雅詩蘭黛 (EL) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Companies fiscal 2012 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 we have Fabrizio Freda, President and Chief Executive Officer; Rick Kunes, Executive Vice President and Chief Financial Officer, and Thia Breen, President of our North America affiliate. Thia is going to recap the holiday season and discuss our strategic progress in North America.

Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC where you will find factors that could cause actual results to differ materially from these forward-looking statements. Except when noted, our discussion of our financial results and our expectations are before restructuring and other charges. You can find a reconciliation between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website.

And I will turn the call over to Fabrizio.

Thank you, Dennis. Good morning and welcome to our fiscal 2012 second-quarter earnings call. First, I want to acknowledge the passing of our dear friend and colleague, Evelyn Lauder, who was the heart and soul of our Company. She was better known for her work in fragrance development and breast cancer awareness, but she was truly a pivotal architect of our tradition, values and culture. Her incredible strengths, compassion and generosity will leave a lasting legacy on all of us personally.

Now let me turn to the quarter. I am pleased to tell you that our Company once again achieved strong double-digit sales and profit growth, and the second-quarter results were largely higher than the top of our expectations. Importantly, our terrific performance was broad-based across geographies, categories and brands. For the period our sales rose 10%, and our earnings per share were [$1.01] after the recent 2-for-1 stock split.

We are now in the third year of our strategy and extremely gratified that we continue to achieve solid gains worldwide, regardless of economic conditions. This clearly demonstrates that we have a winning and sustainable strategy and that consumers are drawn to our unique and innovative products and high touch service approach.

As a company, we continue to increase share in many large and critical markets, outpacing both mass and prestige competitors. Here in the United States, our largest market, our brands increased share by 40 basis points in the high margin prestige skin care category where we have focused much of our resources.

We also improved our competitive position in key categories in countries across Asia and Europe, including China, France, Germany, Turkey and Italy. Spending by affluent consumers remained buoyant this quarter, particularly for the kind of affordable luxuries that we offer. Sales of our higher end brands, including La Mer, Bobbi Brown, Jo Malone and Tom Ford enjoyed sharp double-digit growth globally.

What is driving consumers to our brands, whether in Shanghai, London, Los Angeles or Milan, is a winning formula that combines incredible innovation, brilliant advertising, local relevance and improved high touch services.

We have attracted thousands of new multiethnic consumers, increased our repeat business, and even launched products that created new subcategories. We began this approach about two years ago by strategically advertising several cutting-edge skincare products from Estee Lauder and Clinique with a more frequent use of TV.

Now we are taking the same approach to makeup. Using a full spectrum of television, digital and print ads in key markets worldwide, we recently started aggressive campaigns for foundation products, and later this year we will promote eye and lips products on television, on numerous websites, as well as in magazines. Our advertising is compelling and creative. Early results for the new makeup ads are extremely encouraging.

For instance, at the end of the first quarter, Clinique ran commercial in the US for Even Better Makeup, which helped lift foundation sales and its entire makeup category. The TV ads, our first for makeup, followed a major TV campaign for the companion skin care product, Even Better Clinical Dark Spot Corrector, and some ads promote the two products together. Clinique makeup sales in North America grew 13% this recent quarter, confirming that our advertising works and draws new consumers to our innovative products.

We have also been collaborating with our retail partners to reinvigorate the beauty floor in North America department stores, and results continue to be robust. Both Estee Lauder's and Clinique's sales in the channel climbed high single digits. Much of this is driven by sourcing demand for prestige skin care, and Estee Lauder enjoyed great success. Its North American skincare sales jumped 23%.

During the holiday season, total US retail sales rose 4%, according to the National Retail Federation, in line with prestige department stores. However, prestige beauty sales did even better, up double digits. Our holiday business was strong, and Thia will elaborate on our many successful efforts in North America.

In fast growth in Latin America where luxury brands are booming, we saw exceptional growth, especially from Brazil, an exciting growth opportunity for us. In Brazil our Company is growing the fastest in prestige and gaining share in makeup, skin care and fragrance. M.A.C is number one in the Company and is expanding distribution through freestanding stores and e-commerce, which is planned in the coming months.

Our fastest growth was Asia Pacific where virtually all countries contributed. In China we continue to see solid opportunities for success by building awareness and distribution and bringing in new brands and products. The Company's sales rose an impressive 44% this quarter, on top of 29% last year, allowing us to add a point in share. The outstanding gains were led by Estee Lauder, La Mer and Origins and their desirable skin care products. Some of the highest sales came from door expansion. We entered 10 more cities, bringing our footprint there to 52 cities. Looking ahead we are mindful of factors that could slow the pace of future growth in China currently.

Our European region grew on the strength of trial retail and higher demand in the Middle East and Italy. Our brands advanced in the region to their product services offering and expanded distribution. For example, in Italy overall prestige skin care retail growth less than 4%, but Clinique and Estee Lauder had double-digit gains, demonstrated the consumer response to our superior offering, even amid tough times.

Expanding its high touch concept, Clinique opened its first "Service As You Like It" counter at Galeries Lafayette in Paris, which generated significant media buzz. And Bumble and bumble opened a new retail avenue through 10 John Lewis stores in the UK. Higher passenger traffic and successful marketing activity fueled travel retail, particularly in America and Asia. We are pleased that -- with these results since the channel had exceptionally strong growth in the prior year quarter.

While we believe we are outpacing our competitors in Europe, our outlook reflects continued cautiousness of a slowing market growth as a result of the economic uncertainties that are dampening consumer sentiment there.

Turning now to our fragrance business, we had strong results in the Americas and Asia, particularly in our luxury brands, and from scents that we have created for specific markets. Our hair care category grew nicely on the strength of a promising new collection for Aveda and Bumble and bumble expanded retail distribution.

Across our product categories, our e-commerce business rose double-digit in all regions. We had brand size in 15 countries and continued to roll out sites globally. As our digital effort increased in importance, we are widening our corporate and brand presence in social media. Even with our strong sales growth, we have maintained our financial discipline and are focused on creating greater efficiencies and productivity.

As a result, we achieved a gross margin improvement of 150 basis points, reaching nearly 80%, and our operating margin rose 50 basis points to 22% of sales. Building our capabilities remained an important strategic priority, and we successfully launched another wave of our strategic modernization initiative in affiliates across Europe, Asia including Italy, Spain, Korea and Australia.

Our Smashbox and Bumble and bumble brands also went live. We had terrific, terrific success implementing SMI today. We are encouraged it is going so smoothly, and we expect to eventually reap the benefits of new efficiencies throughout our organization.

As planned, we are substantially ramping up our global advertising spending in the third quarter due to the timing of major launches and to support existing franchises. We believe these additional investments in advertising will allow us to maintain our strong growth in the fourth quarter, in spite of a softening business climate.

One of the exciting new introductions we will advertise is a skincare product from Estee Lauder brand developed specifically for the European market. Called Revitalizing Supreme Global Anti-Aging Creme, it is based on exclusive technology and created after extensive consumer research about what European women want, which is a multitasking cream. This is a great example of our mission to be both locally relevant, as well as creativity driven and consumer inspired.

Increased advertising spending will also go toward commemorating the 30th anniversary of the Estee Lauder Advanced Night Repair franchise, as well as towards Clinique Even Better skin care and makeup products.

Separately we are proud that Estee Lauder's most recent big success, Idealist Even Skintone Illuminator won the Marie Claire Prix d'Excellence award last month in France. The award is given to the most innovative cosmetic products and is a prestigious honor. This product continues to help drive Estee Lauder's skincare business in France.

Our high advertising spending behind our most desirable skin care and makeup products is carefully chosen depending on the country and region. In every case we are locally relevant and invest our money where we think we can have the greatest impact.

For instance, Clinique is our main focus in the US, Estee Lauder in China, M.A.C in Brazil. We put our resources behind the most promising brands in the fastest growing markets, and when circumstances change, our investments do too. We are nimble and flexible and attuned to market conditions globally. Over the past three years, we have generated higher sales by pushing the best opportunities at any given time at any given place around the world.

In our new global business model, our increased sales generate improved productivity, profitability and value creation. We are a growth company, and our bottom line reflects our ability to leverage our highest sales growth for increased profitability. We believe this financial model is sustainable, and we see strong growth ahead. That conviction stems from our continuous emphasis on innovation across product development, packaging high touch services, advertising, merchandising and now digital media.

We are confident we are well positioned to exploit the growth potential of prestige beauty across our categories and regions. Today our best opportunities lie at the crossroads of our state-of-art aspirational skin care products and the growing appetite of the global Chinese consumer for the best of beauty.

With half of the fiscal year behind us, we are confident in our ability to attain our goals and financial guideline. We are taking up the bottom of our full-year earnings per share estimate by $0.03 to $2.16 to $2.23 a share post-split. This more positive outlook reflects continued momentum in our underlying business, which we believe will compensate for expected software markets in Europe and the stronger dollar.

One of the areas we are the most excited about is the fantastic growth in our largest market, the United States. We believe this market will remain vibrant and should help to mitigate slowing in other regions.

Now Thia will talk to you about some of the promising opportunities we see in North America. Thia?

Thank you, Fabrizio, and good morning, everyone. First, let me give you a little background about myself. I have been with the Estee Lauder Companies for more than 30 years in several brands and varied positions. Most recently I was the Global President of the Estee Lauder brand until 2009 when I was honored to be chosen to lead the Company's newly created North American affiliate. Since then, working with my experienced team, we have reignited growth in our home market, which is by far our largest, while improving profit margins. I am pleased to say that our efforts have been a great success.

In fiscal 2011 North America had its best performance in a decade with sales growth of 9% and record profits. Thanks to our sustainable strategy, that trend has continued. Our holiday business was strong and broad-based across categories, brands and channels. Sales in our core channel US department stores rose a healthy 8%, and online maintained its rapid pace, up 24% this quarter.

Many of our brands special holiday sets performed well. Importantly, as the leader in US prestige beauty, we are gaining share against mass and building strong share gains in skincare, which is one of our strategic priorities. In fiscal 2011 total US prestige skin care and makeup gained two points against mass brands. In skincare Clinique, Estee Lauder and La Mer increased share against many major prestige and mass competitors, and across our brands, we gained share in our largest accounts.

Clinique is the largest beauty brand in the United States in both mass and prestige, and with our large portfolio of diverse brands, much of what we do sets the tone for the overall beauty industry.

Our fragrance share in prestige declined in the recent quarter, which was the result of a planned reduction in promotional activity and underperforming products. We are optimistic about the upcoming launches and the continued success of our higher-end fragrance brands, including Jo Malone and Tom Ford.

Our success has been achieved by careful design. As I am sure you recall, the US department store beauty business had languished for many years, but when we embarked on our multiyear strategy in 2009, we worked closely with our retailers to change course.

With US department stores accounting for two thirds of North America sales, our business in that channel is clearly of vital importance. By creating an affiliate in North America, we have been able to support retailers with one strong voice on behalf of all our brands, allowing us to be more efficient and effective.

Internally our brands are sharing and leveraging ideas and resources, making for a more cohesive entity. Our carefully honed strategy has reinvigorated our department store growth and also fueled higher sales in other channels. The pillars of this strategy involve pulling customers into stores with compelling and frequent advertising that features our brands newest and most innovative products. Once consumers come to our brand's counters or websites, we offer personalized high touch services for a customized fit, improved navigation and cutting-edge tools that lead to a pleasurable shopping experience, higher sales and repeat business.

Last year we improved our media mix, putting more money into TV, print and digital campaigns, and taking some out of promotions. And it paid off. The average sales per launch in the US jumped by 67%. When shoppers come to our counters, they may be surprised to discover it is not the same old experience anymore. Clinique is rolling out elements of its "Service As You Like It" format, depending on the size of the door. The brand has installed more than 1000 iPads at its counter that can recommend 180,000 possible product combinations based on skin concerns. By the end of the fiscal year, Clinique expects to have 1500 iPads in about 1250 doors in North America.

Sales at the stores with iPads are running 3% higher than trend, which is a terrific result. Estee Lauder has created a separate studio that offers excellent lighting conditions to match the right foundation to skin tone. The Bobbi Brown brand highlights Bobbi's Picks, her favorite cosmetics and collections to help consumer choice.

Each of our brands is rethinking its in-store experience to appeal to today's consumer and several exciting pioneering concepts, which we will debut later this year.

Our strategy has not only brought new consumers to our brand, but also into department stores to shop for beauty for the first time. As part of the mix, we have attracted both a younger and more diverse consumer.

Here is a case in point. During the recent launch of Idealist Even Skintone Illuminator, Estee Lauder recruited many new consumers. Nearly half were new to the brand, and more than one quarter had not previously purchased at a department store beauty counter. The Company's flagship brand also reached a more ethnically diverse group.

In North America we have also boosted sales in other distribution channels. Our 500 freestanding stores express a brand's equity in the most meaningful way and establish a direct connection with consumers. M.A.C's two-year-old Times Square location is so busy with locals and tourists, that it is the brand's highest grossing store in the world.

Several of our other brands that operate retail stores also have secured prime locations in highly populated areas.

Our e-commerce sales are expanding rapidly. The North American online business continues to be robust thanks to both our own brand websites, as well as retailers' partner sites. The sales in multibrand specialty beauty stores are also amongst our fastest-growing. In recent months, we added several brands in Sephora, including Origins, Bumble and bumble and Bobbi Brown. Our Aveda and Bumble and bumble haircare brands launched major national print campaigns last year to introduce new products, and those ads help drive consumers to salons, freestanding stores and Sephora.

Lastly, we are refocusing our efforts on Canada, which is the Company's sixth largest country and where we see a major opportunity. We established an affiliate there last July to create a dedicated focus on Canadian consumers and retailers to improve our competitive position. Canada's growing beauty business is vastly different than the US, so we have to adapt to its culture. For instance, 40% of prestige beauty sales in Canada come from high-end beauty boutiques within drug stores compared to virtually none here. We will use some of the strategies that have been successful in the US to help drive sales and gain share in Canada. These include running TV commercials to advertise Estee Lauder and Clinique products for the first time and supporting department stores as our key retail channel using some of the merchandising and high touch approaches that have worked well in the US.

To expand our brand's presence, we will continue our growth in Shoppers Drug Mart, an important retailer for prestige beauty and in Sephora as it expands in Canada. We also intend to launch our brands' e-commerce sites. To build on our North American momentum, we continuously improve our capabilities, particularly in consumer insights and consumer relationship management skills. We implemented our first strategic research programs in Canada to get a better understanding of the Canadian consumer, so we can create products and programs that are locally relevant.

We are also designing targeted marketing programs to reach multicultural and multigenerational groups of consumers and are seeking opportunities to expand into new and existing channels, strengthen our social media skills and improve our merchandising and in-store capabilities. We have reduced beauty advisor turnover to the lowest level in a decade and implemented programs to attract and retain our best talent resulting in more effective sales force and several million dollars of savings. We expect fiscal 2012 to be another record year in North America with strong growth across all our major prestige channels. We are excited about the Company's future in its largest market as we look to leverage our portfolio and strengthen our leadership position.

Now I will turn the call over to Rick.

Thank you, Thia, and good morning, everyone. My discussions on the quarter and the outlook exclude restructuring and other charges. Additionally all earnings-per-share information reflect the 2-for-1 stock split, which was effective on January 20.

As Fabrizio discussed, we had another solid quarter with broad-based growth among all of our regions and most key categories. In local currency sales rose 10%, the high-end of our guidance range. Currency translation was minimal, resulting in reported sales growth of 10% to $2.74 billion. As expected, some retailers, primarily in Asia-Pacific, ordered extra inventory before the January launch of SAP in several of our affiliates. This increased our second-quarter sales by $30 million or slightly more than 1 percentage point and operating income by about $23 million equal to $0.04 per share.

These sales would have likely been made in our third quarter. Net earnings for the quarter rose 13% to $401.1 million compared with $355.8 million in the prior year quarter, and diluted EPS was $1.01 compared to $0.89.

Our skincare category continued to thrive. Sales rose 13% in local currency and grew double digits in the Americas and Asia Pacific. A strong innovation pipeline and continued support of existing products fueled skin care gains at the Estee Lauder and Clinique brands. The strength of La Mer also contributed to growth in the category.

In makeup local currency sales rose 12%, primarily driven by our makeup artist brands, as well as Clinique and Estee Lauder. The makeup category grew double digits in every region. Clinique used skincare technology and newly launched products to benefit the makeup category. The launch of Tom Ford beauty also contributed.

Our fragrance business declined 1%, excluding currency, as growth in Asia and the Americas was offset by a decline in the European region. The high-end of the category performed well with strong double-digit growth at Tom Ford and Jo Malone. Increased sales from recent launches were more than offset by lower sales of certain existing fragrances.

In haircare sales rose 9%, reflecting solid growth at Aveda, notably in international markets, as well as the expansion of Bumble and bumble and Sephora in the US. Partially offsetting these gains were lower sales through the direct response TV channel for Ojon.

On a geographic basis, our sales in the Americas remained robust throughout the holiday season and grew 9% in local currency. Virtually all brands contributed with particular strength from our top three, as well as our luxury group. The United States rose 9%, Latin America grew 19%, led by exceptional results in Brazil, while Canada declined modestly.

From a channel perspective, our online business had a terrific holiday period with sales up 24%. Multi-brand specialty beauty stores rose strong double-digits, while department stores rose high single digits, and our own stores were up mid-single digits.

In Europe, the Middle East and Africa, sales climbed 7% in local currency. Growth by market varied, reflecting circumstances specific to each country. Travel retail expanded 15%, reflecting 5% growth in international passenger traffic and strong execution by our brands at point-of-sale. Travel retail had a very difficult comparison this quarter, after growing 45% in the prior year.

Solid growth was delivered in several key markets. The Middle East and Africa rose nearly 25%, Turkey was up more than 30%, and Italy rose midteens. Spain and France rose high single digits, and Germany delivered a very respectable mid-single-digit growth.

Our UK sales were flat as retail slowed and stores kept inventories lean, reflecting uncertainty in the economic environment. Russia had terrific growth at most retailers, but continued to report lower net sales due to destocking at a major account. The relative strength of the Swiss franc is causing consumers to shop across the border, hurting sales in the local market, and Greece remains weak overall due to continued austerity and political turmoil.

Early orders to mitigate potential SAP disruptions added $3 million to the region's sales in the quarter.

The Asia-Pacific region led the Company's growth this quarter as sales rose 18% in local currency. Growth was again driven by China, which jumped 44%. New brands, doors and cities, as well as double-digit light door retail sales growth, fueled the momentum. We also saw strong sales increases in Hong Kong, Korea, Australia and Thailand. Japan declined low single digits. Early orders to mitigate potential SAP disruptions added $25 million or about 5 percentage points to the region's local currency sales this quarter.

Our gross margin improved 150 basis points to 79.9%. The increase was primarily driven by a positive mix of 130 basis points, manufacturing variances of 20 basis points, and currency of 10 basis points, partially offset by higher obsolescence charges of 20 basis points. These figures include the benefit of cost savings initiatives of $29 million.

Operating expenses as a percentage of sales rose 100 basis points to 57.9%. The primary drivers were advertising, merchandising and sampling expenses, which increased 70 basis points to support the Company's biggest innovations, and impairment charges of 20 basis points. These figures reflect savings of $7 million from our cost reduction programs. As a result, operating income rose 12% to $603.1 million, and operating margin rose 50 basis points to 22% of sales.

We realized total savings of $36 million in the quarter from our cost savings programs and still expect to save $115 million to $140 million for the full year. Net interest expense was slightly higher than last year at $17 million this quarter. In mid-January we repaid $120 million in senior notes with a 6% interest rate with cash from operations. This is expected to save us around $7 million annually and was already reflected in our guidance for the year.

In November we settled a commercial dispute that was outside of our normal operations for $10.5 million, which is recorded in non-operating income. This item, along with the $6.7 million in impairment charges, was not included in our guidance.

Our effective tax rate was 32.5%. We reported $6.1 million or $0.01 per share in restructuring and other charges in the second quarter. For the full fiscal year, we expect to record charges of between $25 million and $40 million.

For the six months, net cash flows from operating activities were $610 million compared to $508 million last year. We spent $182 million in CapEx, $522 million to repurchase approximately 11 million shares of our stock, and paid our stockholders $204 million in dividends.

Our days sales outstanding at December 31 were 45, up three days from last year due to timing of collections, while inventory days fell by three to 165 days.

As Fabrizio mentioned, we have built into our forecast continued slower market growth in certain Western European countries and a stronger dollar. However, our business overall is healthy, and our vitality is broad-based, allowing us to mitigate weaknesses in one area with strengths in another.

We run our business on a full-year basis, and for the year we forecast local currency sales growth of 9% to 10%. The operating leverage from higher sales, and cost savings are expected to be partially offset by planned increases in advertising and investments in new systems. This translates to an operating margin improvement of about 100 basis points for the year. The full-year non-GAAP EPS is forecast between $2.16 and $2.23 per share, equal to growth of about $0.17 to $0.21 -- 17% to 21%, rather, versus last year.

For the year we continue to expect to generate more than $1.1 billion of cash flow from operations and invest about $400 million to $450 million for capital expenditures. We still estimate our effective tax rate will be between 31% and 33%.

We have a number of items that will cause some unusual comparisons in both sales and profits in our second half. First, the third quarter sales growth comparison is affected by the pull forward of $30 million in orders to the second quarter this year ahead of the January launch of SAP. The prior year reflected an additional $42 million in sales ahead of an April launch of SAP. These two factors are expected to reduce third-quarter sales growth by slightly more than 3 percentage points and EPS by $0.09.

Second, currency comparisons are expected to be more difficult in the second half. We are now assuming weighted average rates of [1.33 for the euro, 0.78 for the yen and 1.57 for the pound] for the full fiscal year. The euro in particular is expected to weaken in the second half.

Lastly, the cadence of our planned advertising spending this year is weighted to the third quarter, which should help maintain our sales momentum. We expect to increase our advertising spending in the third quarter by about $80 million or the equivalent of $0.14 per share. Taking all of this into account, our third-quarter sales growth is forecasted at 4% to 5% in local currency. Reported sales could be negatively impacted by about 1 to 2 percentage points due to the currency translation. We anticipate EPS for the third quarter to be between $0.28 and $0.32.

We are pleased with the strong first half of the year. Our adherence to strict productivity guidelines and carefully targeted reinvestment should enable us to deliver our financial objectives for fiscal 2012.

And that concludes my comments, and we would be happy to take your questions.

(Operator Instructions). Wendy Nicholson, Citi Investment Research.

My question pertains to the outlook, and the guidance I guess for Europe but in particular for Asia and the pretty dramatic sequential slowdown you are expecting, and is it, I guess, expecting or guiding for? Is there anything that is fundamental to you that you see? Has there been a delay in your orders? Do you feel like there is any place where you are losing share? The numbers out of Sa Sa I know with the Chinese New Year were not great, but is there something specific to you that you are seeing that makes you so cautious, or is it just an undue level of conservatism as you look to the next two quarters?

No, I think that again we will try to make available the very specific number of the reconciliation of the impact of estimated changes. So anyone who wants to call Dennis later to have really every single detail, please do it.

But let me summarize the outcome. That is not the way our business is [coming]. After our spend in first quarter in comp plus 14%, after readjusting all the movements of stocks by quarter because of a semi, we are basically growing every quarter between 8% and 9%, which is an outstanding number and fully in line with our original expectations. And we don't see any slowdown in that sense, just stock movements the way Rick just explained.

So in terms of markets, what we see very specifically is that we do see softness of the markets in Europe. So originally we were expecting a beauty market that would grow in the range of 4%. Now because of the European softening, we see a beauty market that will grow 2% or 3%. But our growth in this market is actually accelerated, and we are building market share. So the differential between the market and our growth actually remains the same.

So that is why I'm saying, it is basically 8%, 9% per quarter. This is the reality of what we see.

The second thing we see is a stronger dollar, and because of the stronger dollar, we obviously have lost some comparison in the second quarter. Net our stronger business results than expected are compensating for some softening in the base market and for the stronger dollar, but we don't see any weakness in our business. Actually we are building market share in the large majority of the strong markets of the world accounts, and namely we are winning big in China, which is our top priority. We are winning big in travel retail, which is our key profit driver, and we are building market share in Europe where the overall growth is softer, but we are building some significant market share in strong markets like France and Italy that will be fundamental for our future. And then, as you heard from Thia, our biggest market, North America, is in excellent shape.

And just following up on that, China specifically I think you said the growth was 44%, which is a sequential acceleration, not only just from the first quarter but from all of last year. I mean is there a point where law of large numbers is going to kick in, and we should think of China as a considerably slower growth market, or do you still think you are talking 20%, 25%, 30% type percent growth rates there for some time to come, albeit in a maybe slowing economy, but the fundamentals of the category, do they still remain that robust?

Yes, we see China remaining very robust. I mean it is a country that is probably having a GDP that will go from 10% to 8%, which we feel is still very robust. And our same door growth in China was 14%.

So we see this market to continue same door, probably in the high single digit to double digit. But because of the expansion of a number of cities of new consumers that become more affluent enter the category and because importantly of the continuous increase on traveling Chinese consumers, we see that China and China's consumers will continue to be a very strong growth driver of our market. Despite that, we are assuming some point of softness in the same door growth that China will deliver in the next year or two that is what happened in the last couple of years. But this will not change in any way the fact that China will be fast-growing and a very important part of our business.

Lauren Lieberman, Barclays Capital.

I just wanted to follow up on some of the launch activities. So I guess the first thing is in the press release it sounded like there was some spending that even happened in the second quarter to support upcoming Q3 launches. Then you have obviously talked about the big investment in Q3 specifically. So could you just give us -- I know there is the European global -- the global skin care product, there is the advanced night repair anniversary, but what are some of the big ones we should be watching for? And are the timing of those kind of mid to end of the quarter, or are they kind of a full-quarter benefit?

So we will be launching products in every quarter. It is clear that the third quarter this year contains a couple of very important launches that were not present [and equally strange] last year. That is why we see a particular increase in advertising in the third quarter. And I mentioned in my prepared remarks, that the Supreme Creme of Lauder in Europe is obviously a very important one that makes a big difference. But also the Clinique launches in foundations and Clinique newly created support for makeup, which is not going to pay out very well, is also another one.

But to really correctly answer to your question, I want to clarify that in every single quarter this fiscal year we are spending more in advertising, merchandising and sampling than the previous year. It is just that this differential last year was pretty important in the fourth quarter, while this year the biggest differential is in the third quarter, and this is because of calendarization of our launches, but every single quarter we spend more in advertising versus last year.

Okay. Great. Is the Supreme Creme launch is that also in the UK, and is the hope that that helps re-accelerate the business? Because I know surely macro concerns, but it was a pretty big deceleration sequentially in the UK. So what is the thought there over the next year or so?

Yes, also in the UK, we have very, very important launches. The Supreme launch will be first in Continental Europe, and then we will decide how to expand it in other countries. But in the UK, there are a set of very, very promising launches in the next six months as well. So it is a strong, solid program.

The UK market, by the way, is part of the markets where we are referring to when we say that we see softness in Europe. Also, we see some softness in the UK market. But, again, I'm trying to use the right words. We don't see any collapse in markets. We see softness. And to clarify the softness, we see the markets growing one or two points below on what we originally expected because of the current consumer feelings and political turmoil, but no more than that.

Nik Modi, UBS.

Fabrizio, can you just give us some perspective as you think about the next couple of years, is there a cap on the spending level? Are you targeting a certain percentage from the sampling at an advertising standpoint? I'm just trying to get a sense in terms of the incremental spend over the next couple of years and how you are looking at that. Thank you.

Yes, there is obviously -- we are targets in terms of percentage of sales of what we believe will be reasonable for the advertising level. But I want to explain the dynamic or the way we are increasing advertising spending. If you look at our cost structure, you will see that every single cost line is going down, except for advertising, merchandising sampling, which is going up. And then, as you know, we are investing in SMI many systems, and we are investing in some new capabilities in the area of R&D, digital and consumer insights. But the real big investments are advertising in SMI.

All the rest is we are saving money. The second element to understand is that when we say that we reduce promotions, which are we actually doing so that we can invest more money in advertising, you will see the impact of production -- of promotions -- sorry, reductions in cost of goods.

And so when you see gross margin continue to progress very well, this includes also a reduction of promotions. While, on the contrary, the increase in advertising is all visible in the OpEx line. That is why the -- part of the gross margin improvement is in reality also allowing an advertising increase because it is exactly about this switch from promotion to advertising that we are driving locally.

Alice Longley, Buckingham Research.

My question is about your operating margins. If I adjust out the forward sales of $30 million and operating profits of $23 million, I'm backing out adjusted operating margins that are basically flat with a year ago at 21.5% or so. I'm wondering why we are not getting margin expansion, that's such an important part of your story, and what I should expect on an adjusted basis for the second half?

Sure. And that is one of the reasons that we went through that sort of lengthy explanation of the sales shifts, and I think that Dennis can certainly refresh you with those numbers if you want to give him a call.

But, I mean if you look at our fiscal year, we are growing our sales 9% to 10% in comparable currency. We have a 150 basis point gross margin improvement, roughly a 100 basis point improvement in operating margin, a 20% growth in EPS, and $1.1 billion of cash flow. So we think those numbers in total are actually a very solid year, and we are not overly concerned about the third-quarter operating margin. It is really due to the factors that Fabrizio is explaining from an (inaudible) (multiple speakers).

No, I'm talking about the second quarter, the one you just reported. If you take out the $30 million and $23 million that were forward shipments and the profits on those, it looks like your operating margins were not up in the second quarter.

Again, in the first half of the year, I think our profitability increased by about 25%. So I don't think we want to get too hung up on a quarter quite honestly. And, you know, that we have always treated our business on an annual basis, and this year, in particular, because of a lot of these shifts, I don't think it warrants any more explanation honestly.

Okay. And then my other question is about fragrances. I understand you are shrinking that business very intentionally. Should we assume it continues to be flattish, or are your launches going to make it start growing in the second half?

Well, I think we mentioned in the prepared remarks that the fragrance grew 11% in the quarter last year, and this year was slightly down. We continue to strategically think about our fragrance business with the long-term objective of eventually gaining market share and turning that business around to grow in a profitable way. And I think that some of the activities that you have seen that have happened have been focused on the reductions of promotions around the fragrance business, which has dropped our volume somewhat, especially during at Christmas time. But we think the long-term it is a smart move to make and the right strategy for the category. And we should see some increase due to launches and some other activities. In the second half of our year, we will see some growth.

Chris Ferrara, Bank of America/Merrill Lynch.

On the fragrance piece, I just want to get a little clarity. I mean is this a situation where it is kind of like two steps forward, one step back? I mean there was some low-hanging fruit to capture in fragrance, and now you have to retrench a little bit and make some more structural change before we see a better trajectory going forward, or am I making too much of one quarter in a tough comp?

I think you are making too much of one quarter. The simple thought is, again, look at the year. In the year we will continue making some decent progress. However, also this year, by the way, it is not finished. We are trying to make our fragrance mix even more efficient, which, again, is also about making less of a promotional business and more of a business driven by great fragrances and great equity and profitable. Obviously the period of the holidays, meaning the November/December period is where the large majority of the promotions are concentrated.

So if we need to do these strategies, which in front promotion, you will see a bigger impact in our second quarter than in any other quarter. So please don't attach so much to the quarter movements in a business like ours because we are trying to drive some fundamental strengthening of our business model, and this really does not happen month by month, but we need to look at this as a year.

Caroline Levy, CLSA.

A couple of questions. One, is it possible to quantify what Russia did to sales and profit in the region and whether you think that will come back in the next quarter or two or if it is a permanent reduction or there is something wrong with the retail climate there? So a little more flavor on Russia.

And then secondly, just on fragrance, it does seem that the category grew very strongly in North America and Europe last year, sort of unexpected recovery. Do you want to play bigger? Do you need to play bigger behind some of the more mainstream brands? Are you reevaluating that strategy at all?

Yes, the answer is yes. Let me start with your second question. Yes, the category has started growing again very nicely, and we want to continue playing in this category and making this category being profitable for us and growing nicely for us in the future. But a key point is that we want to play in this category more and more in the future but profitably. And that is why we are focusing on a new strategy on our Estee Lauder and Clinique brand, and we will continue building our ADF brand on our key designs. We have added three designers that we believe will be very strategic to our business, and particularly we believe that Marni and [Zanium] will be very strategic in Europe and Asia, and the addition of Tory Burch very strategic in continually revitalizing our North American business.

So the combination of our existing designer, plus the new designer, the new strategies on Lauder and Clinique. And finally, I should add a very successful trend on our high-end, meaning Jo Malone and Tom Ford. The combination of this will definitely build more strengths to our fragrance business in the future, and that is our firm intention.

But profitably, not promotionally, but even so probably you will see us playing less aggressively in areas like big holiday season, big promotional moments and more aggressive in sustained fundamental growth.

On Russia, yes, Russia is -- our retail in Russia has been outstanding, frankly, in the quarter. And the market has continued to grow very nicely, and the market share of our brands has been growing. So Russia in the quarter is really specifically attributable to one big retailer deciding a destocking action, and we believe that this will be over time going away.

And just two things to add to that. One is that you will see that we will grow our profits faster than our sales in the fragrance category, which is our objective long-term just as Fabrizio described. So you will see that result this fiscal year. And Russia in total is a little over 1% of our Company's business. So I just wanted to make you aware of that.

Connie Maneaty, BMO Capital Markets.

Can we talk a little bit about the change or the reduction in turnover amongst US sales? I forget what you call them, the people who work in department stores. A few years ago I remember that that number might have been as high as 75%. So can you discuss how it is changed over time, and what the sales and profit impact of that change is?

Sure. And you remember correctly, it was in this upper 70s in terms of the turnover of our beauty advisors. So, first of all, the department stores are our primary channel in North America, and we have high touch beauty advisors, makeup artists, Clinique consultants which are key drivers of our growth. And we have seen 18 months of solid growth, which we believe will certainly continue. And department stores have been great supporters of our strategy in terms of high touch and in terms of beauty advisors and moving more customers from mass into prestige.

So when we talk about the high touch we have, we have invested in terms of point of sale in our overall imagery, and the consumer has responded. And whether it is Clinique's "Service As You Like It" or the Estee Lauder foundation finder, this consumer loves what she is seeing at the counter and she is responding. And certainly this turnover reduction has been very much by design.

We have incorporated a much more -- with the North American affiliate, a much more consistent approach to interviewing. We have had much lower turnover as a result of that, and you are right, it is the lowest turnover that we have seen in a decade, which makes it more efficient for the field. They spend far less time trying to recruit and hire and develop the counter staff, if you will, and it is a much more pleasant experience for our consumers as well because they come back to the counter and see the same person. So this high touch and the reduction of turnover has been a key component to the kind of growth that we have seen in North America.

Linda Bolton, Caris & Company.

On the fragrance business, in terms of potential structural changes in the business, that business, part of it for you is a heavily licensed business as the whole industry is. It is there anything coming up in terms of license renewals or points at which you might renegotiate things that could step-wise change the profitability of the business?

These -- as I said, we just got three new license agreements. Those are very important because I have concluded that we are already working on these projects. That is the biggest change in our portfolio.

Apart from this, our focus now is to make our existing designers become more and more successful, is to build a great business for the new designers that entered our portfolio, and, as I said, continue building aggressively on our high-end part of the portfolio, Jo Malone and Tom Ford, and revitalizing our cosmetic brands, Lauder and Clinique fragrance business.

Javier Escalante, Consumer Edge Research.

I would like you to expand a little bit on what is happening in travel retail and if you can help us understand the sustainability of these implied increasing conversion rates that you are seeing since the June quarter?

If I have my numbers correctly, shipments grew 15%, lapping 45%, and last year you shipped 35% when air passenger traffic was also up 5%, accelerating from the 10% we saw in the June quarter. So do you have enough visibility of our consumer takeaway at duty-free counters and of their level of product inventory? My concern is whether you may be overstating these conversion rates and, therefore, creating a risk of product returns or inventory write-offs in the future?

No, I think we are in very good control. Travel retail is one of our most -- it is clear well managed channels, and we are very well in control of our shipments, and we have a very tight relationship and understanding of the stock level in our retailers. Our actual quarterly result has been plus 15% in this channel after last year plus 45%, I think.

Yes.

So on a very, very difficult comp. So amazing results, if you look at the two years. And also keep in mind that the traffic increase, which is the key benchmark, was in the quarter about 5% or 6%. So we have been growing 3 times traffic, which means we have been continuing converting people at the plus 15% after a plus 45% last year.

Also, as I explained in other times, in travel retail we are building huge market share because the increase of traffic is in travel retail is mainly driven by Asian consumers, which are very keen of skincare makeup and in the travel retail channel, our market share in skincare makeup is definitely more significant than the one in fragrances.

So basically the market is growing in our direction, and that is why it is a combination of classic growth, plus consumer conversion, plus market share growth that we see in our numbers. And obviously, if you look at the actual year to date in travel retail, our number is plus 24%, and the estimate for the full year is still well above 20%. So it is a very solid channel and a solid channel growth, well ahead of increase of traffic.

John Faucher, JPMorgan.

I just wanted to clarify something you had talked about earlier, when you talked about some of the softness in the category, I think a couple of times you said you were doing better. And so I guess I was trying to figure out, is that better -- meaning you are still gaining share, growing faster than the category? Is that better on an absolute basis sequentially? So could you clarify that comment for me? Thanks.

Sure. I think that actually means both of your comments. We are raising our 8% to 10% forecast for our sales to 9% to 10%. So basically we believe that our topline will be strong and largely less risky than we considered in the previous call.

So we are stronger believers, so the better is better than what we believed before in terms of risk in this case because we are only taking out the bottom part of the guideline. And better versus competition because we are growing market share in every one of these markets and better in terms of GAAP versus market. Meaning before we were expecting to grow in every quarter to know after reconciliations, 8% to 9% in a market that was growing 4%, and now we continue to grow 8% to 9% in a market that grows 2%. So better versus the market. So better versus the market, better versus competition, and better, slightly better at least in risk assessment versus our previous guideline.

Bill Schmitz, Deutsche Bank.

In terms of the China commentary, can you elaborate on that? Is it really just the GDP slowdown? Because I think the comment was mindful about conditions that could slow growth in China. So is anything beyond just the potential GDP slowdown?

No, again, we don't see any risk -- big risks in consumption increases in China. We are speaking about slowdown, it was slowdown meaning sales in same doors or in markets, which within China are pretty well developed, like Shanghai, Beijing and some other big cities.

So, and again, slowdown means that the doors that were growing at 12%, 13% now are growing at 8% and 9%. So, again, softening is the right word or slow down, but it is nothing that is worrying.

The point, as I already explained, is for us, even if there is few points of slowdowns in the overall consumption in same doors, the opportunity for growing distribution and to reach new consumers is so strong that we still believe that China for us will continue to be a strong contributor to growth.

And, by the way, we are speaking now the next year. But, then in the long term, I want to clarify this is even more true. I believe China and Chinese consumers in general will be, if you take a three to five years look, will be by far the strongest drivers to growth in the category globally.

That concludes today's question and answer session. If you were unable to join for the entire call, a playback will be available at 1.00 PM Eastern time today through February 17. To hear a recording of the call, please dial 855-859-2056, passcode 41305126.

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.