month called Plantscription.

It is an anti-aging serum made with natural ingredients whose visible wrinkle results rival with anti-wrinkle prescriptions.

In makeup, our second largest category, M.A.C and Bobbi Brown grew double digits globally.

In Asia, our makeup sales grew 19% in local currency.

We continue to integrate Smashbox, our newest brand, into our portfolio.

We are pleased with its contribution to our makeup category.

Looking ahead, M.A.C expects its Wonder Woman spring color collection, which will be in the stores this March, to be its largest collaboration ever.

Also boosting sales will be approximately 30 new M.A.C doors expected to open in our third quarter.

All but two will be in international markets.

Our hair care business is growing more slowly than our other categories, but we believe that sales in US salons will start to improve.

Ojon sales have slowed as we reformulate the products in preperation for a major re-launch of the brand later this year.

In a few minutes Veronique will talk about the great improvements we made in fragrance which remains an important category for the Company.

We view fragrance as an important way to emotionally draw the consumer into our brands and we are committed to profitably building this category.

Veronique, as you know, is responsible for Aramis and our licensed designer brands which account for more than 40% of our total fragrance sales.

Several other brands also sell fragrance, including Estee Lauder, and its fragrance business was healthy this quarter, helped by recent launches and strong holiday sales.

Its Beautiful fragrance was number one in the US prestige department stores in the holiday quarter.

This is quite impressive after 25 years and speaks to the staying power and [durability] of classic scents and brands.

Our high end fragrance brands, Jo Malone and Tom Ford, enjoyed robust sales which we attribute to gift giving a successful new scents.

When we originally laid out our full year strategy we noted that an important objective was not only to achieve sustainable growth, but more importantly profitable growth.

We believe we have created a business model that achieves this objective by leveraging our sales growth in a profitable manner.

In this quarter, our sales rose 11% while our net earnings increased 39%.

And we have explained before, there are many factors affecting our performance which are within our control and others that we can't control that could impact our business.

We have now proven that our strong management team is very capable of outstandingly executing our strategy around the globe even better than planned and we have gained confidence in our underlying new business model.

Yet we can't ignore the fact that various external risks such as volatile economic and political situations, legal and regulatory issues, and currency fluctuation could cause challenges.

In just the last two weeks we have seen turmoil in Egypt, an explosion in a Moscow airport, a downgrade in Japan credit rating, weakening consumption trends in the UK, and continued high unemployment in the US.

The Middle East strikes could affect our travel retail and local business in the region.

Japan is one of our largest markets and its deteriorating economy continues to be worrisome.

We will monitor the situation and their implications for our business.

In the meantime, we believe that our strong momentum driven by our strategies, precise execution and efficiencies should deliver higher profits over the strategic horizon.

I want to thank my outstanding leadership team as well as our fantastic employees all over the globe for their continuous [litigation] and innovation.

Our success is truly a team effort.

Now I will turn the call over to Veronique to discuss our Aramis and Designer Fragrance business.

Thank you Fabrizio, and good morning everyone.

First I will give you a little background on myself and the Aramis and Designer Fragrance group, and then I will outline our strategy for turning this division around.

I've spent the past 20 years in the beauty business including more than a decade in senior positions at L'Oreal; Guerlain, a division of LVMH; and Symrise, a fragrance house.

I have been with Aramis and Designer Fragrances for seven years, the last four as president, and recently added BeautyBank an IdeaBank to my responsibilities.

The Aramis and Designer Fragrance division, or ADF, makes up for more than 40% of the Company's fragrance business and is comprised of nine brands.

Though the Donna Karan and Tommy Hilfiger fragrances drive much of the volume globally, our other brands, including Michael Kors, Coach, Sean Jean, Missoni, and Aramis are important to our success in their regions of strength where we intend to build them to their full potential.

I am happy to share with you the journey we have taken to evolve our fragrance model to one that we believe is more competitive, profitable, and sustainable.

You can see some of the rewards of this work in the greatly improved fragrance results we reported today and over the past year.

As you know, the fragrance industry has been challenged and we have not been immune.

Global prestige fragrances have grown less than 1% over the past three years and the US prestige fragrance industry declined mid-single digits.

Historically, ADF delivered below average profitability compared to both the Company and the industry.

Beginning two and a half years ago we formed our fragrance task force and carefully evaluated the reasons for the underperformance.

The most important reasons were higher than average cost of goods, a fragmented portfolio with no clear winning brand that led to higher marketing costs and a complex execution, and a very US centric portfolio which hindered our ability to play in the most imported fragrance areas, Europe and travel retail.

Our task force focused on fixing in these key issues, shaping a successful strategy for the future, delivering margin improvement, and at the same time, enhancing quality, productivity, and High-Touch services.

We reduced cost of goods by 500 basis points over the last three years while never compromising on quality.

We achieved this by changing our development processes.

We integrated all the relevant parties early on, avoided duplication, and ensured proactive and efficient collaboration.

We also established a more strategic approach to suggested retail pricing around the world.

We introduced two new aspirational fragrances at higher price points, Pure DKNY and Coach Signature, that generate better gross margins.

We are carefully monitoring our mix of promotion around the world and keeping it at a level that allows for margin improvement.

Our promotional mix is now below the global industry average.

Additionally, we are continuously improving our value analysis to ensure the best products at the best possible cost while never compromising on quality.

For example, we have transformed the way we work with fragrance houses, shifting from a model historically based on competing on every project to one based on an exclusive integrated partnership by brand.

This fundamental change in mindset and business structure avoids dilution of resources on both sides, ensures up-front and efficient collaboration in research and product development, delivers substantial savings and helps everyone focus on what's essential to our category -- quality and innovation.

Also, we regularly review our existing components and are streamlining our procurement and manufacturing where possible.

Secondly, we address the complexity of our fragmented portfolio by focusing on priority by brand and by region, implementing at local level a less is more philosophy.

This approach has allowed our markets to efficiently allocate resources and create greater investment returns on fewer activities.

This is particularly true in the US where our model has significantly improved.

We have also minimized complexity globally by drastically reducing our SKUs by 57% over three years.

Most came from low-volume, low image and promotional SKUs helping to focus efforts on the key drivers of the business.

Moreover, in a very competitive field, driven by a high ratio of costly launches, we took the courageous approach to limit newness to a rate below the industry average.

In fiscal 2010, ADF launched only two new fragrances compared to an average of three to five per year in the past.

We believe this pace allows for more consistent and sustainable operating margin improvement.

We are trying to strike a balance between classic and newness.

We plan to introduce a new scent when we believe it will be relevant and meaningful to our consumers.

We are using more consumer insights to understand local preferences and consumer trends.

We endeavor to keep the mix of our sales from new products below the industry average of about 20%.

Last spring, we launched Pure DKNY which is based on a sustainable platform.

This innovation has allowed us to recruit a different consumer and it has been a great success around the world.

At the same time, we maintained our efforts on the key drivers of our Donna Karen franchise, Cashmere Mist in the US, and DKNY Be Delicious globally.

We expanded distribution of our Coach Signature fragrance to US department stores and successfully introduced Coach Poppy which drove strong sales at retail in the US during the holiday period.

We have established a more fluid communication with our region and a closer relationship with key retailers around the world to identify early on the success of our new scents, allowing us to accelerate support if they are doing well or minimize inventory and marketing if results are disappointing.

To address the needs and local preference of our various regions and markets, we are improving our understanding of our consumer base and developing fragrance for positions that resonate with the most demanding consumer.

Though our portfolio is US centric, we have built great momentum in Europe and travel retail with our DKNY franchise which ranks in the top five or 10 in most European markets and with our classic Tommy Hilfiger fragrances.

We are also focusing our efforts on the emerging markets that offer great potential that require a more tailored approach.

For example, we created DKNY Fresh Blossom for Asia which exceeded our expectation by 20% in its first year and continues to grow.

Finally, we continue to steadily develop our big volume, more mature markets like the US and the UK which are critical to our success.

Today, ADF is in the best shape it has been in a while and I want to recognize the outstanding efforts of my team in our New York headquarters and everywhere around the world.

The division has become a positive contributor to the fragrance category's operating profit.

Most importantly, we have a sounder, healthier, sustainable business model.

Our strategy relies less on newness, pipeline and promotions and more on enduring brands and focused activities.

We are encouraged by the initial results of our strategy and feel confident we are on the right path.

So we will begin to accelerate sales growth while maintaining our focus on margin improvement.

Yet we are only in the early stage of a long journey and more efforts during the next few years will be necessary to reach our destination.

We will continuously address local relevancy, focus on priority, optimize our model by region, enhance business in mature markets and in fast-growing ones, and closely collaborate with our retailers.

We are striving to maximize the potential of our existing brands and actively look for new ones with high potential, notably in the high-end segment, both here and in Europe.

As always, we aim to market fragrances with the highest quality, outstanding creativity and High-Touch experience for our consumers while delivering a great workplace for our employees, best in class partnerships with retailers, suppliers, and licensors and maximized returns for our stockholders.

Now I will turn the call over to Rick.

Thank you Veronique, and good morning everyone.

As you know, my discussions on the quarter and the outlook exclude restructuring and special charges.

We had another outstanding quarter driven by broad-based growth across our regions and categories.

Sales rose 11% to $2.49 billion.

Net earnings for the quarter rose 39% to $355.8 million compared with $256 million in the prior year quarter and diluted EPS was $1.77 compared to $1.28 last year.

Sales growth was about 4 points higher than the top end of our guidance.

About 2 points of the upside was due to a weaker US dollar than we had forecast and another 2 points came from stronger overall holiday business.

Our cost of goods margin, and operating expenses, came in about where we expected, allowing us to leverage the incremental sales with the majority of the benefit dropping to the bottom line.

Most of our major categories saw robust gains.

Compared to last year we saw the fastest growth in the strategically important skin care category.

Sales rose 14% in local currency with improvements in every region led by Europe, The Middle East and Africa.

Strong innovation at Estee Lauder and Clinique and solid growth at La Mer were the largest contributors to the category.

In makeup, local currency sales rose 9% driven by our M.A.C and Bobbi Brown brands and the addition of Smashbox.

This was partially offset by the discontinuation of Prescriptives in department stores.

The category grew in all regions with particular strength in Asia-Pacific.

Our fragrance business grew 13% excluding currency.

The category grew double digits in the Americas and Europe, helped by recent launches and good holiday sell through.

In hair care, sales rose 2% as gains in Aveda were mostly offset by soft results at Ojon.

On a geographic basis Europe, The Middle East and Africa was a stand out.

Sales rose 15% in local currency.

Travel retail grew almost 45% as the marketing and conversion efforts succeeded, international passenger traffic continued to decline, and Asian retailers stocked up in advance of the holiday season and the Chinese New Year.

Our UK sales grew 6% driven by good retail traction despite some tough weather conditions.

Most of the major Western European countries saw strong sales growth as the retail pace picked up from last quarter.

Clinique, M.A.C and many of our niche brands performed the best at retail.

Also our sales benefited from perfumeries which completed the reassortment we have discussed previously, stocking up on faster moving products.

Collectively the emerging markets in the region rose double digits.

However, the economies of the Southern European regions, including Spain, Portugal, Italy and Greece, remain concerning and could affect our future growth.

The Americas region continued to grow nicely with sales rising 9% in constant currency.

Nearly every brand contributed.

Additionally, Latin America and Canada both grew double digits.

Although US holiday sales were strong we believe this level of consumption may not be sustainable as long as unemployment remains high.

We continue to see healthy sales growth in the Asia-Pacific region which had a 10% rise in local currency.

China rose 29%, fueled by expanded distribution and the strong light door retail growth that Fabrizio mentioned.

Hong Kong grew more than 20% and Taiwan rose 16% as well.

Korea grew 4%, but Japan and Australia declined slightly reflecting their tougher economic environments.

Our gross margin improved by 180 basis points this quarter to 78.4%.

The increase was primarily driven by a strategic change to the product mix of 150 basis points and favorable manufacturing variances of 30 basis points.

These figures include the benefits of our cost saving initiatives of $37 million.

Operating expenses as a percentage of sales improved 200 basis points to 56.9% reflecting better leverage from our higher than expected sales.

The improvement was primarily due to lower selling, shipping, and administrative costs of 220 basis points, a favorable comparison to the prior-year period when we incurred impairment charges of approximately 200 basis points, and lower losses from foreign exchange transactions of 30 basis points.

These improvements allowed us to invest in higher advertising, merchandising and sampling of 240 basis points, in line with our strategy, as well as on stocked-based compensation costs of 40 basis points.

These figures reflect savings of $20 million from our cost reduction programs.

As a result operating income rose 34% to $537 million and operating margin rose 380 basis points to 21.5% of sales.

We achieved total savings from our ongoing programs of $57 million in the quarter and we now expect to save between $180 million and $190 million for the full year.

We reported $16.1 million in net interest expense this quarter versus $19.9 million last year.

The decrease is due to lower debt levels.

The effective tax rate was 31.3%, slightly below our projected range primarily due to favorable settlements of tax audits.

We recorded $19.3 million in restructuring and other special charges equal to $0.06 per share for the second quarter.

For the full year we expect to record charges of between $50 million and $60 million.

For the six months, net cash flow as provided by operating activities was $508 million compared to $617 million last year.

The biggest driver of the variance was an increase in the value of accounts receivable.

Our days sales outstanding were 42 days at the end of December, two fewer than last year.

Inventory days were 168 days compared with 150 days at the end of December last year.

Given our long supply chain, it has been challenging to accurately forecast the pace of recovery and demand as well as the rapidly changing product mix.

Also, as suppliers ramp up to meet the more robust industry demand, we are experiencing delays in delivery of some materials.

We are intentionally building inventory to mitigate these factors.

The good news is that our service levels are improving and we do not anticipate future obsolescence issues associated with the higher inventory.

During the six-months, we spent $145 million for capital expenditures which includes our Company wide systems initiative.

We also used $250 million for the purchase of Smashbox and $148 million for our increased dividend.

For fiscal 2011, we expect to generate around $900 million to $950 million of cash flow from operations and use about $350 million for capital expenditures.

We are encouraged by the better than anticipated sales and earnings in our first half and with the fine execution of our strategy to date.

That said, we continue to balance this optimism with a healthy respect for the risk inherent in operating in a global environment that Fabrizio mentioned a few minutes ago along with more aggressive competition.

For the year, we expect local currency sales growth of 8% to 10%.

Our fiscal year guidance builds in assumptions of approximately 130 for the euro, 85 for the yen, and 150 for the pound.

This scenario would reduce reported sales by about 1 percentage point.

We are as committed as ever to continue investing behind our strategic priorities in the remainder of the fiscal year to drive future growth and increase share.

In fact, we intend to increase incrementally more advertising during the second half to maintain momentum going into next year.

At the same time we are continuing to pursue our cost savings programs.

We expect at least a 160 basis point improvement in operating margin this year.

At this time, we now estimate our effective tax rate will be between 31% and 33%.

I would like to remind you that we recorded a $31 million tax credit in the fourth quarter of last year which will make EPS comparisons difficult.

We are raising our full year non-GAAP EPS forecast to between $3.40 and $3.60.

Sales for the third quarter are forecasted to come in between 8.5% and 10.5% in local currency.

This reflects an easier comparison to the prior year when we took a $31 million charge for returns from European perfumeries.

The negative impact of foreign exchange translation is expected to decrease sales growth by about 50 basis points.

We expect EPS for the three months ending March 31, 2011 to be between $0.44 and $0.57.

Longer-term, we are working hard to make our four strategy a reality.

By the end of this year we already expect to come close to our original savings and margins expectations.

Therefore we are again raising our operating margin target for fiscal 2013 by 50 basis points to a range of 13% to 14%.

This target includes a revised expectation for cost savings of between $625 million and $675 million, over the four year period, an increase of $75 million to $125 million from the original savings goal.

That concludes my comments for today.

We would be happy to take your questions now.

(Operator Instructions).

Our first question today comes from Alice Longley with Buckingham Research.

Good morning.

Good morning.

Congratulations.

You never said anything about the weather in the March quarter, which has been pretty grim here in the US.

Have you factored that into your guidance, and could you give us a little sense of what the sales growth will be in the Americas in the third quarter, as is in your guidance now?

I think that we did indicate in the third quarter and for the second half of the year that we did not anticipate really quite the robust results that we've seen in the Americas region that we have to date.

So we do anticipate a little bit of a slowdown, because we think that the continuing high level of unemployment is going to have some impact on our business here in the US.

Regarding weather specifically, it's built into our numbers, yes, but the weather is several days out of a three-month period, so let's see what the impact is.

But it may not be quite as significant as you might think.

Okay.

Can I just ask one more housekeeping question?

Sure, sure.

Travel retail.

Can you give us an update on what percentage of sales and travel retail is now?

Is it up to 10% of your sales?

Are the margins on that business still around three times your corporate average?

So, our -- it's 9%, a little bit over 9% of our business and its margins are -- it contributes more than 20% of our profits.

So it's an important piece of business for us certainly.

Thank you very much.

Your next question comes from the line of Caroline Levy with CLSA.

Good morning.

Thank you so much.

I wonder if you could talk about new product introductions in China, and whether there is any progress on that and whether that in any way hindered your sales growth.

I know it was strong.

Any sense you can give us about that China business?

Yes, this is Fabrizio.

In China, we are making progress on the registration front because we did a lot of work and a lot of diligent amount of research.

We are able to respond to the new requirement for re-registration of existing products.

So we are a work in progress there.

In terms of the ability to reduce the new ingredients in China for the moment, the industry has not been really re-opened to the right process.

We are actively working on this, and we hope that in the short time, this will be reopened.

However, we are not waiting for that, because first of all, there are many of our product launches which do not assume new ingredients so they can be operated.

And second, we have some amazing products and SKUs of many brands that still have relatively low levels of awareness in trial, so we are focusing on bringing our best product to the maximum potential in this environment where we need to delay or postpone some of the global launches.

That's great.

And then if I might on makeup -- if you could talk about anything you're doing on the Estee Lauder or Clinique brands on makeup that could accelerate growth for those two?

We -- on both of these brands, there are two aspects that make up what that we are doing.

First of all, our makeup innovation pipeline is going to be stronger and stronger in the next 12, 18 months.

We have some very exciting innovations both on the side of Estee Lauder and on the side of Clinique.

At the same time, both brands are improving their High-Touch service environment with special focus also on the makeup experience.

For example, in my remarks I underlined the importance of what we call the foundations room of the Estee Lauder brand that will be testing in department stores in the US, where consumers can get a perfect match of their foundation based on perfect lighting that we elaborated with a big light producer around the world.

So, both innovation and services.

Your next question comes from the line of Chris Ferrera with Bank of America Merrill Lynch.

Hey, thanks.

Guys, I guess the 2013 operating margin target that you just rated to, it seems like it would suggest -- since it looks like you are probably going to do $13 million in fiscal 2011, I guess it suggests either -- I guess an acceleration in the reinvestment rate, or maybe diminishing returns on those investments.

And based on the results that we're seeing so far, that doesn't seem likely.

So can just kind of shed a little bit of light on why the margin expansion would slow, given what you're seeing in strength on the top line?

I mean, even with a slight deceleration in the top line it just seems unrealistic.

Yes, let me tell you -- basically we are trying to balance in this moment, growth.

And we are trying to get the right flexibility for investment in our biggest opportunity.

At the moment we have two big phenomena out there.

First of all, we want to have the flexibility of reinvesting on what's working in our profitable brands, and to grow their overall market share.

And the second point, we are gaining substantial market share in emerging markets behind investment.

We are learning how to do that.

Now, my point of view is it's much better to grow market share in emerging markets in a moment they are emerging, meaning when there is strong growth and there is not yet a finally-formed competitive environment, then that being late in market share growth, and then having to fight for market share when the markets are completely established.

So, we plan to continue to accelerate our penetration in emerging markets, and we assume to have the flexibility of investment for that, which is not necessarily, as you said, an investment which had lower return.

It's just an investment which is more uploaded, up front in terms of market share than and we can build up.

The second point of this concept of balance is that frankly, in the last two quarters, particularly this last quarter, we were really hitting on all cylinders.

And we cannot assume that we will continue hitting to every second a cylinder in every moment for the next two years.

Let me just make you the point.

What are those cylinders?

First of all, internal cylinders, our innovation group is working fantastically.

US department store holidays was better than expected.

Our more investment in advertising and less investment in promotion that we committed to is working, and frankly, was a risky move.

We are building new capabilities to be able to advertise in television and digital, to connect in a different way with consumers, and we are delivering amazing high-quality of TV advertising and digital connection with the consumer, which is frankly, a new capability.

So our learning curve is particularly steep.

Travel retail strategy is working unparalleled, fantastically well, and travel retail is growing.

And there's been no turmoil in the travel retail, at least not so far, assuming that the Middle East issue will not turn into travel retail turmoil for the moment.

We are focusing our resources on emerging markets in China.

This is paying out perfectly well.

80% of our less-performing brands have responded super well to the turnaround plan, as we have heard about ADF variances a few minutes ago.

Our savings, restructuring are in line ahead of goals, and the currencies are all playing in our favor vis-a-vis our estimates constantly.

Even the tax audits come in our favor.

And externally, all the potential is rationally SAP, internally, or market issues or terrorism issues.

Nothing happened in the last period.

Thank God.

And so really everything is playing in our favor.

Frankly, we are not assuming this to continue with 100% in our favor, so we are balancing, summarizing the opportunity of investment, we are balancing the opportunity of being in more market share where appropriate, and we are making assumptions which are optimistic, but still reasonable in terms of what we view the future environment.

Thanks a lot for all the color, Fabrizio.

Your next question comes from the line of Linda Bolton-Weiser with Caris.

Hi.

Can you just remind us what percent roughly of your business is Japan?

And also can you comment on the slowing of growth in Korea?

That's an important market and I think you said it was up only 4%.

And also finally, can you comment on -- you alluded to growth objectives and initiatives in Brazil, and L'Oreal is also eyeing that market as a big opportunity for growth.

Can you just comment on how you think you are going to be successful there and maybe how you're approaching it differently or maybe similarly to L'Oreal?

I'll start with the second question, and I will look -- be specific to answer the first one.

On Brazil, Brazil is going to be an important market for us.

As you know, Brazil is a market which is pretty well developed.

It's one of the biggest beauty markets on the globe but it is developing mass, and not in prestige.

So our challenge is very different from the one on L'Oreal.

L'Oreal is also mass-focused, mass-division.

We don't.

We are 100% focused on prestige and luxury, and this assumes that in Brazil, we'll need to help building the distribution channel that allows the distribution of prestige.

And particularly being able to create a prestige market value equation despite the barriers to entry to the market there.

So it is going to be a step-by-step approach, gradual, focus on prestige, and will include development of free-standing stores as one of the channels that will have Brazil creating a luxury market.

And then regarding Japan, it's between 4% and 5% of our global sales is in Japan.

And the Korea growth rate of 4% -- Korea as a market is really sensitive to movement in their exchange rate versus the US dollar, and we see a shifting of business between the domestic market and the travel retail market.

And if you've been to Korea, you'll understand that they're -- in Seoul in particular, they are very integrated.

The stores are right next to each other essentially.

And shoppers move by, based on exchange rate movements, they shop between either the travel retail channel and/or the local market channel.

And we really look at Korea as a business on a combined basis, if you will.

Like how is our sales going through both of those channels, and our business is pretty healthy.

Your next question comes from the line of Wendy Nicholson with Citi Investments Research.

Hi, good morning.

My question goes back to the discussion of the long-term margin target and, two questions specifically.

Number one, SAP, can you update us in terms of what you are expecting in terms of cost savings, and whether that is reflected in the outlook for 13% to 14% operating margin?

And then second, can you give us a little bit more color on China specifically, sort of just as a model for those emerging markets, Fabrizio, where you said you want to be first as opposed to last.

How much money are you making on the bottom line in China right now, and do you think that margin goes down before it goes up?

Because I would imagine that at the growth rate you're putting up there, at some point there's favorable operating leverage, and that margin ought to go up.

So I'm surprised emerging markets are going to cost so much more relative to what they are costing today.

Thanks.

Wendy, let me start with the second part of the question.

You are absolutely right that on China, specifically, the business model we are working on is a business model where the going margin, meaning the margin after the strong period of investment, is going to be accretive to the average of the Company and not diluted.

This has been designed on purpose to make sure that the future growth of what we believe will be the biggest market of the globe in 2020, 2025, will always be, for this Company, an accretive -- accretive to margin.

However it is not an easy task, but that is the goal.

To arrive to this goal at what we call the going margin, meaning after -- and we will decide when we are ready to get there, we are ready to invest in the years in various areas.

We are investing, obviously, in advertising our main brands to create the right awareness.

We are investing into accelerating our distribution particularly in secondary cities around China.

We are investing in creating new capabilities, even we have recently launched internally an evolution of our strategy where we want to build, really, our second home.

That's the way we define it in China, which has implication in terms of our organization capability, the amount of local talent we'd hire, we'd distribute in the Company globally, how seriously we take the relationship with the future of China, and how much we invest in research.

You probably are already aware that we are creating a research center -- we have created, we are increasing a research center in Shanghai.

We are looking also to many other areas to further enhance our ability to work digitally in China.

So it is a combination of big investment in capability, advertising, introducing new brands, and increasing distribution, that in the short time will make China still profitable, but obviously will require investments.

While in the going, the result of all this will be ---(inaudible) hopefully, will be accretive to the total margin of the Company.

And I will let Rick answer the first of your questions.

So, Wendy, for SAP, we talked about the majority of our locations being up and running by the fiscal 2012 to 2013 timeframe.

So when we talk about benefits for SAP, quite honestly, right now we are in investment mode, and most of those benefits become enabled as we get the majority of our locations, if not all of our locations, up and running on SAP.

The benefits that we see coming from SAP are really one of the legs that gets us beyond our fiscal 2013 operating margin target, so that is really something beyond that's really going to support our continued growth and improvement in profitability.

The things that it does for us, obviously, better supply chain management will improve our gross margin, better inventory management.

It also is a big supporter of our indirect procurement organization, which we are building out now.

But it really will enhance the information that they have to work with.

And also, it helps, quite honestly, support the organizational changes that we have in place because it will give them better information faster, and help them make better business decisions.

Most of the benefit is to come from SAP and most of it, quite honestly, falls outside of our current strategic planning timeframe, which takes us through fiscal 2013.

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

A couple quick questions.

The fixed cost percentage of sales -- I know it used be around 60%, 65%.

Is that number still the same, and do you envision that coming down over the next two or three years?

The number is roughly around that area, Bill.

And one of the things that we are doing, quite honestly, very well right now, is leveraging incremental sales growth and really keeping a close eye on that fixed expenditure, if you will.

So we've got things in place like productivity, headcount, and other measures that are really allowing us to leverage this great sales growth that we have, and give us a lot of resources to invest more in some of the key business drivers; advertising, merchandising and sampling and also improve our profitability.

It is roughly in that 60% area, and you know, there's fixed and there's semi-fixed, and there's lots of things that can get in there but that's a good benchmark.

Good.

And will that come down over time?

It will come down certainly as our sales grow faster, absolutely, because we are leveraging that fixed cost.

Okay, got you.

And then lastly, in terms of the gift-with-purchase and the purchase-with-purchase, is it fair to say that a lot more sales this quarter were at full price?

And I guess the longer term question is, do you think industry is finally off this, like, harrowing of discounted sales, because they really don't need it?

I think you guys kind of proved that in the holiday season, but are your competitors falling in line on that new sort of sea change in the industry?

Yes, Bill, it's Fabrizio.

Yes, we are purposely diminishing the level of promotion, and as reaching the money or the investment from short-term promotion to initiative support and equity building.

And this is working.

So, not only we are increasing the total advertising levels, but within [total story A&P] level, which includes promotions.

This one is going up -- as a line, is going up thanks to converting to more A&P support, the savings that we are having cost of goods in many other areas.

But then within the A&P line, we have further improving the mix, switching more money in pool activities like print advertising, television advertising, digital advertising, and less money into promotions and other minor activity in stores that were less efficient in building the long-term.

This is one of the biggest moves that we are making, and I think a lot of the results are coming from that.

If competition is full -- I would say it's a mixed picture.

There are a couple of luxury competitors which are taking, in my opinion, from what I can see, a similar approach.

But I would say that the majority of the competition is not following this kind of direction.

Rick, you wanted to add a point?

Yes, I was just going to mention, Bill, that regarding our gifts as a percentage of sales, we are about 30 basis points lower than year-over-year.

So, to Fabrizio's point, we are pulling money out of that pure promotional area and investing it in things that we think are much more beneficial over the long-term.

Your next question comes from the line of Andrew Sawyer with Goldman Sachs.

Thanks.

Fabrizio, I think when you talk about your long-term margin target historically, you alluded to the desire to get the US department store business stabilized before you ratchet that up further.

Do you feel more comfortable about the multi-year prospects for the department store business, and maybe you can touch a little bit on how some of these new initiatives you have are working in terms of modernizing the format?

Thanks.

Yes.

We feel more comfortable with the direction but I don't think the work is finished.

It is just the beginning of a long journey.

What we are doing together with our retail partners is basically creating a model where our biggest brands concentrate their advertising effort on big, new winning initiatives.

The example is Clinique Even Better, that spot.

This advertising brings, because of this great brand, this new initiative in print, television, digital advertising, all-in concepts focus on this one big idea.

The result of this is that it brings many new users and new consumers into the department store door to get to the Clinique counter in my example.

And then, the counter, with the service that we are creating, sells more than one product because they can bring the consumer into a (inaudible) usage, it doesn't sell only the single product advertised.

Plus, thanks to CRM and other activity, creates more loyalty and obviously continue to sell the overall equity of the brand and the full experience of the brand.

This is, I believe the right model for prestige which is very competitive as to the alternative model of mass and consumer seems to like this model.

And importantly this model brings to the retailers -- in your question to department store in the US more traffic.

And we have the number.

Our Clinique, Even Better, Clinical have been bringing new traffic of people that before were not entering those department stores to department stores thanks to this new model.

So we are contributing with this new model and second we are contributing, improving the overall services of the beauty floor of department stores with our brands which as you know are a big percentage of this floor.

I think the number I quoted in my prepared remarks which today in skin care we have 21 out of the 25 top SKUs in US department stores is clear.

Consumers are voting.

They prefer our products and our service.

And in this way I think we can give a big contribution.

Said this, obviously department store will need to continue to do their part in creating the right level of traffic and the right level of new modern shopping experience which is needed to conquer the young people of the future.

But we are optimistic.

Thanks for that color, Fabrizio, and just a quick one for Rick.

Can you give us some color on the amount of buyback you're looking for this year?

Thanks.

Sure.

Our strategy for cash has always been the same -- invest in our business.

I think we are doing a nice job at that.

Make acquisitions.

We acquired Smashbox this year.

And then return excess cash to shareholders.

Our total shareholder return for the last 18 months is about 150%.

We increased our dividend about 38% after our annual meeting and we continue to see both dividends and share repurchases as options to return excess cash to shareholders.

I think over the last 18 months we purchased around 7 million shares back.

We are little bit slower in the second quarter, admittedly, but we intend to continue that for the balance of the year and we have 15 million, approximately, shares still outstanding in our share repurchase authorized by the Board of Directors and so we will continue activity in the balance of the year.

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

Bernstein and Company.

Two questions.

The first one is around travel retail, given it continues to be so important to your business.

45%-ish of growth, 8% to 9% of sales, so it really contributed, call it 3.5, 4 points to top line growth and maybe 7 to 8 points to the bottom line.

You mentioned it as one of the risks going forward, certainly it's done very well so far.

To help us dimensionalize the risk could you talk a little bit about how that business disaggregates, and in fact, the growth disaggregates by region -- location of transaction by region?

And then also new doors versus same-store sales?

Let me explain to you what is happening in travel retail.

First of all, travel retail is growing as I have explained, there are three big dynamics.

The first dynamic is there is more people traveling.

And in this dynamic I want to underline, the majority of the new travelers have an origin in Asia and they are actually Chinese.

The numbers say that in this year Chinese traveling will reach 40 million and they assume to be 90 million in the next three, four years.

So obviously the Chinese traveling is the biggest source of travel retail which brings me back to what I was explaining before based on Wendy's question.

That the importance of us winning in China and investing upfront and creating amazing desirability in China has a double implication, is obviously the margin in China, but also the results in travel retail.

Because in this moment travel retail growth is heavily influenced by the brands which have a strong [element] with Chinese consumers in China.

So we, in our strategy, are linking those two elements so far very successfully.

The second point is that we are improving our marketing and advertising activities within travel retail to improve conversion of the traffic into shoppers.

Only 10% of the people entering an airport shop.

If this can become 12% or 13%, this percent is already a big increase on demand.

In this way we are also increasing advertising in airports or services at travel retail, in airports, et cetera, and many other marketing tools.

The third is that we are gaining market share in the fastest growing categories within travel retail.

Travel retail as storytelling is being composed by 50% of fragrances, and the remaining 50% skin care, makeup and a very little bit of hair care.

In reality we are taking a very strong direction in winning big in skin care and makeup in Asia where travel retail is actually more directed by skin care and makeup than the average globally while finding the right balance between makeup and skin care and the important category of fragrances in regions like Latin America or Europe or North America.

And in this way combined we are having a solid performance in fragrance, but we are having a skyrocketing performance in skin care and makeup mainly in Asia.

Finally, you asked about how this is by region.

I would say, Asia is the fastest growing, but Europe is still the biggest and Latin America is also growing very, very fast.

That's the current status.

And one last point.

We mentioned in our prepared remarks and in my comments I said that there was some buy-in, if you will, and stocking up in Asia in particular for Chinese New Year.

And so our sell in was a little bit stronger than our sell through in the second quarter.

That will balance itself out for the rest of the year.

So that 45% number, while a great number, does not really reflect sell through, our sell through number was a little bit less than that.

We have time for one more question which comes from the line of Mark Astrachan with Stifel Nicolaus.

Thanks and good morning everyone.

Just looking at hair care.

I'm curious if the increased focus on that business by some of your principal competitors potentially impedes your ability to grow sales and increase profitability.

And then just related to that, could you talk about what you think the size, your size is whether beneficial or does it make it more difficult to compete in that market versus some of those competitors?

Yes, our strategy is to compete in the high end market in salons and specialized retailers for hair care.

And in that niche we have a relatively high market share actually in the US.

And we are very small internationally.

To answer your question, we operate in a niche and we, in our strategy I don't think will conflict with what our competition is doing because they are mainly operating in mass or in larger scale than we are.

Our idea is to continue gaining strong market share in the high end area of hair care and I believe we can do that.

And in terms of size, our size in the US in that segment allows us to compete effectively.

Internationally we are very small and in fact our international expansion strategy is going to be very focused.

Meaning, few markets where we will enter in this high-end segment and operate to create critical mass there is opposite to a strategy of being little or small in many small markets.

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.