雅詩蘭黛 (EL) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to the Estee Lauder Companies FY16 fourth-quarter and full-year 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.

Good morning, everyone.

On today's call are Fabrizio Freda, President and Chief Executive Officer, and Tracey Travis, Executive Vice President and Chief Financial Officer.

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.

To facilitate the discussion of our underlying business, our full-year comparisons have been adjusted for the impact of the prior-year implementation of our Strategic Modernization Initiative and the discussion of our financial results and expectations are before restructuring and other charges.

You can find reconciliations between GAAP and non-GAAP figures in our press release and on the investor relations section of our website.

During the Q&A section we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for the call.

I will turn it over to Fabrizio now.

Thank you, Dennis, and good morning, everyone.

Our company had a very successful year in FY16.

We delivered excellent financial results with adjusted constant currency net sales growth exceeding 7%, faster than global prestige beauty growth, and adjusted earnings per share rose 13%.

We also made progress on our strategic objectives by further diversifying our business, strengthening our multiple engines of growth, and advancing our creativity and innovation.

This year new products represented nearly one-quarter of our sales, an all-time high.

Additionally, we designed and launched Leading Beauty Forward, a multiyear initiative to increase our efficiency, speed to market, and agility.

Our strong performance confirmed our resiliency during a volatile fiscal period that began with MERS in Korea and ended with Brexit in the UK.

In between, we experienced sharp currency fluctuations, disruptive geopolitical events, including increased terrorism, and slowing economies in some of our key markets.

In global prestige beauty, we also faced tougher competition and changing consumer behavior.

Nonetheless, we successfully navigated these new challenges while also strengthening the Company's fundamentals, making us confident we can sustain our strong and profitable growth and achieve our long-term goals.

Our best growth came from our makeup category, especially MAC; our luxury brands; the Europe, Middle East, and Africa region; and the online and specialty multi channels.

Our ability to grow so strongly in such a dynamic landscape is a testament to our more balanced and better diversified business and strategic ability to identify and anticipate changing consumer and industry trends.

That is what defines and distinguishes our company.

Another of our key attributes is our increasing agility.

During the year, we saw a variety of markets impacted by unexpected economic political and social events.

During those times we made sure our resources were aligned with other areas having better growth potential.

Another key strength is our multiple engines of growth throughout our more than 25 brands that span categories, channels, and countries.

This allowed us to achieve double-digit growth in some brands, channels, or markets, while balancing slower growth in other areas.

For example, continued political unrest in Hong Kong caused a sharp drop in Chinese tourists who traveled to other countries instead.

Our brands quickly responded by increasing the range of products appealing to Chinese consumers in key tourist doors in the markets they visited across Asia and Europe.

FY16 was also marked by rapid changes in global prestige beauty.

Thanks to our 10-year compass, we had anticipated many of the trends and were well-positioned to meet consumers' changing desires and shopping habits.

For instance, we have increasingly invested in digital marketing and e-commerce, which was our fastest-growing channel this past year.

Our global E&M commerce sales surpassed $1 billion for the first time, a milestone we are very proud of, and we expect our strong online growth to continue.

We made progress on our strategy as we strengthened many of our brands and diversified our portfolio.

Our compass pointed to the growing interest among Millennials for more specialized brands, so we nurtured the ones in our portfolio into significant competitors.

Several of them, including Jo Malone, Tom Ford, Smashbox, MAC, La Mer, powered much of our growth and gained share.

As makeup sales soared across the industry, Smashbox and MAC grew sharply, driven by their creativity and strong consumer demand.

Our specialized luxury brands were big winners and we acquired By Kilian, which strengthens our standing in the fastest-growing area of fragrance, the ultra-prestige tier.

Additionally, we made a minority investment in a successful Korean skincare brand, Dr.Jart+, which gives us an interest in a local brand in that very influential market.

Our two big multi-category brands stabilized overall as they each ended the year with flat sales.

However, both brands restarted solid growth in makeup.

Estee Lauder's makeup sales rose in every region, led by foundations and lip products.

Its long-standing Double Wear foundation continued to be a best seller worldwide.

In skincare, its innovative Advanced Night Repair PowerFoil mask helped accelerate the sales of the ANR franchise in China and generated buzz and photos on social media.

The brand's global net sales reflected strong growth in the European region and emerging markets, offset by declines in Asia Pacific, largely due to Hong Kong.

Clinique also advanced on many fronts.

Its makeup sales were up sharply on a global basis and Pep-Start eye cream was a top seller in several markets.

Clinique created digital campaigns featuring Millennial influencers that contributed to solid sales growth in the specialty multi channel and in Europe.

These gains were offset by declining in US mid-tier department stores and Hong Kong.

Looking at our business geographically, sales in emerging markets rose 15% overall and 25% excluding China.

To fuel our momentum, we further emphasized our local relevance in products and on social media.

This past year our brands reached many new consumers in emerging markets.

Jo Malone entered Brazil, for example.

We launched our first e-commerce operations in Mexico and La Mer had terrific growth in Russia.

Our channel strength reflected industry trends and we invested in the areas with the best traffic and growth.

Sales in our online business rose 27%, reflecting solid gains in brands and retailer sites.

We opened more sites for our brands and with retailers globally to widen our products' availability.

Orders and conversion grew more than 20%.

We continued to selectively expand our brands in specialty multi-retailers globally to broaden our consumer base.

For example, in North America, Estee Lauder introduced the Millennial-oriented Estee Edit collection in Sephora, while Origins launched in select Sephora stores inside JC Penney and plans to roll out to full distribution there this year.

In Europe, Smashbox continued to broaden its presence in Boots in the UK and entered the specialty multi-retailer La Gardenia Beauty in Italy.

We strengthened our capabilities, particularly in R&D, information technology, digital, and consumer insights.

Across our brands, creativity and innovation remained a priority.

Approximately 24% of our sales came from new products and our investment in research and development climbed in line with our sales growth.

Our global patent portfolio has increased 40% in the last four years, primarily in skin care and strategic areas with high consumer interest.

Our newest patents cover technologies that will anchor high-quality products that we expect to have broad appeal and delight global consumers.

We also launched Leading Beauty Forward to reduce costs and free-up resources to invest in the areas that will help fuel our growth, including retail, innovation, digital, social media, and new consumer-facing activities.

In this fast-paced environment we want to improve our speed and flexibility as we go to market and serve global consumers in creative and contemporary ways.

In this new fiscal year our actions fall into two broad areas.

The first is increasing the reach of our target consumers throughout white space opportunities across geographies and channels.

The second is enhancing our consumer engagement with new experiences and innovative and high-quality products and services which will encompass digital marketing, disruptive in-store merchandising, compelling creativity, and omnichannel offerings.

Our brands have numerous opportunities to attract new consumers in every region.

MAC is one of our largest brands, but isn't as widely distributed as other brands.

It has approximately 1/10 the doors of Estee Lauder and Clinique and about half the distribution of several direct global competitors, so there are millions of untapped new consumers the brand can potentially reach.

Many of our small- and medium-sized brands are now poised for global expansion.

For example, in travel retail, Jo Malone today is available in less than half of Tier 1 airports, so there is a lot of runway left to reach additional traveling consumers.

Online, Jo Malone has e-commerce websites in just eight countries compared to 26 for Clinique.

In fact, Jo Malone expects to launch E&M commerce in approximately 10 new markets this year.

As our consumer coverage increases, we are carefully watching same-store sales growth as well.

We expect new points of distribution, same-store growth, and pricing to each contribute approximately the same amount to our total sale growth this year.

Freestanding stores are expected to account for about one-third of our new distribution this year.

As our brands broaden their reach, they will emphasize fast-growing, image-building channels.

In the online world, our focus is on mobile and omnichannel.

Consumers expect a seamless, integrated experience across channels, platforms, and social media.

We are implementing new technologies and digital experiences, including online booking for in-store appointments, omnichannel loyalty programs, and high-touch mobile services.

With sales in specialty multi-retailers on a fast track, we will increase the number of doors we are in and widen the scope of our brands in the channel to reach the consumers who shop there.

For example, Clinique plans to roll out more ULTA locations and enter some Sephora stores inside JC Penney.

Estee Lauder, meanwhile, will reach new shoppers with a curated selection of products in ULTA, in 30 stores and on ULTA's website.

In travel retail, global passenger traffic is forecasted to grow mid single digits.

We expect our net sales to surpass traffic growth, led by many of our midsized brands that have opportunities to enter additional airports all over the world.

We are working closely with department stores to bring more traffic to beauty, both in-store and online.

We will elevate the consumer experience in department stores with differentiated, customized services, such as makeup lessons from our expert advisers, for which there is a strong demand.

Although department stores have been challenged in the US, they continue growing internationally, including in the UK, Western Europe, Australia, Canada, and Latin America.

Social media is integral to every beauty brand today and an important component in winning with Millennials.

To engage consumers, our brands plan to utilize more global and local influencers, beauty consultants, and makeup artists to amplify their messages.

Estee Lauder is collaborating on a makeup collection with fashion designer and influencer Victoria Beckham and she is promoting it to her 12 million Instagram followers.

Our brands are increasing their media spending and devoting more resources to digital, which allows them to target their communications to potential new consumers with relevant messages, thanks to better data and new technologies.

Approximately 30% of our total advertising spending is now digital, up 15% from last year.

Our brands are doing interesting activities in the digital space.

Estee Lauder launched an interactive global content network based in New York that works like a newsroom and Bobbi Brown held its first live video on Facebook celebrating its 25th anniversary and a new campaign, which attracted nearly 1 million viewers.

Innovation remains paramount as our brands pursue high-growth subcategories.

One area is skincare with instant benefits, such as masks from some of our brands that make skin glow.

In addition, Clinique's Pep-Start HydroBlur moisturizer hydrates and blurs skin imperfections on the spot and Estee Lauder's Revitalizing Supreme Plus Wake Up Balm creates instant morning radiance.

We plan to accelerate our growth in skin care.

The recent launch of Estee Lauder's Advanced Night Repair Ampoules should help drive the brand's important franchise.

Clinique created a collection around Pep-Start with the addition of moisturizers and cleansers and La Mer is rolling out a new formula of its core moisturizing line.

With new innovations and consumer engagement activities, we believe we can further strengthen our leading position in makeup.

Estee Lauder is building on its Double Wear foundation with an innovative cushion stick.

Clinique introduced Super Balanced Silk Makeup, an entry priced foundation with sun protection, and MAC InstaCurl Lash mascara has a customizable brush.

We also plan to propel our fragrance business, particularly in the ultra-prestige tier, where we have a large and desirable portfolio.

Jo Malone's highly-anticipated major fall launch is Basil & Neroli and Tom Ford's newest entry in its signature collection is Orchid Soleil.

Prestige beauty is a thriving consumer area and its growth continues to exceed mass beauty in key countries.

Underlying demographic trends are positive.

The middle class in emerging markets, Millennials, and ageless consumers have a big appetite for prestige beauty and those populations are increasing.

We operate in an unpredictable global environment and carefully monitor ongoing issues, such as the ramification of Brexit on our business.

We are aware that unforeseen challenges will arise.

However, we have comfort in knowing that we have many strengths that underpin our financial performance.

Our diversified business is anchored by multiple engines of growth, a wealth of creativity, and the ability to quickly react and adapt to events and trends, making us optimistic about our long-term success.

Over the next three years, we expect to generate sales growth of 6% to 8% and double-digit EPS increases in constant currency.

This year we expect to once again outpace global prestige beauty growth and gain share, despite external headwinds and challenges.

In FY17 we forecast constant currency sales growth of 6% to 7% with double-digit EPS growth.

I want to thank my executive team and every one of our employees for their hard work and passion.

They are one of the key reasons we have performed so well and continue to be so confident about our future.

Now I will turn the call over to Tracey.

Thank you, Fabrizio, and good morning, everyone.

First, I will review our FY16 fourth-quarter and full-year financial results and then cover our expectations for the FY17 first quarter and full year.

As a reminder, my commentary excludes the impact of restructuring and other charges.

Additionally, the FY16 full-year comparisons have been adjusted for the impact of the prior-year implementation of our strategic modernization initiative.

Net sales for the fourth quarter were $2.65 billion, up 7% in constant currency compared to the prior year.

Incremental sales from our newest brand acquisitions contributed approximately 50 basis points of this growth.

Our business was quite strong in Europe, the Middle East, and Africa, despite macro events in France, Germany, and Turkey, as well as the UK Brexit vote.

Net sales rose 12% in constant currency, with double-digit growth in most countries, notably the UK, Germany, and most of the region's emerging markets.

Our sales declined in France due to a large drop in tourism and in the Middle East because of continued economic uncertainty.

Our global travel retail channel delivered an 11% net sales increase, reflecting strong retail trends in many tourist destinations, partially offset by continued weakness in Hong Kong and in Brazil.

Currency volatility and terrorist activity continued to affect travel and consumption patterns and we saw moderation in passenger traffic to Europe in the quarter.

Sales in the Asia Pacific region grew 6% in constant currency.

Australia was a standout, growing strong double digits, while China, Korea, and Japan grew mid to high single digits.

Our net sales in Hong Kong continued to decline, but less than in the previous quarter.

Net sales in the Americas increased 3% in constant currency.

Latin America grew more than 20%, led by Mexico and Brazil, and Canada rose mid single digits.

Sales in the US rose low single digits.

Our sales through both online and specialty multichannels continued to rise double digits.

However, declines in tourist-driven retail doors and continued weakness in the brick-and-mortar business of mid-tier department stores curtailed growth.

Makeup sales again led product category growth, rising 12% in constant currency.

MAC, Smashbox, Clinique, Bobbi Brown, and Tom Ford achieved double-digit makeup growth and Estee Lauder rose mid single digits.

Foundation, lip products, kits, and pallets have been very popular among all consumers.

Hair care sales increased 5% in constant currency.

Aveda benefited from the launch of Invati for Men products and Bumble & Bumble experienced solid growth in Germany and in France.

Skincare sales grew 3% in constant currency, led by growth from La Mer and Origins.

These increases were partially offset by Estee Lauder and Clinique, reflecting continued weakness in US mid-tier department stores as well as in Hong Kong.

Sales of fragrance products rose 2% in constant currency.

Jo Malone was the largest contributor to growth as sales rose strong double digits.

Our recent acquisitions, Le Labo and Frederic Malle, are growing rapidly and By Kilian provided incremental sales.

Our gross margin was unchanged from the prior year.

Favorability from pricing, lower obsolescence, and supply chain savings were offset by channel mix, currency, and new products.

Operating expenses as a percent of sales declined 10 basis points.

Higher store operating costs associated with our retail store growth was offset by lower selling and shipping costs and cost savings from our SMI program.

As a result, operating income rose 7% and operating margin improved 10 basis points.

On a constant currency basis, operating income grew 9%.

Net earnings increased 7% to $163.1 million.

Diluted EPS of $0.43 was 9% above the prior year, reflecting higher earnings and a small benefit from a lower share count and lower effective tax rate.

Earnings per share for the quarter included $0.04 of dilution from acquisitions and $0.01 of unfavorable currency translation.

On a constant currency basis, EPS increased 11%.

Switching to our full year, details of our performance are largely covered in the press release so I will focus on some of the highlights.

With strong net sales up 7%, our gross margin improved 10 basis points.

Manufacturing favorability and lower obsolescence were partially offset by product category mix and currency.

Our full-year operating margin declined 40 basis points to 15.5%.

While the decrease included slight dilution from the recent acquisition of By Kilian, the decline was almost entirely driven by 50 basis points from the impact of adverse currency.

We continued to benefit from our cost savings and sales growth leverage.

We ended FY16 with an effective income tax rate of 28.3%, a 200 basis point improvement from the prior year.

Net interest expense rose to $55.1 million from $45.7 million in the year earlier, reflecting the increase in debt from our May 2016 bond issuances, partially offset by higher investment income.

In FY16 we realized approximately $135 million in restructuring and other charges, $54 million of it related to the transformation and modernization of our global technology infrastructure, which is largely complete, and approximately $81 million in charges for our Leading Beauty Forward initiative.

Operating cash flow was $1.79 billion, representing a slight improvement over the prior year, adjusted for the SMI shift.

We invested $525 million in capital projects, two-thirds of which was in consumer-facing areas such as counters, retail stores, and E&M commerce sites.

We repurchased 10.5 million shares of our stock for $890 million and paid $423 million in dividends to stockholders, increasing our dividend rate by 25%.

In total, we returned approximately 104% of free cash flow to stockholders, contributing to our 6.4% total stockholder return for the fiscal year, which compares with 4% for the S&P 500 for the same period.

Additionally, we invested in an acquisition and a minority interest and we increased our balance sheet leverage by issuing $600 million in senior notes at favorable rates.

Overall, we are very pleased with the performance we delivered in FY16.

Our 7% net sales growth and 13% in EPS growth in constant currency are strongly aligned with our long-term goal and we have laid the foundation for a more efficient and effective organization to leverage growth with the launch of Leading Beauty Forward.

Now looking ahead over the next few years, we plan to continue to focus on our strategic priorities with an even greater emphasis on speed and agility in the context of a rapidly-evolving prestige beauty landscape.

The recent Brexit vote has added a layer of uncertainty that will most likely not be fully understood for some time and we believe the risk of other economic and political disruptions will remain high as we start our new fiscal year.

Nevertheless, our strategies are sound and, as a result, over the next three years we expect our business to continue to become even more balanced and diversified by product category, brand, geography, and channel.

Prestige beauty is expected to grow at 4% to 5% annually for the next few years and we remain committed to our goal of exceeding the growth of global prestige beauty by at least 1 percentage point annually.

We also expect to continue to drive value from our existing cost-saving programs and we expect to begin realizing some of the initial benefits from Leading Beauty Forward in FY18 and generate annualized net benefits of $200 million to $300 million upon full implementation of the program.

With the recent approvals of the first initiatives under Leading Beauty Forward we can now develop more effective organization structures to enable increasing improvements in consumer engagement for our brands, as well as develop more efficient and effective processes for many of our corporate functions, including the initial organization design of a potential shared service support structure.

We expect to approve further initiatives throughout the next few years.

All of these efforts should permanently reduce the run rate of the areas addressed under the program and provide funds for continued investment in capabilities that more directly support the sustainability of our profitable top-line growth.

It is more important than ever that we maintain the financial and operational flexibility to compete effectively in the dynamic prestige beauty industry.

We must be able to nimbly allocate the appropriate amount of resources as consumer preferences, travel corridors, and exchange rates continually shift.

Balancing cost savings, sales leverage, and reinvestment for future growth, we expect operating margin expansion of approximately 110 to 150 basis points in constant currency through FY19.

We remain committed to our goal of growing EPS double digits in constant currency each year, which we have delivered consistently for the last seven years.

Working capital improvement also continues to be a focus and we expect improved cash-to-cash cycle performance across accounts payable, accounts receivable, and inventory.

Over the next three years we plan to free up over $400 million in additional cash, which would increase our growth in cash flow from operations in excess of our earnings growth.

We are targeting inventory days to sell of approximately 150 days by the end of FY19, a marked improvement from today's levels.

Now let me focus on our outlook for the FY17 full year and first quarter.

In FY17, sales are forecasted to grow 6% to 7% in constant currency.

We expect all product categories and regions to grow, led by the makeup category and the EMEA region.

By channel, growth is expected to continue to be strongest in online, specialty multi, freestanding stores, and travel retail.

As Fabrizio mentioned, several of our brands will accelerate their expansion in specialty multi-retailers and online, which should enable us to reach new consumers as they increasingly shop multiple channels for prestige beauty products.

The impact of this activity and the cadence of our new product launches are expected to produce stronger top-line growth subsequent to our first quarter.

Our estimate reflects current spot rates, given the recent volatility we have experienced the last two years.

Those spot rates are $1.12 for the euro, $1.31 for the pound, and $1.01 for the yen.

We continue to achieve cost savings from our SMI program.

In FY17, we expect to generate approximately $150 million in savings, primarily from indirect procurement, A&P optimizations, supply chain initiatives, and selling effectiveness, some of which will be used to invest behind our newly-acquired brands and omnichannel capabilities.

We anticipate our tax rate will range between 28% and 29%.

Diluted EPS is expected to range between $3.38 and $3.44 before restructuring charges, including approximately $0.08 of dilution from currency translation.

In constant currency, we expect our EPS to rise by 8% to 10%.

In FY17 we expect to take restructuring and other charges of $80 million to $100 million with about $35 million to $45 million in the first quarter.

We expect to update these investments when additional initiatives are improved.

And as a reminder, total program costs beyond FY17 over multiple years are anticipated to be in the $500 million to $600 million range.

In FY17 we expect cash flow from operations of approximately $1.8 billion, relatively flat with last year with the inclusion of the impact of Leading Beauty Forward.

Capital expenditures are planned at approximately $550 million, or 4.5% to 5% of sales.

With respect to our capital structure, we have room to grow our dividend while maintaining a sustainable payout ratio and, as of June 30, we had approximately 18 million shares remaining on our buyback authorization.

We will continue to assess the need for greater leverage to support our strategies, including shareholder returns.

For the first quarter of FY17, we expect sales to rise approximately 2% to 3% in constant currency.

Translation could hinder growth by approximately 1 percentage point.

We expect our small- to mid-sized brands to continue to be strong contributors in many global markets, owing to their increasing appeal with multiple consumer groups across various channels.

We also expect continued growth to be generated in many developed and emerging markets, particularly in Europe.

Partially offsetting these growth drivers in the quarter are some macro issues that we expect to impact our results.

Our US business continues to be affected by low traffic in mid-tier department stores and tourist-driven doors and we are facing a difficult comparison to the prior-year quarter, which was our strongest quarter in the US, when Estee Lauder and Clinique launched major skincare products and MAC had exceptionally strong results.

Our cadence of product launches reflects smaller programs for all three in this year's first quarter.

The Middle East is projected to decline as distributors adjust inventory levels to reflect sluggish consumer spending.

And we're experiencing weak sales in France as the threat of terrorism curtails travel and domestic spending in the near term.

For the first quarter, our EPS forecast is between $0.73 and $0.77 before restructuring charges.

The adverse currency translation on sales for the first quarter equates to about $0.03 of EPS.

And as a reminder, the size and quarterly cadence of our new product launches and our programs changes from year to year.

We continue to focus on delivering annual results in our overall long-term sales and profit growth plans.

We look forward to another successful year ahead for our company and for our brands.

We are fortunate to operate in one of the highest-demand consumer categories today.

Our brands are among the most desirable in the industry and we believe our team is the most talented in the industry with their incredible creativity, passion for the business, and depth of knowledge on what products consumers aspire to have.

This winning formula continues to support our confidence in our plan despite a volatile political, economic, and currency environment.

And that concludes our prepared remarks.

We will be happy to take your questions at this time.

(Operator Instructions) Jason English, Goldman Sachs.

Good morning, folks.

Thank you for the question.

I guess two questions, if I could, and both of them margin-related.

It seems like just sort of backing into the implied margin -- I apologize if you gave the detail in some of the prepared remarks -- but it looks like you are looking for sort of a flat margin year at the EBIT line this upcoming year.

Is that true?

And if so, maybe what are some of the puts and takes that get you there?

Then sticking on margins, there was really good progress a couple years ago in seeing fragrances march higher.

We had a setback last year; we kind of stalled at margins this here with some weakness in the back half this year.

Maybe what's going on with the margin progression and the plans to improve profitability on fragrances?

In terms of the overall margin, it's impacted primarily by currency again this year, so this is the third year in a row where we have had a fairly significant impact from a margin standpoint on currency.

And that's the primary driver.

We certainly have some of the mix impact related to makeup and skincare going on as well this year, so some of it is mix impact and some of it is the currency impact.

As I indicated, we still do have our cost savings programs to offset a lot of the unfavorability that we are experiencing and we continue to work on other initiatives to improve the margin.

On fragrance, one of the things that we have spoken about, Jason, in the past is much of our growth is coming from some of our fragrance brands that have higher margin characteristics.

Jo Malone is a very profitable fragrance brand for us.

Our newer acquisitions, because of some of the purchase accounting, don't yet have the margin characteristics of a Jo Malone, but we certainly expect that they will once we get past the purchase accounting impact in the next year or two.

Awesome, thank you.

Steph Wissink, Piper Jaffray.

Thanks.

Good morning, everyone.

Just a follow-up question on Leading Beauty Forward.

Could you just give us some sense of the cadence of the savings and the reinvestment?

Should we assume, on a quarterly basis, that they are pretty well in sync or will there be some timing inconsistencies we should be planning for based on the costs and then the reinvestment?

Thank you.

What we had spoken about as it relates to Leading Beauty Forward, we don't expect to see any savings from the program until next year.

So this year we don't expect to see savings from the program.

As far as the restructuring this year, it could be a bit lumpy in terms of quarter to quarter, depending on when projects are approved under the program.

And just a reminder, in the program we are doing a fair amount of org redesign, so there are a lot of costs upfront in order to realize the savings so that we can actually more permanently reduce costs going forward.

So that's a bit of what's going on in FY17 as it relates to Leading Beauty Forward.

We will start to see savings in FY18, more in FY19, and beyond FY19 is when we expect to achieve those run rate savings of a net $200 million to $300 million.

Thank you.

Caroline Levy, CLSA.

It has to be on China.

I was just wondering if you could help me understand what you are seeing in Hong Kong and greater China as a whole, because one of the calls we are making is that there will just be more Chinese traveling domestically.

Do you have the travel retail setup within China that will help you there, or do you have to build sort of traditional stores to capture the Chinese who are not traveling outside as much as they were?

And then just within Korea, I think you are already lapping MERS, so I was just wondering if you expect accelerating growth there.

I know you are doing much better; you are growing, but are you seeing some good trends there?

Caroline, we love your questions about China and so the answer is, yes, I think you are right.

First of all, the amount of Chinese consumer traveling abroad is very solid.

As you know, it's well above 100 million this year, 117 million is the numbers we calculate and it's growing.

So first of all, there is no -- at least to our knowledge -- any reduction of travel.

Now where they travel, you are absolutely right; less of them travel to Hong Kong and more of them travel to different destinations internationally.

But it's also true that there is an enormous increase of travel within China and we are very well-positioned.

As you know, there are duty-free areas within China where we are very strong -- for example, Hainan islands -- that are increasing and there is more people traveling there.

On top of that, the fact that consumers travel touristically within the country offer us the possibility of continued building distribution in third-tier and fourth-tier cities, where we are enjoying this internal travel, which obviously in this case is not duty-free.

So both are true -- continued increase of external travel and increase of internal travel -- and we are catering to both opportunities.

As far as Korea is concerned, we are doing very well in Korea.

We are growing -- for the year we have been growing more than the market, so we build market share and we continue to see very strong growth also in the Seoul airport.

And so the Korea trend in FY16 has been very, very strong.

We expect the Korea market to continue to have a strong influence on Asia in general and that the Korea consumers continue to be high-demanding consumers that we use also as a benchmark for the kind of new ideas and new products that we've got to launch in Asia or globally.

Caroline, we do see in the first quarter, in addition to we're lapping, as I mentioned, very strong growth in the quarter last year from the Middle East and in France and softer performance this quarter, for obvious reasons that we spoke about.

We are seeing very strong growth in Korea in the first quarter because we are lapping MERS.

That's great.

Could you touch on Hong Kong at all?

Just what you see happening?

Hong Kong, as we said in the prepared remarks, is -- we continue to see decline in Hong Kong.

We continue to see reduced flow of tourists, but we see increased purchase and increased business with local consumers.

So Hong Kong continued to lose tourists and continued to have a solid, actually increasing, business with local consumers.

I believe the market is in a transition and the same from Macau.

So we see declines, but declines at lower levels than declines we saw before.

Thank you so much.

Mark Astrachan, Stifel.

Thanks and good morning, everybody.

Fabrizio, wanted to ask about your acquisition strategy and your thoughts on whether continuing to purchase small brands makes sense, particularly as it seems your larger competitors are making some larger scale deals.

And then also could you discuss fragrances, where you've focused, compared to doing makeup, which seems to be a focus of some of your competitors, as well as perhaps skincare, where you make a play perhaps for the improvement in that category relative to levels in recent years?

First of all, we agree it's not about buying small brands.

That's not the strategy.

The strategy was to create a portfolio of high-end artisanal fragrances that combined could change really the market and make the fragrance market again a market of high-end, consumer demand-driven brands that can inspire the consumer in the world of fragrance and make us the company with the best portfolio in this growing area of the future.

That's was the acquisition strategy there.

It's not about small brands or big brands.

It was about building the most amazing portfolio of artisanal fragrance brands and we have done this.

So you are also right that there is a growing makeup business around the world.

We already have an amazing portfolio that some of our competitors didn't have.

We have MAC, Bobbi Brown, Smashbox -- by the way, Smashbox was the first acquisition that we had done; it was exactly makeup.

But we agree with you that the future will see opportunities to continue growing in makeup and there will be opportunities for more makeup brands in our portfolio.

And in terms of skincare, we purchased GLAMGLOW, which is a skincare brand, and is a skincare brand -- although small, but is a skincare brand, in our opinion, with great potential to grow and to become big.

And also is focused exactly on the new skincare trends: instant benefits like masks and specialty multichannel dynamics.

Finally, we purchased a minority interest in one of what is the fastest-growing skincare brands in Korea today, which is Dr.Jart+, which was exactly the strategy.

So I believe that the point is the strategy is not about fragrances or small brands; the strategy is about acquiring brands that fill strategic opportunities in our portfolio.

And this will continue to be the strategy.

Thanks, that's helpful.

I just wanted to follow-up then.

From a MAC or your overall makeup portfolio standpoint, are you seeing any impact from your competitors doing deals like -- not to name specifics, but obviously L'Oreal has talked about some of the brands that they have growing quite exponentially.

Our MAC brand has been growing double-digits very strongly globally in FY16 and we expect MAC to continue to grow double digits globally.

Also in FY17.

It is a super-strong brand.

As a lot of markets where MAC is growing 20%, 30%, there are so many more consumers that the brand has not reached, so there is full potential.

The competitiveness of the US market in makeup has definitely increased and, in fact, we see the need of increasing the competitiveness in the makeup; also activity of MAC in the US.

But for example, we saw the same opportunity on Lauder and Clinique a year ago.

And I just want to repeat that in the last 12 months Lauder and Clinique makeup in the US grew double digits, showing that when we focus on a specific market and a specific area we can get the results.

So, yes, there is an opportunity there and we are very focused on it.

Olivia Tong, Bank of America Merrill Lynch.

Thank you.

You guys have obviously done a great job over the years of growing well ahead of the category and Q1 expectations are for a fairly massive slowdown.

So can you talk through -- you've already talked through some of the things that will impact Q1, but can you talk to the order of magnitude of things that will get better to get you from that 2% to 3% back up to the 6% to 7%?

Like how much is a new distribution, like the JCP relationship, ULTA, etc., versus new store openings and improvement macro travel retail innovation?

So if you could just talk about order of magnitude of those things and then I have a follow-up.

Sure, I will start and then please, Tracey, add any perspective.

The building blocks of FY17, maybe that's the best way I can address your question.

The building blocks is that -- the first building block is pricing.

And as I said, out of the 6%, 7%, about 2 points will be pricing.

A lot of the price increases of the year happen in January and so already this 2% of pricing is skewed towards more the second part of the year.

Then think of the distribution.

The second 2 percent of increase of the year is greater distribution, reaching new consumers around the world.

Now many of these new distribution, including the one in specialty that you just mentioned, are going to happen after October.

Many of the freestanding stores in Europe that we [thought] -- the majority of the freestanding stores we are going to open will happen in that period and many of the new specialty multi-doors in the US will happen after October.

So that's the second difference, that second positive which is going to happen more skewed ahead in the fiscal year versus the first quarter.

The third -- the point is, as I said before to the previous question, we have a very solid new fragrance portfolio in the high end.

Now these fragrance portfolios, as you know, tend to have a huge opportunity to grow during holiday periods and so all the holiday periods -- not only Christmas, but also Valentines, Mother's Day -- happen to be after October.

And this will be another big extra acceleration element which is later in the fiscal year.

Then we have all our innovation programs.

As Tracey said in her prepared remarks, our innovation schedule changed in the year.

We have less blockbuster initiatives this year because we believe the consumer and the social media environment which is developing need more diffusion of newness verses a blockbuster approach.

So a lot of innovation is more skewed as of October in our portfolio.

This is the other building block on the same door sales that will impact the same door 2%, 3% of progress that we see in the year.

Then, as I said, Estee Lauder and Clinique are on an improvement trend and we expect Estee Lauder and Clinique to continue to improve.

And MAC US is expected to continue to improve in the second part of the year.

So all these factors will improve the comp part of the fiscal year.

A lot of good steps that we believe will, over the year, accelerate.

The last thing I want to say on that is that we have proven -- just the year, FY16 that we finished, we grew two of the quarters more than 8% and another quarter at 5%.

So we have proven that we have the capability, the potential to grow 8%-plus in the quarters where all the key elements of our building blocks start acting together.

Thanks, Fabrizio, that's pretty helpful.

Two follow-ups.

First, can you provide how many doors you opened in the quarter?

And then just the incremental distribution that you spoke to, obviously it helps grow sales, but how do you assess the risk, the potential risk to the prestige of the brand for Clinique going to a more value-tier department store?

Then, just generally, how do you view the door expansion potential for Clinique and Lauder brands beyond some of the specialty multi -- the incremental doors that you talked about?

I think you said 30 doors for Estee.

How much more -- the Estee Lauder brand; how much more opportunity do you see there?

Thanks.

First of all, we see many opportunities around the world on reaching new consumers.

So it's not about diversification of distribution; it's really about reaching new consumers and reaching where the traffic of prestige consumers are.

We don't plan to reach consumers which are not interested in the prestige.

We don't plan to distribute in any area where prestige and luxury is not well-presented and we do not plan to distribute anywhere where the service quality will not be to the level of prestige.

So we continue to be completely focused on luxury prestige distribution; that means the right environment, the right target consumer, and the right service level.

However, the world is evolving, the world is changing and there are many new opportunities: online, specialty, travel retail, freestanding stores, and obviously some very promising new activities also in the department store world.

We are focusing on all of them and wherever there is growth of prestige consumers.

So that's really the structure.

What you see in the specific examples we are sharing are the immediate next steps, but these are immediate next steps of the long-term strategies.

So the answer to your question, there are more and more opportunities over the year to continue reacting in that direction.

And then, Tracey?

Olivia, I want to make sure that we clearly answer the question.

When we have quoted door counts in the past, we are really talking about retail stores.

In some cases our company-operated stores and in some cases our total store count, which includes our third-party operated stores as well.

So when you ask the question about how many doors we opened in the fourth quarter, we opened 35 of our company-operated retail stores in the fourth quarter.

We opened a little over 170 of those stores in the full year.

We also opened third-party stores as well in the year.

And, as Fabrizio indicated, of our total distribution growth, that's about a third of the growth of that 2% distribution is freestanding stores.

So they are becoming a bigger part of our overall base of total sales, but still the largest drivers of our growth are our comp performance and certainly the contribution to innovation.

Maybe the other number is that the sum of the freestanding store that Tracey just described in FY16 grew 11% sales.

Bill Schmitz, Deutsche Bank.

Good morning, everyone.

Perhaps I'm not understanding the negative mix, because it seems like the most profitable brands and the most profitable regions are the ones that are growing the fastest.

So why is there negative mix in the P&L?

It's a couple of things.

We have a lot of mix impact in the P&L, so it can be a bit challenging.

But if you just look at our category margins, makeup is a very high-category margin for us, as is skincare.

Skincare is a little bit higher than makeup, so when you see the disproportionate growth of makeup, which is happening in the industry and certainly we are both driving and benefiting from, and the slowdown that we've seen in skincare, it does have a mix impact.

So that is a piece of it.

The other piece is that Hong Kong is a quite profitable area of the world for us from a sales perspective, a sales and profit perspective in that region, and the double-digit declines that we've seen in Hong Kong have also had an impact.

So there's a geographic impact -- the Middle East would be the same.

So there's a geographic impact and then there's a category impact from a mix standpoint that we have experienced.

We have -- and the team has done a tremendous job of offsetting that impact with our cost-saving programs and other choices that we have made in order to continue to grow double-digit EPS growth.

Lauren Lieberman, Barclays.

First one is actually just on the point of double-digit growth and this was the case on last year's fourth-quarter call as well.

But, Fabrizio, twice you've mentioned for FY17 an expectation of double-digit local currency earnings growth, but at the same time, twice it has been mentioned that the guidance is 8% to 10% local currency.

So I just wanted to clarify which it really is, understanding there are risks on the table and (technical difficulty) 8% to 10% versus double digit is two different things.

The second thing is around cost savings.

I believe for FY16 you started the year expecting $200 million of SMI-related savings.

You lowered that to $175 million for the year I think back in May and then as look into FY17 you are talking about $150 million.

So it feels like some of those expected savings aren't achievable for some reason, something's changed because I would've thought maybe it was a delay in timing.

But something with SMI it just feels like perhaps the savings are not quite what had been anticipated even 12 months ago.

Thanks.

Thank you for your question.

I will answer the first part.

You know, 8% to 10% has 10% at the top of the range, which is double digit.

So our point is that we are committed to do our best to deliver double digits and, as usual, if you review our range, we are committed to do our best to reach the top of the range.

But telling you 8% to 10% in this moment in time at the beginning of the fiscal year, where there's so much volatility out there and so many social and political situations that we have also explained in our remarks, we are basically acknowledging that there are some risks.

And so that's what 8% to 10% means.

But does not take anything away from our commitment to do all we can to deliver the double digit, meaning the 10%.

So that's simply the way we see that.

Then, Tracey, you want to --?

On SMI, we are actually pleased with our SMI program.

We did set a target of $200 million for -- some programs got off to a bit of the slower start, given the volatility that we were managing through in the year, so we ended at $185 million.

$150 million -- and, again, we are talking about year-over-year cost reduction.

At some point as you start to go further and deeper on some of these initiatives, there's going to be less opportunity.

Clearly, when we initiated the second phase of our savings program, we went after the biggest opportunities first and then you start to see that weighing down.

Hence, the reason why we announced Leading Beauty Forward, which certainly will generate more savings in future years as the SMI savings start to narrow a bit.

So I think we are right on track with respect to where we expect to be in terms of SMI savings and we certainly will always strive.

We have a very competitive team, so we always strive to exceed what we -- what our targets are.

Ali Dibadj, Bernstein Research.

I want to ask a short-term question and a long-term one, going back to some of the questions from earlier.

One is still on your 2017 guidance -- 6% to 7% constant currency, 8% to 10% on the bottom line.

I guess I'm still not convinced that the margins you are projecting are flat because of currencies, and maybe dispel me of that confusion because it looks like it's less than 1% of an impact on your top line for the year.

You talk about $0.08 on the EPS line, but that's like 2.5% of EPS so that's a very large multiplier, much bigger than we would've expected.

So trying to get a sense of why that's the case.

And even that, by the way, doesn't explain the margin structure being flat given all the cost-cutting that you're doing, the good cost-cutting that you doing.

So that's question one.

The other one is I do want to go back to the question in terms of distribution expansion into Sephora and Sephora in JCPenney, into ULTA with Estee Lauder -- which I think we would have said 10 years ago, if ULTA had existed, would have been crazy.

Jo Malone pushing more.

We have seen a lot of not the same, but analogous issues.

Just recently Coach, as an example, said, look, we are pulling back from department stores.

Again, slightly different issue because they were discounting a lot.

But we've heard this before from Tommy, Burberry, Ralph Lauren, as Tracy knows very well.

And you look at this a lot, guys, so I want to get a sense of how you are looking at it.

Appreciate your thoughts on this, because there is a concern that at some point you are going to get rid of the scarcity; at some point you're going to massify the brand, which drives the brand erosion and you kind of lose a little bit of that prestige.

So given some of those analogies, can you explain kind of long term how much longer do you have before you start hurting the brand?

Thanks on those two, short and long term.

Okay, Ali; let me start with your questions with respect to margin.

Currency is another big impact and we gave you the spot rates that we are using, which again certainly could change during the course of the year.

But rather than us predicting how that will change, we are using current spot rates and that definitely has an at least 30 basis point impact on our margin for the year.

In addition to that, we did talk about the fact that some of our very high profit margin regions are actually showing either slower growth or declines in the case of Hong Kong, as we mentioned.

The Middle East has slowed quite a bit.

UK is a bit softer than what we certainly have experienced over the last couple of years.

So those are all impacting.

If nothing changed with respect to either our category mix or our geographic mix, then you would be absolutely spot on, but those are things that we are managing as well.

So our cost savings programs not only help us to expand the margin, but they have helped -- and fund some of our investment, but they have also helped us -- because of some of the programs that we put in place a few years ago and are continuing to deliver on, are helping us to offset the negative impact of some of the macro situations that we are experiencing right now.

Okay.

And on distribution, Ali, my point is we vet every single decision, starting with the consumer point of view.

So we are not distributing our brands anywhere where the consumer doesn't demand them and the consumer is the target consumer.

The distribution decisions we are taking are always brand-building, meaning they are consumers that are on target, particularly Millennials, that we would not be able to reach without proposing the brand in that area.

And that's what is happening around the world.

Particularly the Millennial consumers are changing their shopping habits.

The brands that do not evolve their shopping habits to reach these consumers will basically actually lose structure with the new luxury consumer rather than risk their image.

It is an evolution and it is driven mainly by the habits of the Millennial consumer.

Also, it's very different by category.

This is happening very aggressively in makeup, for example, in the way the Millennial consumer in makeup -- is happening also around the world.

And a lot of this is about online and the availability of the brands online.

So second thing is not the image of the distribution, but is the -- we call it consumer reach.

The way we look at this -- because, again, that's your question -- we don't look at it like only the image.

We look at it: do we reach the right consumer?

So it is an analysis (inaudible) from target consumer reach.

In fact, that's why we have used this language in our prepared remarks: coverage, reach rather than expanded distribution.

Then when you look at internal number of doors, that's actually -- there are a lot of closures.

There are a lot of stores which are being closed; not only in the US, around the world.

So in terms of number of stores, this is not necessarily an increase of availability.

It is putting the brands where the consumer expects them at a certain moment of the progress.

Last thing I want to say is that you mentioned Estee Lauder and Clinique, which are today, within prestige, broadly distributed brands.

But keep in mind that all the rest of our portfolio has actually an enormous amount of extra distribution opportunity, meaning our brands have not even started being available to the right level of consumer around the world.

So a lot of our distribution expansion is not about Estee Lauder and Clinique; it's about bringing the rest of our portfolio available to the right target consumer around the world.

And numerically, in terms of sales and profits, that's where the biggest opportunity is.

Jonathan Feeney, Consumer Edge Research.

Thanks very much for the question.

I wanted to follow up, maybe from a little different angle, on Ali's question.

I want to ask about the channel.

How do you manage it internally?

How do you break the news to your core channel customers, your department stores, that the exclusive availability of not just Estee Lauder, the prestige brand products, but -- the efforts and alignment of your company have been such a big part of their success historically that at the margin, yes, you are following the consumer, but this necessarily means less emphasis on those channels and maybe less investment in those channels going forward.

My question would be how do you manage, how do you compensate people to make that switch internally?

How do you have those -- have you ever gotten push back from some of your department store partners that maybe what you are doing is hurting them a little bit at the margin?

And maybe going down the road, are there ways to make the business actually more profitable by maybe investing a little bit less with businesses that have been -- retail partners that have been more important to you in the past than they are today?

Thank you.

No, as I said, we start from the consumer, from the consumer demand and so that's the way we make distribution decisions.

And we make distribution decisions in partnership with our retail partner.

They always notice things before and we have very, very honest discussions about what's needed for the brand.

Sometimes a new distribution decision actually helps sales for the brand in the total country, including in the retailers where the brand was previously distributed.

And, by the way, our brands very rarely are exclusive to a retailer.

They are targeting certain groups of consumers and that's clear.

For example, Macy's, as you know, has announced to close 100 doors.

We are collaborating and we will collaborate with Macy's to protect the consumption of our brands in these doors transferring to other Macy's doors' consumers.

We will do our best to support Macy's in this plan, which we believe they are doing the right thing.

We will focus a lot to support Macy's in selling more in the remaining doors that they will focus on, as well as we continue to support Macy's in building the best we can the online business that we have together.

Also, our retailers decide to close doors or do other things and we collaborate with them in keeping the sales, continue increasing the sales.

It's not about one or the other.

If we focus on the client, on the final customer, we get always the right decision made and there are normally win-win for the brands, for our retail partners, and for the consumers.

That's what we are looking; that's our principal.

As far as your question in terms of, if I understood correctly, in terms of internal, internal I think we just have our normal processes.

As I said, we are starting from consumer understanding.

We make the decision and then we discuss those with our partners.

Jason Gere, KeyBanc.

Good morning.

I guess just one question.

I was wondering how you acquire customer data for some of the freestanding stores.

I know there's obviously a lot of data you can get from the department stores, but I was just wondering how you can leverage some of that information in terms of really trying to keep the momentum going with freestanding.

Especially as a lot of those stores are in some of these malls where you are seeing some I guess weakness in traffic with some of the mid-tier department stores; I was just wondering how you think about that.

Actually, it's easier for us to acquire consumer data from our freestanding stores, given the fact that we have the point-of-sale equipment, than it is in the department stores where we don't.

In some cases in department stores, you're right; we do also have some equipment that allows us to capture the consumer But in all of our stores, our freestanding stores, we do, so it's actually easier for us to capture it in stores as well as online.

We certainly do.

Our teams look at that information; our brands look at that information and understand what trends are selling in freestanding stores and whether or not that mirrors or not what is selling in department stores and put plans together accordingly.

Those are all areas that as we expand distribution, as consumers continue to shop in multiple points of distribution, we continue to aggregate that information and look at whether or not there are any differential trends that the entire business can benefit from in terms of our strategies and how we allocate resources.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

As you think about the growth of new products and the impacts that they are having, how do you see their influence on the gross margin?

And over what period of time should new products essentially reach or exceed the corporate average gross margin?

And does it differ by category?

Thank you.

Dana, great questions and I probably should've mentioned this as well when Ali asked his question on margin.

Depending on our innovation in a particular year, in some cases we actually choose to launch some innovation that actually has lower gross margin, because we have identified a consumer need in that particular space and believe that that product will drive incremental sales and will build to be a large franchise, particularly for franchises like Estee Lauder and Clinique and particularly in skincare.

So we have seen in recent years some new innovation that actually is a bit of a lower gross profit margin.

Clearly, as sales continue to build on products that we launch that are new, you are amortizing the tooling and you are getting some more favorability in terms of gross profit margin.

But, largely, they stay relatively close to where they are at, unless there's a significant increase in volume, in which case you get lower cost of goods.

But we do manage and our team -- when you think about the number of brands that we have and the number of new product launches that we have where we have had, to Fabrizio's earlier comment, a steady increase in the amount of innovation, our teams manage that gross margin mix quite tightly in terms of making sure that we -- the new innovation, at least over a few years, is offset by innovation that also is more margin accretive.

And I just would like to add one point to this point on gross margin.

At the end, we are a prestige luxury company and so our main task is to have pricing power.

And the moment we do a good job, we can do both: we can give to the consumer this super high-quality packaging experience they want and price for it so that we protect the right gross margin evolution over time.

It's all about pricing power and the power of our brands to sustain it.

Linda Bolton Weiser, B. Riley & Co.

I was curious on the US market, given some of the weakness that you are seeing, if you are making any modifications or if you have any initiatives regarding your selling methods in department stores.

I know several years ago you made some changes, like more open sell and things like that.

So can you talk about what you're doing to try to help the department stores drive that traffic in beauty?

Also, is your investment behind the consultants or the salesforce in the stores, is it rising because of the weakness?

Do you make more investment there?

Then, finally, you mentioned on the Macy's how you're hoping to help them shift consumption to other stores.

But in the near term is that impacting some of your weakness early in your fiscal year in terms of just the sell-in to fewer doors in Macy's?

Thank you.

Let me start answering this question.

As you probably know, Macy's has announced their intention to close 100 doors, but they did not give a specific calendar of when this will happen.

So the answer is, no, in the first quarter there is no assumptions of the new closing doors.

But Macy's closed, I believe, 40 or 50 doors so far and, yes, there is obviously the impact of the first 44, 45 doors that were closed before in FY16 in the first quarter impact.

But to your core question for the long-term, we definitely are focused to support our department store partners to improve -- to continue to improve the experience on our brands and in general in the beauty floor of department store.

We have many activities in this area, many in the area of improved services, many in the activity of innovation and distortion, many in the area of connecting social media to the activity in the area of sampling.

In other words, we are really focused in working together how to increase traffic in-store, which is, in this moment, the key opportunity.

Then to your second question is what do we see.

And, yes, we see a lower traffic than what we would like to see in our counters in mid-tier department stores, and that's what you see in our quarter-one estimate as well.

We are working hard to support our partners to go back to increase the traffic at every level.

At the same time, both ourselves and our partners work pretty closely together on making sure that as we see -- at the same time of growing volume in all the strategies that we are jointly working on to grow traffic to the beauty counters in the stores, recognizing the reality that there are more options today for women to buy cosmetics and beauty products in many different channels, where historically it was only more singularly in the US market.

We are also making sure that, as you do in a freestanding retail store, looking at staff-to-sales ratios, which any retailer looks at and makes sure that those are appropriate for the amount of traffic you see near term.

And then investing back in those resources when sales increase.

So that, too, is important, both for our partners as well as ourselves, to make sure that we are managing profit accordingly.

Joe Altobello, Raymond James.

Thanks, good morning.

First question, I wanted to go back to the Lauder and Clinique brands and maybe if you could assess for us some of the progress you guys have made over the past 12 months in turning around those brands.

Is the momentum that you are seeing as we exit FY16 what you expected to see 12 months ago, given the spending behind those brands, given the expansion in specialty multi, the launch of Estee Edit, how those contributed to that?

And are you connecting with the Millennial to the extent that you had hoped 12 months ago?

Then, secondly, on Leading Beauty Forward, Tracey, earlier you mentioned that no benefits in FY17.

But is there spending in that program is going to run through the P&L that is not being -- that is not extraordinary and being excluded?

Thanks.

Let me start with leading Beauty Forward.

There is a slight amount of spending that's running through the P&L, but it's not meaningful at this point.

Most of the program costs right now are running through a restructuring because of the nature of the program, which is largely form design oriented.

On Lauder and Clinique, a year ago in this call Lauder and Clinique were declining.

Now they are flat and so there has been a significant improvement of trend.

We said they would have started from turnaround in the makeup area of both brands, because it was the area that was better fitting the other goal, which was to attract more Millennials to the brands.

We have done it in the US.

Lauder and Clinique makeup is growing double digit, which, frankly, was declining just a year ago and this is an impressive improvement.

And also globally both brands are growing their makeup in a very strong way.

Now the skincare also did some progress, as we explained in the prepared remarks.

However, on the skincare, two key issues which is Hong Kong continues to decline and the mid-tier department store traffic issue that we just discussed in the last half an hour.

Those two have been a drag to accelerate as well the skincare part, which now we will do our best to do in FY17.

So good progress on both brands, with an excellent start in makeup and some more work to do in skincare.

Last point is to your question: is that what we forecasted?

Frankly, we have done in line or slightly better than what we expected.

But we did not forecast Hong Kong to continue to decline in the way it has declined and we did not anticipate the kind of traffic reduction in mid-tier department store that we have seen in the course of the year.

So those two things actually were different than what we anticipated a year ago.

Steve Powers, UBS.

Thanks, I'm going to try to test your endurance with three quick ones, if I could.

The first one is you mentioned Macy's.

Across FY17, does your guidance embed any net inventory destocking at the retail level or not?

That's the first question.

Second question is if you could just update us, in aggregate, as you think about your own freestanding doors as well as your own online sites, what percentage of sales is the direct-to-consumer business today and how do you expect that to trend over the next three years?

Then finally, with respect to makeup versus skincare, not surprisingly 2017 sounds like another makeup-led growth year, both for yourselves and the industry.

But as you think about the makeup ahead of skincare trend, how long do you think that lasts?

I don't know if you can take some learnings from past cycles or other consumer insights, but just as you think about your three-year outlook, do you expect makeup to run ahead of skincare for the duration or is there a crossover point?

Thanks so much.

Let me take the first two.

As it relates to is there some destocking assumed in our forecast and guidance for this year, yes, given some of the retail dynamics that are going on.

It may not be enough, but we do have some clearly in there, given what's happening in the US market in particular.

As it relates to direct-to-consumer, which for us would be our freestanding stores and obviously our e-commerce as well as retail or dot-com sites, it's about 17% of our total sales is our direct-to-consumer business.

And then on the makeup and skincare --?

On makeup and skincare, I think, first of all, that makeup will definitely continue to grow and very, very fast.

There are two dynamics which are happening, which we believe are for the long term.

The first one is the Asian consumer is using makeup more and more.

So the dynamic of skincare versus makeup, a global level, the strength of skincare was driven by the fact that the fastest-growing demand was coming from Asia and Asia consumer used much more skincare than makeup.

I think this will continue, so nothing wrong with the skincare trend, but the makeup trend in Asia has dramatically accelerated because the billions of Asian consumers are using makeup more and more.

This is a very strong long-term trend.

The second is the Millennial generation.

The data shows that the average Millennial use more makeup in more occasions during the week than their mothers.

So the more the Millennial generation grows in percentage of the total population, the more makeup usage will continue to accelerate.

So those two trends are long term.

However, it doesn't mean that skincare needs to continue being -- growing less.

Actually, we see already the first signs that as soon as the Millennial will discover also more of the skincare routine, this can impact the skincare.

For example, our new brands like GLAMGLOW, which are more focused on Millennials and they are more based on instant-benefit skincare, which are more important for Millennials, are seeing amazing growth when they do a good product launch.

So I personally believe also skincare will accelerate in the future, driven by positive trends.

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.