雅詩蘭黛 (EL) 2015 Q3 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Companies FY15 third-quarter conference call.

Today's call is being recorded and webcast.

For opening remarks and introductions, I will turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea.

Please go ahead, sir.

Good morning.

On today's call are Fabrizio Freda, President and Chief Executive Officer, Tracey Travis, Executive Vice President and Chief Financial Officer, and Dennis McEniry, President of ELC online.

Dennis will discuss our current online business as well as future opportunities.

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.

Our discussion of our expectations for the Fourth Quarter and full Fiscal Year are before the impact of accelerated retail orders that took place in the fourth quarter of FY14, due to the July implementation of our Strategic Modernization Initiative, which would have occurred in our FY15 First Quarter.

You can find reconciliations between GAAP and non-GAAP figures in our Press Release and on the Investor Relations section of our website.

And I'll turn the call over to Fabrizio.

Thank you, Dennis.

And good morning, everyone.

Our Company delivered an excellent performance in the third quarter of FY15.

With broad-based gains across most brands, China and regions.

Our net sales rose a strong 8% in constant currency, exceeding the top end of our expectation by more than 1%.

Sales leverage and cost management drove our earnings per share, which climbed a robust 49% in constant currency, also surpassing our expectations.

Importantly, we achieved these strong results despite some ongoing market challenges.

One of the more difficult environments was Hong Kong where the expected recovery did not materialize due to continuing political protest and fewer travelers from Mainland China.

Additionally, change in travel patterns caused by currency swings negatively impacted trial retail trends in a number of countries, Brazil, Russia, Turkey, and Hong Kong in particular.

Economic growth in the European region was largely improved.

Through our focus initiatives, we outperformed the Markets in the region and delivered robust gains.

Thanks to the multiple growth engines we have developed and our proven ability to execute through many challenges, we expect the pace of our constant currency sales growth to continue in the Fourth Quarter.

Our strength will continue to be driven by both new launches as well as acceleration of compelling products and services that are already resonating worldwide.

As FY15 draws to a close, recognizing the progress we have made, we are increasing our constant currency sales growth forecast to 6% to 7% for the full year.

On the bottom line, we are raising the floor of our constant currency EPS guidance range, which increases our mid-point target.

Also, our EPS guidance includes dilution from acquisition-related costs.

We are using our better than expected profit this quarter impact for incremental investment in the Fourth Quarter.

These investments will drive Estee Lauder and Clinique's turnaround plan in the US and support business building capabilities.

We also expect investment spending to continue to drive gains in some of our best performing areas, including the UK, Europe, China, and our luxury brands.

Additionally, Mac is accelerating free-standing store opening.

The improving trends we saw in the third quarter give us the confidence to spend more in the final few months on initiatives that we expect to carry our momentum into FY16.

Global prestige beauty is one of the most vibrant areas in the consumer product space.

It has provided consistent annual growth, currently mid-single digits.

Some areas are growing significantly better than the average, so we are overemphasizing those.

For example, some of the fastest growing product areas are contouring treatments and [cremes], facial [eyes] and masks, eye and lip makeup, and high-end fragrances.

Additionally, when consumers shop, they are increasingly attracted to [E&M] commerce sites (inaudible) source.

Geographically, we see significant opportunity in most emerging Markets.

Recently Europe has begun to improve, and in the US, the mid-cap category is thriving.

We are strategically positioned to win in each of these large higher-growth areas, by brand, product category, geography, and channel, which led to our strong growth in the quarter, well ahead of the industry average.

We believe we have just started touching the potential in many of these areas, and we are finding ample room to drive our business.

Our successful efforts in developing a broader profile with multiple engines of growth and fashion into more beauty trends were evident in our results.

Even at a time when two of our biggest brands did not grow at acceptable levels in our largest market, the rest of our business more than compensated, fueling robust sales growth for the Company.

Our broad based portfolio is a clear strategic advantage.

Brands such as M.A.C., Joe Malone London, Smashbox, Bobbi Brown, or Tom Ford continue to be power engines of growth, generating double-digit sales gains.

In fact, nearly half of our brands achieved at least 10% growth or more.

In the US, a majority of our brands achieved a very strong performance.

Many of our products are perennial best sellers.

We had growth across most channels with healthy retail sales in specialty multi, eCommerce, and free-standing stores.

Nonetheless, Estee Lauder and Clinique's sales growth in the US Department Stores lagged behind prestige beauty growth in the market.

As you know, we've been working to reign in stronger growth in these brands, and we have new exciting programs being deployed now and over the next 12 to 18 months.

Clinique is taking a holistic approach.

Its major launches earlier this Fiscal Year were successful higher-priced skin care products, and now the brand is also emphasizing its sizeable makeup business in the US and seeing encouraging results.

For consumers, makeup provides instant gratification and fresh new looks.

For Clinique it offers more exciting opportunity for entry-price products, which attract millennial and fits with the brands heritage positioning.

Clinique's spring makeup launches are in the important categories of foundation and lipstick.

Launched in February, Beyond Perfecting foundation and concealer is helping to drive the entire makeup category for Clinique, which grew again in the US in the quarter.

Clinique is number one in foundation in its home market.

The brands other exciting makeup launch, Clinique pop lip colour and primer, feature an accessible price point in a case that [displays] the color inside.

Clinique expects its new [lipstick] product will further accelerate its lipstick sales, which are projected to be up double digit in the US this Fiscal Year.

In both skin care and makeup, Clinique is launching products that play to its strength and reinforces leadership in key subcategories.

One important area for the brand is moisturizers, where it holds the leading position in prestige beauty in North America.

To further strengthen its authority, Clinique is launching this fall its first creme in its best-selling, dramatically-different moisturizing line by adding a formula geared to consumers with dry skin.

The new creme should generate incremental sales in its powerful core franchise.

We believe the brand is beginning to attract more millennials through these new makeup and skin care products.

And at the same time it is engaging consumer with fresh advertising, communication, instant merchandising, and new services.

The Estee Lauder brand is modernizing its image and reaching out to a wider demographic, while continuing to serve its core consumer with significant new products.

It has had successful this year with several makeup products and expects this strength to continue with Kendall Jenner, the brand's millennial spokesmodel.

In the Fall, Kendall will appear in digital, print, and TV advertising for an exciting new fragrance called Modern Muse [Le Rouge], which [stands] the inspirational concept behind the Modern Muse franchise.

She will also promote our [cami] makeup products, which will be discussed during our next call.

Makeup and fragrance had a good record and category for younger consumer.

The most exciting development at Estee Lauder is its next major launch, a new franchise of transformative product that creates visible definition for a beautiful, more contoured looking face, which is an important new beauty trend.

Named New Dimension, the collection includes a concentrated serum, a liquid tape precision treatment, and contour kits for face and eye.

The actress, Eva Mendes, will be the face of this new skin care product in digital, TV, and print advertising.

New Dimension is targeted to global consumers of multiple ages and ethnicities.

The line launches in North America in July followed by international market in September and additional product we roll out later in the year.

We expand New Dimension to create a new sub category for Estee Lauder brand for core consumers.

Let me now discuss our total international business.

We continue to successfully execute our emerging market growth strategy, which is progressing well.

In total, local currency sales from all energy Markets, aside from China, climbed 29%, with exceptional results in Brazil, Turkey, and South Africa.

In some Markets, such as Russia, devaluated currencies reduced outbound travel creating more local demand and sending sales up sharply.

M.A.C.

is our largest brand in many emerging Markets including Brazil, Turkey, or the Philippines, and its strong gains in these countries contributed to its stellar global growth.

M.A.C.

is now available in more than 100 countries and territories, and we entered four new Markets only this quarter.

China continues to be an area of strength for us.

Our constant currency net sales climbed 14%, and most of our brands were up double digits.

Although skin care remains the dominant category, makeup has seen rapid acceleration, allowing us to leverage our position as the worldwide leader in prestige makeup.

Our total retail sales in China rose high single digits for the quarter, and we estimate we gain share overall.

Sales increases were broad based across our brands with several up double digits, including Clinique.

Sales also rose in nearly all channels, including Department Stores, freestanding stores, and Sephora.

Today, China's consumer can buy our products in brick and mortar stores in 94 cities, three more than last quarter.

The most rapid growth, however, was online where our business more than doubled.

Our travel retail business improved, despite several challenges.

Retail sales climbed 7%, slightly higher than [passage or traffic] growth, which remained robust.

The strongest retail gains were in Asia Pacific led by Japan, which benefited from tourists attracted by the weak Yen, as well as [talent] for Australia.

We believe we gained share in travel retail in calendar 2014, driven by accelerated growth in certain limited distribution brands and improving business in Europe, the Middle East, and Africa.

We continue to add distribution points and invest in the channel to help fuel our future growth.

Online China continued to show exceptional progress this quarter and is a key element of our long-term growth strategy.

Our brands will benefit from the best-in-class capability we have established in this rapidly growing area, from both retailer expansion and our continued brand site's development.

Dennis will discuss these exciting opportunities for E&M commerce.

As we continue to demonstrate, we have significant growth drivers through our business, and I'm particularly excited about the long-term potential of the four brands we recently acquired.

We are integrating them into our operations and developing strategic plans for their future.

They have started tapping into our capabilities and infrastructure to leverage their creativity and growth potential.

During the quarter, we continued to improve our productivity, manage our expenses, and delayed some planned investment spending until the Fourth Quarter to fuel new initiatives.

Tracy will provide more detail.

We are pleased with our results to date in FY15.

We are confident we will achieve our full year targets, even in face of continued headwinds, and remain optimistic about our long-term strategic direction.

We are currently in the process of updating our compass, our ten-year view of the prestige beauty landscape that will provide insights to fuel our multiple engines of growth and propel our business forward.

Our goal is to continue to generate superior top line growth above the industry average and leverage that growth into increased profitability in order to announce stockholder value.

Now, I will turn the call over to Dennis McEniry, who has lead the Company's highly successful and profitable online division for the last 12 years.

Under his leadership, eCommerce has grown from its infancy to a striving business that will constitute approximately 8% of our Company's sales this year and an even greater portion, approximately 12%, in our most developed Markets.

Dennis?

Thank you, Fabrizio, and good morning, everyone.

We have been a leader in online prestige beauty and consistently delivered outstanding growth year after year.

Our compounded annual growth rate over the past five years was 25%, with an accretive margin to the Company.

Our global technology platform combined with the regional and local market execution has allowed us to serve consumers at the local level with global business scale.

The online beauty channel continues to grow, and we are well positioned to capitalize on this opportunity.

Consumer preferences are shifting, and more and more people are comfortable shopping online and via mobile for beauty products.

We are committed to bringing our high-touch services online to meet those changing consumer needs.

We were the first global prestige beauty Company to go online with the Clinique brand in the US in 1996.

Today, we have more than 130 direct-to-consumer E&M commerce sites in 30 countries.

Together with our Marketing sites, we attract over 325 million online visitors globally each year.

Our direct-to-consumer sites generate approximately 60% of our global online sales, with retailer sites generate the remaining 40%.

Both are contributing growth of over 25% a year.

This year, we are seeing strong growth from retailer sites such as Nordstrom and Macy's in the United States, John Lewis Partners in the UK, and [Du Glias] in Europe.

We greatly value our partnerships with all of our retailers around the world.

And together, we share best practices and explore ways to win in the growing online business and the new world of OmniChannel.

In aggregate, our online sales are expected to grow nearly 30% this year, an acceleration over our previous five years, with double digit growth across all regions.

North America accounts for approximately 65% of our sales.

The US is our most established market and often leads in experimentation of conversion driving enhancements before they are rolled out to international sites.

From the very beginning, we've been focused on bringing our signature high-touch service from in-store to online.

It is important to us that our consumers can engage with our beauty advisors and makeup artists along their digital shopping journey.

Many of our brand sites feature live video chat with beauty advisors, integrated content and commerce, enhanced product browsing, photo uploads, skin care diagnostics, shoppable videos, auto replenishment, and more.

These enhancements not only support our mission to deliver our best high-touch service to our consumers, they also successfully drive engagement and conversion to sales.

Internationally, the UK is our second largest market, contributing approximately 15% of our global online sales with particularly strong momentum from M.A.C., Bobbi Brown, Jo Malone, and Clinique brand sites, as well as a number of our important retail partners.

Asia Pacific, Europe, and the Middle East and Africa, and Latin America, which contribute the balance of our online sales, are collectively growing over 50% year-over-year.

While many Markets in these regions are relatively new entries for us, and are currently small, they are experiencing high growth, and we are excited about their long-term potential.

Emerging Markets continue to be a key building block for our international growth.

China is our third largest online market.

We are on track to more than double our online sales in China this year.

In addition to our six brand sites, we have four shop-and-shop sites on TMALL.

Estee Lauder is the number one prestige beauty brand on TMALL, and we are excited that La Mer became our fourth brand on the platform a few weeks ago.

All four of our brands on TMALL are greatly exceeding our expectations, and we plan to launch additional brands there in the near future.

Virtually all of our brands are growing double digits online globally.

We work closely with them to support product launches and insure online is used as an engine to drive buzz, product information, and sales.

Beauty is one of the most active categories online with countless searches for products and how-to videos.

Beyond our brand sites, we strive to remain active, relevant, and innovative in social media in order to drive engagement.

A terrific example is our I-love-makeup channel on YouTube, which features our companies products, makeup tutorials, and video storytelling.

It is the most subscribed beauty channel on YouTube of any brand with 30 million views.

We are experiencing strong mobile growth, with some Markets generating more than half of their online sales from mobile phones and tablets.

Across all regions, sales growth from Mobile Devices has greatly exceeded sales growth from PCs.

To capitalize on the consumer shift to mobile, we have expedited the launch of M-commerce sites around the world and have developed strong capabilities to win in the mobile space.

OmniChannel is a strategic initiative for the Company to enhance consumer shopping experience by allowing them to seamlessly move across channels.

We are in the early stages of developing our OmniChannel concepts.

This quarter, we plan to launch OmniChannel pilots with M.A.C.

and Origins free-standing stores in the US, with more to follow in the UK and internationally, then, next Fiscal Year.

We remain excited about the future of our online business.

We have developed a strong business model for E&M commerce with winning capabilities and teams.

For example, we're able to take our learnings from M.A.C.

in existing Markets and use them to maximize our launch in new Markets, such as M.A.C.

in Brazil.

We will continue to launch new Markets, expand our brand distribution in existing online Markets, and win with our retail partners.

As we continue to fuel growth in online and drive OmniChannel initiatives, we believe we will see significant opportunities ahead of us.

In closing, I would like to thank my colleagues and the Company and our retail partners worldwide for their continued partnership.

I will now pass the call over to Tracy.

Thank you, Dennis, and good morning, everyone.

First, I will review our FY15 Third-Quarter results and then share our expectations for the fourth quarter and the full year.

My commentary excludes the impact of the Venezuela re-measurement charges that we recorded in both this quarter, as well as the year-ago quarter.

Net sales for the third quarter grew 1% over the prior year and rose more than 8% in constant currency, above the top end of our expectations.

Sales did accelerate sequentially from last quarter, as we expected, driven primarily by improved results in the US, Latin America, China, and most of Europe and the Middle East.

Our recent acquisitions contributed 50 basis points to sales growth this quarter.

Our businesses in Hong Kong and travel retail continued to be softer than expected, as Fabrizio noted earlier.

Our gross profit margin of 80.5% was 10 basis points above the prior-year period, primarily reflecting currency favorability of 20 basis points.

Operating expenses improved 60 basis points to 64.9% of sales.

The largest drivers of the decrease were 70 basis points of favorable selling and shipping expenses and 40 basis points of advertising, merchandising, and sampling expense leverage, as we continue to experience faster growth from brands with less traditional advertising, and those brands have become a greater proportion of our total sales mix.

Partially offsetting these improvements were increases in certain G&A expenses, such as retail store operations and information technology, as well as acquisition related fees.

During the quarter, given a mixed retail environment in certain Markets, including in part due to the severe winter weather conditions in the US, we were also more prudent during the quarter in some areas of our planned second half of the year spending, which contributed to the lower operating expense margin and which will also contribute to an acceleration in spending in Q4.

As a result, operating margin rose 70 basis points to 15.6% in the quarter.

Earnings per share came in at $0.72, approximately $0.22 above the top end of our guidance range due primarily to better-than-expected sales and to the timing of certain investment spending in general and administrative costs.

EPS would have been $0.10 higher on a constant currency basis for the quarter.

All elements of working capital continued to improve during quarter compared to the prior year.

This was largely driven by continued progress in inventory days-to-sell, which decreased by 28 days to 164.

The primary drivers of the improvement in inventory were a combination of favorable currency translation, supply chain process improvements, and a favorable comparison to the preliminary SMI-related inventory build in the prior year.

For the nine months of this Fiscal Year, we generated approximately $1.4 billion of cash flow from operating activities, an increase of 18%, or $216 million versus the prior-year period, most of which is driven by working capital improvements.

We invested $280 million in capital projects, largely in customer facing areas, such as counters and new retail stores to support our brands growth plans.

During the third quarter, we completed the acquisitions of GLAMGLOW and Frederic Malle, bringing the total pay for acquisition costs this Fiscal Year to $237 million, which we funded with a combination of cash on hand and commercial paper, leaving our free cash flow to be distributed back to stockholders.

And regarding return of capital to stockholders, for the nine months ended March 31, we deployed $626 million of cash to repurchase approximately 8 million shares of stock, reducing our diluted shares outstanding by approximately 7 million shares from the prior-year period.

We also distributed $260 million in dividends to stockholders, which was a 15% increase over the prior-year period.

We continue to expect to distribute approximately 100% of our free cash flow and share repurchases in dividends by the end of this Fiscal Year as another vehicle to enhance stockholder value.

Let me now turn to our outlook for the fourth quarter and for the full Fiscal Year.

My commentary for the full year continues to exclude the impact of the acceleration of retailer orders that shifted sales from the first quarter of FY15 into the fourth quarter of FY14, related to our July rollout of SMI.

The impact of that shift was $178 million in sales and $127 million in operating income, equal to approximately $0.21 per share, and it affects comparison of both the fourth quarter and the full Fiscal Year.

With two months to go to the end of our Fiscal Year and the momentum we built in the third quarter, we are raising our sales estimate and now expect sales growth for the full year of approximately 6% to 7% in constant currency.

This includes 30 basis points from our recent acquisitions.

The US dollar has continued to strengthen since we provided guidance last quarter, and currency translation is now expected to negatively impact our full-year sales growth by approximately 5 percentage points, equal to $550 million in sales.

Our estimate for the remainder of the year assumes [1.08] for the Euro, [1.50] for the pound, and [1.20] for the Yen.

Our sales growth guidance, including the negative currency impact, is approximately 1% to 2%.

We are narrowing our full-year EPS range to $2.92 to $2.97.

This compares to our FY14 EPS of $2.95 before charges and the accelerated orders.

The 5% negative currency impact on sales equates to approximately $0.27 of earnings per share, $0.04 more than our last update.

In constant currency, we are raising the low end of our range and maintaining the high end of our previous range.

On this basis, EPS is expected to rise between 8% to 10% for the year.

Our EPS guidance continues to include approximately $0.06 of dilution from acquisitions.

Our sales in the Fourth Quarter are expected to grow 7% to 8% in constant currency, or flat to down 1% on a reported basis.

The strong constant currency sales growth in the fourth quarter is expected to come from new product launches from Clinique and Estee Lauder in both skin care and makeup, as Fabrizio mentioned earlier, incremental growth from our previously announced acquisitions, continued acceleration of growth in North America, continued strong momentum from M.A.C.

and our other makeup brands, and an easier comparison in Japan against the past [vat] increase of sales period in the prior year.

We are very pleased with the overall course of our business thus far, as we have managed through a tremendous amount of Global Market volatility by continuing to execute well against our strategy and by leveraging the strengths in our portfolio, creating accelerated momentum in the second half of the year versus the first half.

We expect mid to high single-digit constant currency sales growth in the fourth quarter, and we are committed to reinvesting behind our strategic priorities.

We planned a meaningful increase investment in our fourth quarter behind both our current and upcoming product launches, as well as to support accelerated door opening activity in particular for M.A.C.

We also expect to continue our investments in building capability in areas such as information technology, R&D, digital marketing, and human resources.

Lastly, the fourth quarter will reflect $0.03 of acquisition-related activities.

We anticipate fourth-quarter EPS will come in between $0.27 and $0.32.

The approximately 8% negative currency impact on sales growth in the quarter equates to approximately $0.10 per share.

In closing, we are pleased with our team's ability to navigate major macro headwinds and deliver strong operating results, and we believe we are well positioned to deliver great results for this year, as well as position ourself for another strong year of growth in the next Fiscal Year.

And with that, we conclude our prepared remarks, and we'll be happy to take your questions now.

(Operator Instructions)

Our first question today comes from Steve Powers with UBS.

Hi guys, good morning, thanks.

I guess I was hoping you could start by just providing a little bit more clarification around that full-year guidance.

Because I understand the incremental FX headwinds, but in light of the large beat this quarter and the progress you seem to have made offsetting M&A dilution, the full-year outlook basically implies you plan to reinvest the entirety back in the business in Q4.

I know that was, in part, a timing decision, because you alluded to it, but could you just talk more about where the investment will be targeted?

And what type of return we should see, because it's a little surprising not to see more of the beat flow through, given the underlying top-line strength?

And then while you're on the topic of guidance, I know this second part may have to wait until August for a full update.

But FX seems to be taking a pretty big chunk out of your planned margin progression, again, based on this full-year outlook.

So I'm wondering what kind of risk that poses to your longer term target of 17.5% EBIT margins by FY17 as you look forward?

Thanks.

All right, Steve, great questions.

So one of the things that we have done historically -- and I think many of you recognize that -- is in the fourth quarter, if we are having a good year and generating incremental savings, not only from our cost savings initiatives, but also from the momentum of the business, we take the opportunity to invest behind some of the strong growth drivers that we have to, not only end the year strong, but also position ourselves for the upcoming Fiscal Year.

So that is what we plan to do this year.

So the fourth-quarter investment is a combination of planned investment that we had targeted for in the second quarter, that if the third quarter was strong, we would reinvest back into the fourth quarter in those brands that are showing momentum.

So that's a piece of it.

And the other is, as I had mentioned in my prepared remarks, we were a bit prudent in the third quarter, recognizing that we had some weather challenges in North America.

And we were expecting an acceleration in sales, so we wanted to make sure that that momentum occurred before we spent as heavily behind some of the marketing programs for the new product launches that we had in the third quarter.

And obviously, the third-quarter results that we just announced support that.

So the fourth quarter contains continued support around the turnaround plans for Estee Lauder and Clinique.

We do have new product launches again in the fourth quarter, and we'll be supporting both the launches we did in the third quarter, as well as in the fourth quarter, with that investment.

We have additional investments supporting the momentum at M.A.C., Tom Ford, and Jo Malone, again in line with the tremendous growth that we've seen out of those brands this year.

We did have a bit of a delay in some of the M.A.C.

store openings that we had planned in the third quarter, and we'll now have a fair amount of M.A.C.

store openings opening in the fourth quarter.

So that's also putting some additional investment pressure on the fourth quarter.

And then we'll continue to invest in some of the corporate capabilities that we have outlined for you all year.

We have a ramp up in spending in R&D, information technology, HR, and in digital.

So those are generally the areas.

Regarding our outlook over the next couple of years, you're correct.

We will, in August, update what the impact of foreign exchange has been on our long-term outlook.

And, Fabrizio, I don't know if you want to add anything to that?

Yes, we will update then, but you asked to get a sense of the situation.

We have today a 0.4 point of margin.

We should be set to buy the acquisitions.

Just want to clarify, this is going to be about 15 months input, so it's not a long-term input because at the end these acquisitions will be over time margin accretive.

And the costs of the acquisition will be reabsorbed in the demand.

So the impact on currency [that you are in] today is about half a point, if currency, if we had to go back to the currencies.

And we are working internally to look at way in which to operate this with more savings or other activity that will probably -- we plan to work around this current currency situation.

And by the way, the currency in the long term could also change again.

So we don't know, and so we will come with a point of view in August on what is the right balance for the future.

Our next question is from the line of Caroline Levy with CLSA.

Good morning, thanks very much.

Love to just discuss the online opportunity in China.

It's still -- obviously it's number three -- but it's still pretty small, and yet in other categories, it's really massive.

I'm just wondering what your view is on how big it could be over a 5- to 10-year period relative to the bricks and mortar business, if could you talk a little bit about that?

And separately, in online, just to talk about how you plan to activate the New Dimensions, did I get that right?

Yes.

So to answer the first question, and then I would like Dennis to say a few words, but today we have 8% of our global business online.

I hope you were impressed as much as we are by the progress that's been done online, and by the potential in the long term.

In the countries which are more developed like US, we have about 12% of our business.

We believe that in China, China could be 20% of our business in the long term, being online the way the countries progress and the way other categories are progressing in this area.

We are the beginning of the journey in China where we are very well advanced in the US.

I don't know, Dennis, if you want to add anything?

Yes, I think, first of all, we're pleased with the growth in China.

We're going to more than double our business this year.

We expect in the next few years that our business will be about 20%-plus, as Fabrizio mentioned.

It is a business that's quite new for us online in the market.

And in the current quarter, it basically performed as well as the UK in terms of the size of the business.

So its become, essentially, in this past quarter, equal to our Number 2 business, and growing at triple digits, so we're very pleased.

And on New Dimension, we are very excited with this new launch of the Estee Lauder brand.

We believe that the contouring category is a new trend.

And there are many consumers around the world which are enthusiastic about entering this category and experimenting what the experience can be.

The product is excellent, does a fantastic job, so we have a great formula.

And we have great plans, and I hope, as I explained in my prepared remarks, that we plan to start from the United States in July and then rollout internationally as of September, which is also, [Caroline], the way we think of giving our best shot to accelerate the US Market.

Our next question is from the line of Olivia Tong with Bank of America.

Good morning, thank you.

It sounds like on new product set, there's a decent-size surge relative to recent years.

So how do you think about the contribution from new products going forward, not only Q4 but FY16 as well?

And then following on that, as you focus more efforts behind millennials, does that in any way impact how you think about contribution of price mix to the top line?

Thanks.

So I'll take this one.

The percentage of innovation as part of our sales every year, percent on new product, is increasing.

We have done great progress in the last year.

And we have increased this significantly, slightly ahead of the market, and obviously, the more [de-acceleration] of the industry is in makeup.

The more, obviously, this is innovation intensive because makeup internal number of product launch is more intensive than any other category, so we are very well prepared.

We will continue to be ahead of the industry average in terms of the ability to innovate, exercise creativity, and launch new products.

However, how we are doing it, as I think I explained in my remarks, we are doing it analyzing the markets, analyzing what's big and what's growing the fastest.

And third, anticipating and inventing new breakthrough areas, so the combination of focus innovation on what's big, what's growing, and inventing the new is basically our program.

And in total, this will constitute the continued increase of innovation year after year.

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

Yes, thank you.

You guys have been pretty up front in terms of some of the pricing differentials related to China and travel retail over the past couple of years and how that's impacted your European business in particular.

Can you talk a little bit about what you've seen in some of the other luxury categories in terms of some of the price changes out there?

And is that something that you see entering the prestige beauty category going forward?

Thanks.

I just noticed I didn't answer the previous question on pricing, which was the mix with millennials, so I'll start from that.

The fact that the entry price point products are, obviously, more successful with the millennium than the very high-end luxury, but this doesn't mean that the entry price point products are less profitable for us.

So actually the mix of entry price product in prestige for us is a favorable mix, so we don't see any pressure from this trend.

On the contrary, it's a good trend.

Now going back to the question on pricing versus our category, we have a very articulated pricing process and pricing strategy globally.

We, as a group or team internally, they measure pricing, price evolution, impact of currency changes, and, obviously, what competition does around the world constantly.

This has happened already since few years, and so we don't see any need of changing our strategy, nor our processes.

We continue to execute the process of harmonization, the process of responding to currency changes, the process of responding to competitive needs, and obviously, most importantly, to consumer desires.

And we'll continue that direction like you have seen in the last year, so we don't see a big change, in other words.

Our next question is from the line of Chris Ferrara with Wells Fargo.

Thanks.

Good morning.

Fabrizio, I wanted to go back to advertising in this particular quarter.

So coming into the quarter, you'd planned to increase ad support in the business.

And the idea was that sales would accelerate on that increased support and better launches.

So you got the sales lift, up 8% organic, which is good.

But you got 40 basis points of ad leverage, which is, I think, very different than what everyone was looking for.

So I guess I was hoping just for some insight into this.

Can you quantify how much advertising was actually deferred into Q4 and was the brand mix so different -- meaning the brands that require advertising grow faster -- was that mix so different from what you'd expected that you were able to get that growth on 40 basis points of advertising leverage?

I'm just trying to look for a little more understanding on this would be helpful.

Sure, and let me say, first of all, yes we are postponing some advertising to the fourth quarter as Tracey explained.

That's why let me refer to the total year.

Because your comment anyway is correct, we have in percentage advertised leverage on the total year even if by quarter this is assessed [by swing], where we invest more on the initiative we choose to support more, but for the total year, this is absolutely a correct statement.

Our absolute level of advertising is basic flat, but in percentage of sales, we are leveraging it.

So why this is happening, first of all, we (inaudible) the advertising.

There is a swing toward digital that has an impact, and in many countries today is still a positive impact.

Second, there is a fact that our traditional brand, which are typically more advertised, Estee Lauder and Clinique, as you know, are not the ones which are driving the growth the fastest.

On the contrary, the fastest growing brands, such as M.A.C., or Jo Malone, or Le Mer, or Bobbi Brown, are not advertised the traditional way.

They are advertised more in digital, but most importantly, a lot of what we consider their marketing is in their free-standing stores and is in areas at which where the cost is somewhere else, is not on the advertising line.

And so in some of these brands, we are not necessarily leveraging the support to the brand, just changing line where you will find it, as Tracey explained.

And now if Tracey wants to add anything --

Yes -- no, we, obviously, with our expansion of direct to consumer, we are seeing shifts in our expense line.

So we're seeing faster growth of store, operating expenses, occupancy expenses.

And to Fabrizio's point, we are seeing shifts from advertising and promotion as those brands are growing slower than the brands that certainly are expanding from a direct-to-consumer standpoint.

As far as your question on our expectations in the third quarter and what shifted to the fourth quarter, we had about [$30 million] of advertising that shifted, advertising and promotion, that shifted from the third quarter into the fourth quarter.

And again, that allows us to advertise both the launches that we had in the third quarter, as well as the ones we are going to do in the fourth quarter.

Our next question is from the line of Wendy Nicholson with Citi Investment Research.

Hi.

Sorry for the background noise; I'm in an airport.

But first of all just following up on that advertising question.

As you go into 2016 -- and I appreciate you don't want to give us any guidance -- but as you go into 2016, and you put more effort behind the flagship Clinique and Estee Lauder brands, do you think that overall advertising ratio will go up?

And then second question, just following up on the DDML creme.

I know when you launched DDML plus, it was a little bit of a disappointment in that it wasn't incremental revenue growth, it was actually just cannibalizing the core business.

So what makes you think that the creme is going to be incremental to that franchise?

Thanks.

Okay, thanks, Wendy.

I'll take the first part, and Fabrizio will take the second part.

So again we are not going to give guidance, obviously, for FY16, but certainly, as we indicated, we do plan to support Estee Lauder and Clinique as they continue to respond to both the new product launches and differential advertising and mixture of traditional advertising in TV and print, as well as increasing levels of digital advertising, that we would expect to spend more in FY16 on both of those brands.

However, given the mix shift that we're seeing with the faster growth of other brands, that does not necessarily mean that when you look at our advertising and promotion line, you will see deleverage, quite the opposite.

I think you'll continue to see us leverage marketing advertising and promotion with the growth that we are seeing in the makeup artist brands and some of our direct-to-consumer channels.

Yes.

And Wendy, on the creme, is, first of all, Clinique has an outstanding DDML lotion business, which is loved by consumer and is preferred in many parts of the world.

But for example, the creme form is very preferred in Europe.

We have seen, for example, in the Estee Lauder brand that some years ago developed a creme called Supreme for Europe in a creme form, this being one of the key drivers in the regional dilutive brand.

And now also, Clinique will have the creme preferred form that will have, first of all, a completely different regional relevance.

In the US, a creme is very preferred with people with dryer skin.

And in fact today, in our profile of Clinique we have an opportunity to have much higher market share for DDML in the area of people with dry skin.

So there is a wide space, an extra business, no cannibalizing, which is a big [net extra] opportunity with this initiative, in our opinion, in every country of the world.

Our next question is from the line of Dara Mohsenian with Morgan Stanley.

Good morning.

Good morning.

First, just a question for Dennis.

Can you give us a sense of how the profitability of the online business compares with the remainder of your business?

And then, Fabrizio, you obviously posted strong organic sales growth this quarter.

You're expecting another strong quarter in Q4.

As you look out to FY16, can you discuss if you expect some of the key drivers behind that back-half strength will continue?

And on the other hand in Hong Kong, can you discuss your expectations there?

And what you're expecting going forward?

Thanks.

Okay, I will start answering this while Dennis prepares his answer on the profitability of online and online in general.

So the current trends that are behind our strong growth, frankly, we expect to continue.

And I tried to describe them in my opening statement, which is basically is the multiple engine of growth.

The fact that if you look at our business by channel, by region, by brand, we have more than 1/3 of our business, which is growing double digit, which basically means that the rest of our business can grow just in line with market, and we would achieve the kind of progress you are seeing today for the long term in a sustainable way.

That's our model, and the way we obtain our model is focusing wherever is big and growing, more than the average and having the agility and the speed to re-allocate resources, wherever needed.

What you see in the way of operating, I believe, is a special focus on agility and resource re-allocation in a fast way to react to market dynamics.

That's a strength, so the multiple engines of growth, the differentiation of our diversification, sorry, of our portfolios and the agility of resource re-allocation depending on trends is the fundamental area of competitive advantage that we have built.

And I do believe that will continue to favorably impact our business trends also in FY16 and in the future.

Hong Kong, you asked, no, Hong Kong, frankly, as I said again, we do not see the recovery that we had hoped.

Hong Kong, the Chinese travelers into Hong Kong is still weak.

And the protest is creating some low-level retail, particularly at the high end, so we don't see an immediate recovery of Hong Kong.

In Hong Kong we are working, first of all, to cater better to the local because that's, obviously, more sustainable and more for the long term.

And we are swinging the attention, again resource allocation, toward more entry price of prestige versus the very high end has been typically the way the market has developed.

And this will require some time, so I still believe Hong Kong in the long term will remain a very vibrant and outstanding market, but I think it will take some time to re-allocate resources to the reality we are seeing in this moment.

Dennis?

Yes, as to the margin contribution of the online business, we don't break that out publicly.

It's different, frankly, by market and by region.

I will tell you that it is in the group of the highest contributors of margin to the Company, so we're up in the realm of the groups that contribute the most margin to the operating margin of the Company.

Our next question is from the line of Mark Astrachan with Stifel Nicolaus.

Thanks, and good morning, everybody.

I wanted to understand what kind of growth rate is anticipated for the fourth quarter for brands Clinique and Estee.

And just sort of broadly longer term, what's a reasonable growth rate for those brands over the next, call it, year or two relative to what you've been seeing for those brands?

And how do you holistically think about growth longer term for those brands?

So in this moment we expect these two brands to be in the Fiscal Year on a slight decline this Fiscal Year.

And we are working to have next year a slight positive, and then, over time, accelerate more.

That's basically the answer to your question.

That's why I keep saying we'll take about 12, 18 months to see a turnaround and then an acceleration, but for the moment you need to expect at least that's our forecast from a slight decline to a slight positive.

That, however, will have a very positive impact on the overall Company acceleration, particularly if the rest of the business remain as solid and vibrant as it is today.

Our next question is from Lauren Lieberman with Barclays Capital.

Thanks, good morning.

Good morning.

I had a question for Dennis around decisions to work with retailer sites.

So I think before I've heard you guys talk about the decision to launch a given brand in a given brick and mortar retailer like do you do Macy's on 34th street, for a given brand versus the nearby Sephora.

What's that thought process for dot com business with your retailers?

And I'm thinking in particular about expanding your presence with Ulta.com.

Thanks.

Yes, so the first thing we do is we look in each country and each market at fit for each particular brand.

We would prefer to support authorized retailers in our brick and mortar relationships as they're important to each one of our brands.

We do look at other opportunities in each market.

For instance the TMALL opportunity in China is a unique business model.

It allows us to run our own free-standing stores, if you will, shop and shop online, and we do look around the globe at other fits for our brands.

But our preference is to start and to build our business with our authorized retailers and help them grow their online business and our brand business with them.

Our next question is from Nik Modi with RBC Capital Markets.

Yes, good morning, everyone.

Fabrizio, I was hoping you can address two things on the whole strategy with millennials.

Given that they are always looking for new news and it's probably making you accelerate some of your innovation or at least the pace of innovation, how do you manage complexity, number one?

But also the integrity of the Clinique and Estee Lauder brands in particular as you step up the new news?

Any help with that would be much appreciated.

So let me start, Nik, and then Fabrizio will take it from there.

One of the things, and we'll start with Estee Lauder.

And certainly, many of our brands are focused and quite successful with millennials.

What we have done and part of the turnaround strategy with Estee Lauder and Clinique is to focus, in addition to focusing on our core consumers, also focusing on attracting this new millennial consumer, which is more digitally savvy and, certainly, interacts with brands initially in terms of how they consume information in a different way.

Hence, the focus of those two brands more on digital from a communication standpoint, some of the spokesmodel choices that we've made as it relates to Estee Lauder to really reach out to a more digitally savvy millennial consumer in particular, and some of the new product launches for Clinique that, not only we believe appeal more to a millennial, as well as to our core consumer franchise, but also are more entry-level price point focused for the millennial consumer.

We do balance that, and I'll take Clinique for instance.

We started the year off with two very strong higher-end products for skin care, which was the Sonic device, as well as Smart serum.

And certainly, that was focused on the core franchise and focused on the broader consumer base.

And they're coming back with a strategy to focus on millennials.

We do have a fairly regular, when you talk about complexity, and, certainly, we have a lot of brands now and a lot of SKUs.

We do go through a line edit every year to do a SKU reduction and SKU rationalization.

And that is part, one of the many cost-saving initiatives that we are executing against and ramping up now that we have SMI and have more visibility to that information than we've ever had in the past.

Yes, and so just say the, obviously, complexity will actually improve with all the plans that Tracy just explained.

So even if we deal with more innovation and more specific targets and more local relevance -- by the way, you didn't mention, but is another big driver of complexity.

But the way we are operating in the concept which SMI, that we will definitely be ready to manage this complexity and the complexity will improve.

Now going back to the millennial is that it is good news.

The millennials love our products, and when we talk directly to them and talk to them the way they want to be talked to, they really love our products.

And the social media impact of some, for example, of the millennials spokesmodels that now we have is just impressive and amazing.

And this is driving our communication with millennials.

Want proof of that?

Dennis just spoke about our vibrant online business.

This online business is driven mainly by the millennials, and this is one of the fastest growing parts of our business.

And the other thing I want to say, we do these also internally to prepare the Company to be able to speak to millennial, we are making sure the Estee Lauder Company will be a great place where the millennials want to work in.

And we, Senior Management, are working with millennials regularly.

And we have programs to make sure that we listen to them more regularly to understand also, not only what they want for as a consumer, but also as a professional, and how we can work together and modernize the thinking of the Company, even internally.

So it's a big process.

We are really embracing the need to modernize, and we are embracing the Millennial generation as a generation that can help us modernizing as professionals and as consumers.

Our next question is from the line of Ali Dibadj with Bernstein Research.

Hi guys.

A couple things.

One is just wanted to see if you have an inventory level target [post SAP], because it is quite great that you're giving all that cash back to shareholders, so want to see how far it can go?

And then number two is if you could tell us a little bit more about the relative slowness on skin care plus 4%?

And how that ties to, or is exclusively driven by, the heritage brands, especially in the US?

And what do you think you can do about it, especially in the context of expanding into new channels with those brands?

So ULTA, more in Sephora, more SKUs, more brands perhaps, more third-party commerce sites et cetera.

Is that one of the solutions to resolve, perhaps, the skin care problem?

Thanks.

Okay, so, Ali, I'll take the inventory question.

We are aggressively working with our organization to manage inventory turnover and to improve inventory turnover.

And you're seeing the beginning results of that now.

So we spoke about it last year, that post-SMI, we would have the opportunity to really leverage the tool and start to drive some of the supply chain opportunities from an organizational standpoint, everything from improved forecasting to improved flow of inventory and movement of inventory throughout our supply chain and to our consumers.

So -- our customers and our consumers -- so that's happening.

We have talked in the past about a target of [140].

We have not given a time frame as it relates to that.

We are aggressively working towards achieving that goal and being able to communicate a more specific time frame for you as it relates to that goal, so you can expect an inventory update from us on the August call along with our three-year outlook.

Yes, and on skin care, in my opinion the best way -- first of all, skin care remains the biggest and one of the fastest growing together with (inaudible) categories around the world.

So Ali, you are referring to skin care US, which definitely needs to accelerate, but skin care is driving around the world, and in Asia, it continues to be, by far, the biggest category and growing.

So skin care you ask, can (inaudible) benefit mainly from some amazing breakthrough innovation that will drive and continue to push the consumer interests.

And that's our main focus.

And then, yes, the skin care can also benefit from, thanks to this innovation, getting more traffic and more interest in Department Stores about the skin care and creating more animation in store and more activity.

And then as skin care continues to grow online, in a very successful way, which shows again the potential of it when it iss well targeted.

And finally, you mentioned the specialty channel, which has been, for the moment, more focused on makeup and has been -- the specialty China has been one of the key drivers behind the makeup acceleration.

As far as the specialty China and methodology of breakthrough in store activation used by the specialty channel will translate into skin care.

I think this will further accelerate prestige skin care also in the US.

We have time for one more question.

Our final question is from the line of Steph Wissink with Piper Jaffray.

Hi, good morning, everyone.

Just a really quick question for you, Dennis.

As you talk about your online business, it's almost $1 billion here in the next 12 months or so.

Can you talk about the data capture and some of the information that you're using, whether it be directly for the online business, or just strategically across the organization, the information that you're capturing online?

Thank you.

Yes, so it's a great question.

Actually, online, as you're alluding to, we can capture so much consumer insights.

And we are starting to really use those in all areas of the business, not only in our marketing for the total business in every channel, but also in product development, in R&D.

And we're really getting so much feedback from our consumers.

And we're using all of those data insights, which, frankly, differ by market and by brand around the world.

But we're able to collect those globally because we have one global technology platform.

And we're sharing them throughout the Company to make better decisions and better strategies and better products.

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.