雅詩蘭黛 (EL) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2017 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.

Please go ahead, sir.

Good morning, everyone.

On today's call, we have 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 our 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.

To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges and other adjustments disclosed in our press release.

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

(Operator Instructions)

And now I'll turn it over to Fabrizio.

Thank you, Dennis, and good morning, everyone.

Fiscal year '17 was another successful year for our company.

We built momentum in every quarter, pivoted our business to the channels and categories driving global prestige beauty, created exciting new products, reached new consumers and strengthened our multiple engines of growth.

When the year began, we said we expected our sales to accelerate as demands progressed, and they did, building each quarter and culminating in an exceptional final quarter and full year.

The fourth quarter results came largely from terrific trends in China, travel retail and online as well as from many of our brands, including our latest acquisitions.

In this new fiscal year, we expect our effective strategy to continue to drive our momentum, leading to strong sales and profit growth.

For the full year, we delivered sales growth of 7%, approximately 2 points ahead of global prestige beauty, enabling us to, once again, gain share.

This is the eighth consecutive year we generated a strong performance and outperformed the industry, demonstrating the sustainability of our strategy despite inevitable external headwinds.

This year was marketed (sic) [marked] by greater economic and geopolitical volatility and terrorism, which curtailed demand in several countries.

The trend of consumers shifting their shopping preferences by channel accelerated, which resulted in declining traffic in some U.S. brick-and-mortar department stores.

At the same time, global competition intensified as new beauty brands and thousands of new products competed for a share of consumer wallets.

Despite these challenges, we strengthened our growth engines and created formidable new ones, which was evident in higher sales across our major product categories.

Through our artisanal and luxury brands, we have reinvigorated our fragrance category.

We also solidified our leadership in the fast-growing makeup category with the acquisitions of Too Faced and BECCA.

These exciting brands anchor our portfolio with millennial consumers who often prefer to shop in specialty-multi retailers and online.

Central to our success was pivoting our business to capture new consumers.

We did this by increasing our exposure to the fastest growing prestige channels, strengthening our brand portfolio, investing in key geographies and announcing our digital and social media communications.

Consumers had a growing emotional attachment for their beauty experience, strong loyalty to product performance, a desire for High-Touch service and a preference for experiential channels.

These are the pillars of our company's success that we will continue to build on.

In fiscal 2017, we took decisive steps to gain a more significant presence globally in specialty multi-retailers and increased our penetration by 40%.

We have historically been well represented in specialty multi internationally.

We reinforced our position with new and existing retailers.

In Europe, some of our brands expanded in Sephora and Douglas.

In Asia, our brands went into more Sephora stores in China and Southeast Asia and captured new opportunities with the brand-building specialty multi-retailers that are emerging.

Clinique was our first brand in EVEANDBOY in Thailand and in Olive Young in Korea.

In the U.S., our high-end La Mer and Jo Malone brands entered Sephora flagship stores and began selling on its website, joining many of our other brands -- of our brands that are already successful there.

In addition, Estée Lauder and M-A-C opened in selected Ulta Beauty stores and on Ulta.com, which helps them reach new target consumers, especially in smaller cities.

E-commerce continued to be vibrant and our business accelerated, growing 33% with strong global growth.

Our brands opened sites in new countries and with various retailers, planting seeds for future gains.

In the fourth quarter, we launched M-A-C on China's popular Tmall, and it was the platform's largest prestige beauty launch.

Our travel retail sales grew more than 20%, generating the best gains in 5 years, due to strong demand for our product and wider availability of our brand portfolio in large productive airports.

Passenger traffic grew high single digits, and a resurgence of Chinese tourists helps drive our strong performance.

We remain the leader in makeup and skincare combined in travel retail, and our makeup sales soared, which lifted many brands.

One of those was Tom Ford.

Its travel retail business more than doubled, fueled by Chinese consumers who coveted the brand's high-end makeup and fragrances.

Our brands continue to be highly desirable.

Our best performance were many of our midsized and luxury brands, which grew double digits and helped fuel our makeup, skincare and fragrance categories.

As an example, La Mer's success stems from driving trial with compelling innovation and repeat purchases with core products.

The Estée Lauder brand returned to solid mid-single-digit global growth for the year, delivering gains in both makeup and skincare.

It was well-positioned to take advantage of the resurgence in China and travel retail and strengthened its euro franchises with innovative new products.

Advanced Night Repair, Double Wear and the Pure Color Envy lipstick lines all grew double digits.

The brand also benefited from effective social media and digital marketing, which led to its top ranking in the L2 China beauty index.

We strategically invested in key geographies to match success.

Countries representing more than 1/4 of our sales grew double digits, including emerging markets of China and Russia as well as developed countries like Italy.

We attribute the strong results to locally relevant products and communications and targeted expanded consumer reach.

Thanks to a strong economy and growing desire for prestige beauty, demand from Chinese consumers climbed, both in their local markets [and] as they travel the world.

Our China business accelerated throughout the year, delivering outstanding growth of more than 40% in the fourth quarter and 19% for the year.

A record 133 million Chinese tourists traveled last year, as we see this momentum continuing, which should positively impact our business across the globe.

Enhancing our social media and digital engagement is a priority across our portfolio.

Our brands leveraged a growing number of influences.

And as we grew our experience, we gained share (inaudible) media value, ending the year as the #1 prestige beauty company in the U.S. according to Tribe Dynamics.

The intersection of social media, digital marketing and e-commerce is integral to our brand strategies.

And we have a digital-first mindset throughout the company at this point.

In fiscal 2017, we continued to direct more advertising dollars to the digital space.

Nearly half of our visible A&P spending globally was digital, up significantly from the year before.

In other areas, we began implementing several programs under our Leading Beauty Forward initiative.

We augmented our digital talent, cut expenses and reinvested in high-growth areas to position us to compete more effectively in the environment that lies ahead.

With the prestige beauty landscape shifting rapidly, we are proactively positioning ourselves to capture the new ways consumers are engaging with beauty.

To continue to lead and win, we will leverage our company strengths, our broad prestige brand portfolio, superior product quality, creativity, talent and brand building distribution all across our many geographies.

Let me now discuss the focus of our fiscal year '18 strategy.

We will continue to connect our brands to high-growth, brand-building channels to align with how and where consumers are shopping.

We expect specialty multi, online, travel retail and freestanding store will continue their strong growth.

Dennis will discuss the online segment shortly.

In specialty multi, we are capturing new consumers by matching our brands with global retailers that are the right fit and collaborating to drive trial, repeat purchase and regional usage.

For example, M-A-C is opening in Sephora's top stores in Brazil, and we launched in the specialty multichannel in Asia Pacific.

We are rolling out Too Faced in Sephora in most European markets, including France, and in Douglas in Germany.

In the U.S., La Mer, Jo Malone and Tom Ford will solidify their distribution in Sephora, while Estée Lauder, M-A-C and Clinique will extend their presence in Ulta.

In addition, Bumble and bumble is launching on Ulta.com this weekend, followed by 500 Ulta stores.

In travel retail, we are building on our strength in skincare and further growing our makeup and fragrance categories.

We are introducing some of our newer brands, opening more doors in high-traffic airports, developing new store formats, ensuring we have locally relevant product in major travel corridors.

We expect that higher passenger traffic, coupled with effective marketing to increase conversion, will lead to strong sales growth again this year.

We are enhancing the experience of our freestanding stores by adding more open-sell environments such as a M-A-C redesign of its Times Square flagship.

M-A-C will offer different shopping options across its stores, which should strengthen productivity.

Throughout our more than 1,400 global freestanding stores, we are adding more omnichannel capabilities to connect them with online.

Globally, department stores are an important brand-building channel that provide high-touch service, and we are investing by modernizing our counters and our service model in the best-performing doors.

Many international department stores continue to generate very healthy growth, especially those in high-traffic touristic destinations like Harrods or Selfridges in London, where our business is robust.

In several other markets such as China or Italy, department store are delivering strong gains.

Our biggest challenge has been in some U.S. brick-and-mortar department stores, which are struggling from falling foot traffic, especially in smaller malls and touristic-driven doors.

U.S. department store represents approximately 17% of our global sales last year, and we are encouraged by new signs of strengths in some retailers' top doors.

We will leverage that activity by improving our merchandising, our service, our communication and our sampling.

And we are also collaborating with U.S. department stores to boost their business online, which is growing strongly.

We expect our makeup and fragrance categories to lead our growth.

As the global leader in prestige makeup, we are leveraging the individual strengths of our many makeup brands to cater to different consumers.

We will drive our luxury and artisanal fragrance portfolio by strengthening the brands we recently acquired and supporting Jo Malone and Tom Ford's excellent momentum.

In skincare, our sale improved last year, and we anticipate even better growth this year, supported by exciting innovation and more robust consumer demand.

Looking at our 3 biggest brands, we expect Estée Lauder to again deliver solid growth.

We also anticipate improvements at M-A-C.

Its international business has remained strong, and it plans to open 200 new Ulta stores in the U.S. by fiscal year-end.

Clinique has enjoyed good momentum in China and travel retail in recent months and the recent response to new launches such as Fresh Pressed serum with pure vitamin C. And we believe its results will also improve.

We will continue to reallocate resources and add talent to our social media programs, which have become a critical component of beauty marketing.

Our brands are aligning with authentic and locally relevant influences and amplifying their storytelling to ensure that their content is differentiated and memorable.

Consumers are purchasing beauty products more frequently than in the past, partly because they can quickly and easily order online.

This is especially true for our hero products and franchises, which generate more trial and bring in new consumers as well as repeat business, which is more profitable.

We have a robust cadence of launches planned, with an emphasis on strengthening core franchises.

As an example, Estée Lauder just introduced Advanced Night Repair Eye Concentrate Matrix, which incorporates innovative technology and has been well-received.

It also launched a new formula of its best-selling Double Wear foundation, which is a top recruitment product in many markets, attracting both millennials and ageless consumers.

Foundations are a large and high loyalty subcategory, and many of the brands like Clinique are introducing new formulas.

Its Even Better Glow makeup is off to a strong start.

M-A-C Next to Nothing lightweight foundation is a departure from the brand's full coverage makeups and should continue to be a strong recruitment product this year.

In skincare, La Mer is rolling out 2 new types of moisturizers to support its iconic Crème de la Mer product lineup, including a lotion with a matte finish, and we expect a strong consumer response.

Clinique launched Fresh Pressed serum and the supercharged version of Moisture Surge a few months ago, each to terrific reception.

And they should continue to be a major sales driver for the brand this year.

To gain insights and help drive decisions across innovations, social media and marketing, we are using much more analytics.

We expect our investment in advertising to increase and comprise a greater percent of sales with digital media the fastest-growing outlet.

We will advance more programs and the Leading Beauty Forward, allowing us to drive further efficiency, provide more fuel, reallocate resources to high-growth areas and advertising and better leverage sales growth.

In closing, we are extremely proud of our performance in fiscal 2017.

I want to thank our global employees and my executive team for their leadership and ability to effectively execute change across the organization, which is an important competitive advantage for our company.

We are fortunate to operate in a highly desirable industry and are focused on the many opportunities in our future.

We are confident in our ability to win.

We will achieve our goals by leveraging our successful strategy that is based on multiple engines of growth, a well-diversified business, superior talent (inaudible) and unmatched product quality and branding.

As we have shown this past year, we are executing our change agenda with excellent speed.

As we drive our momentum, we will continue to embrace a changing landscape, push the boundaries of possibility and pivot to tomorrow's opportunity as consumer preferences evolve.

As I mentioned, we are instilling a digital-first mindset throughout our company.

And now Dennis McEniry, who has led our online business for the past 17 years, will discuss this exciting area.

Dennis?

Thank you, Fabrizio, and good morning, everyone.

We created our dedicated online division almost 20 years ago.

And today, it encompasses a global team of nearly 700 people working on hundreds of direct-to-consumer and retailer sites across 39 countries.

We are responsible for building and operating our direct-to-consumer E&M commerce sites, partnering with retailers to fuel their growing online businesses as well as spearheading digital technology innovation and omnichannel initiatives.

The online division has historically grown sales at an average annual rate of about 25% and is margin accretive to the company.

In fiscal 2017, online sales accelerated, growing 33% to $1.3 billion globally.

Many of our brands, in particular Estée Lauder, La Mer, M-A-C and Tom Ford, had an outstanding year online.

Too Faced, our recently acquired brand, more than doubled its online sales when viewed on a 12-month comparable basis.

In our top 4 online markets, e-commerce represents approximately 20% of our sales.

Globally, online represents 11% of total company sales, up from 4% just 5 years ago.

We continue to outperform total online retail growth in the U.S. and in the U.K., our 2 largest online markets.

In China, our third-largest market, we nearly doubled online sales and were again the top prestige beauty company on Tmall for Singles' Day.

We also nearly doubled our online sales in other emerging markets such as Russia, Turkey, South Africa.

And we launched in the UAE, Saudi Arabia and India.

Our fiscal 2017 online growth was fueled by both direct-to-consumer and retailer sites, which account for approximately 60% and 40% of our online business, respectively.

We launched over 45 direct-to-consumer sites on our own platform and third party platforms such as Tmall.

Our signature high-touch services that are available online set us apart from our competitors.

We combine real life beauty experts who have extensive knowledge about our products with technology to deliver the best beauty advice online.

We also work with artificial intelligence and other technologies in order to deliver a more unique, interactive, personalized tool such as virtual try-on of makeup technology using augmented reality and facial recognition technology as well as a bots-powered foundation finder tool.

On retailer sites, we saw strong online growth from a number of customers, including Sephora, Selfridges and Douglas.

Many of our brands, in particular Estée Lauder, Clinique and M-A-C, had an outstanding year on Macys.com.

We also successfully launched Estée Lauder, Origins and M-A-C on Ulta.com and Jo Malone and La Mer on sephora.com.

We are enhancing our omnichannel capabilities by linking our online platform to our freestanding store and support our newly launched loyalty programs with M-A-C Select, Estée E-List and My Origins Rewards, our consumers are spending more across channels and more frequently, improving our consumer retention rate and driving higher consumer lifetime value.

Mobile commerce continues to drive our results as it provides consumers with always-connected and always-on commerce.

Mobile accounts for 2/3 of our traffic and nearly half of our online sales.

We anticipate this trend to accelerate, so we are expanding our mobile team and increasing investments in mobile innovation to provide the best beauty experience.

We are working to tie our social media efforts to m-commerce sales with the best high-touch beauty experts in the industry.

This branded beauty experience brings our brands to life in a way that is personalized, locally relevant and fun, all delivered to her mobile device 24/7.

The online team has a strong track record of delivering consistent double-digit top line growth and margin accretive profit growth to the company while navigating a rapidly changing online environment.

Looking forward, we are confident of our proven capabilities positioning us well against our competitors to drive continuous, sustainable growth.

We have built a strong e-commerce foundation with a global team located in 39 countries, which makes us highly competitive.

Our model gives us a solid platform to deploy new -- more brands in more countries with more products and categories in the future, which will enable us to garner new consumers around the world.

We are strategically focused on expanding our brand-building distribution online across both direct-to-consumer and retailer sites.

Opportunities exist in capitalizing on industry growth as more consumers shift online, adding new brands in our existing markets, expanding our online platform to the countries we are not currently in.

For example, we plan to expand our online presence in India, Middle East and Southeast Asia this year.

A number of our brands, including Jo Malone and La Mer, have many untapped markets to enter.

We also have attractive online expansion opportunities from recent acquisitions, including GLAMGLOW, Too Faced, Le Labo and BECCA.

Our strategy also includes a focus on category opportunities.

Fragrance is our fastest-growing category and currently accounts for less than 10% of our online sales.

With untapped potential, especially in the Asia Pacific region, we expect our fragrance brands to drive significant online growth over the next 3 years.

Our growth opportunities will also be fueled by technology improvements, innovation and advanced data analytics.

We are investing capital and resources in key areas, including mobile, omnichannel, digital innovation and marketing technology.

To ensure online remains a key engine of growth for the company, we are committing -- committed to further developing and building our talent.

We have trained over 2,500 people in digital this past year across the company, and the digital and online area has the fastest growth in terms of people headcount.

Our online team, which is tightly integrated with our brands through close collaborations, consists of 80% women, 60% millennials and 39% Gen X. It is our priority to foster a team culture that promotes diversity, learning and strong collaboration in order to drive success in a fast-paced environment.

In closing, I want to thank my amazing team for its strategic thinking and tireless execution.

I also want to thank my colleagues in the company and our retailers worldwide for their continued support.

Now Tracey will review the company's financials.

Thank you, Dennis, and good morning, everyone.

First, I will review our fiscal 2017 fourth quarter and full year financial results and then cover our expectations for the fiscal 2018 first quarter and full year as well as our 3-year targets.

My commentary today excludes the impact of restructuring and other charges and adjustments, including Leading Beauty Forward charges, impairment of intangibles, adjustments to contingent consideration and the China tax adjustment, which are all disclosed in our press release this morning.

Net sales for the fourth quarter were $2.89 billion, up 11% in constant currency compared to the prior year period.

Incremental sales from our most recent acquisitions of Too Faced and BECCA contributed approximately 3.5 points of this growth.

Our business in the Asia Pacific region led our growth this quarter, with sales up 18% in constant currency, driven primarily by accelerated momentum in China.

Sales in China rose more than 40%, as you heard Fabrizio mention, with broad-based growth across brands and channels.

All of our brands grew double or triple digits in China this quarter, and our online business more than doubled.

Hong Kong continued its rebound, with high single-digit growth ending more than 2 years of declining sales.

We also achieved solid sales growth in Japan, Korea and Indonesia.

In Europe, the Middle East and Africa, net sales rose 12% in constant currency, led by a 20% increase in global travel retail.

The outstanding growth in the travel retail channel reflects a 9% rise in international passenger traffic and buoyant retail in areas of historical strength for us, notably Hong Kong, Macau and the U.K.

The strong performance across most of our brand portfolio, in particular Tom Ford, Jo Malone, La Mer, M-A-C and Estée Lauder, was driven by new launch activity and targeted expansion in high-performing airports to reach new consumers.

The EMEA region also benefited from double-digit sales growth in many markets, including Italy, France, the Nordic countries and Greece.

The U.K. and Spain also grew low to mid-single digits.

In the region's emerging markets, the Middle East grew strongly as it lapped the downturn that began last March and began to slowly replenish stock.

Overall, retail continues to be consistent with the economic situation in the region.

Russia was flat but other Eastern European markets and India rose double digits.

Net sales in the Americas grew 6% in constant currency.

Latin America sales rose 20%, led by double-digit increases in Argentina, Chile, Peru.

Mexico and Brazil rose high single digits.

Sales in North America rose 5% due to the addition of our newest brands, Too Faced and BECCA.

Excluding the acquisitions, North American sales declined 3% due to continued softness in the brick-and-mortar business of department stores and, to a lesser extent, freestanding stores.

Our net sales in online and specialty multichannels rose double digits.

For the quarter, our gross margin declined 170 basis points from the prior year period due primarily to adverse product mix, including the impact of the fiscal 2017 acquisitions and the associated inventory step-up.

Obsolescence in currency also contributed to the margin decline, while pricing partially offset the decreases.

Operating expenses as a percent of sales improved 250 basis points, primarily due to lower selling expenses that reflected our changing channel mix, along with prudent expense management.

These improvements were partially offset by higher advertising, R&D and store operating costs.

As a result, operating income rose 20%, and operating margin increased 80 basis points.

Diluted EPS of $0.51 was 21% above the prior year and grew 25% in constant currency.

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

EPS was higher than expected due primarily to the outstanding results delivered by our travel retail in China businesses, stronger growth in skincare and overall disciplined expense management.

Now let me cover a few highlights of our full year results.

Net sales were 7% in constant currency.

Incremental sales from our most recent acquisitions contributed approximately 2 percentage points of that growth.

Our gross margin decreased 110 basis points.

Supply chain efficiencies and pricing were more than offset by the mix of higher-cost new products; the impact of acquisitions, including the inventory step-up; higher obsolescence and adverse currency.

Operating expenses as a percent of sales improved 140 basis points, primarily due to lower selling expenses and prudent expense management.

These improvements were partially offset by higher store operations costs, stock compensation and shipping expense.

Our full year operating margin rose 30 basis points to 15.9%.

This margin included 70 basis points of unfavorability, comprised of 50 basis points of dilution from the recent acquisitions and 20 basis points from currency translation.

We improved our expense leverage of sales growth, and our cost-saving programs contributed more than $200 million in savings this year.

Net interest expense rose to $75 million from $55 million in the prior year, reflecting our increased debt level, partially offset by higher investment income.

Net earnings grew 7% to $1.3 billion and diluted EPS rose 8% to $3.47.

Earnings per share included $0.12 of unfavorable currency translation and $0.08 of dilution from acquisitions.

At constant exchange rates, EPS grew 11% for the year.

In fiscal 2017, we recorded approximately $143 million after tax in restructuring and other charges for our Leading Beauty Forward initiative.

We've begun establishing more efficient structures in certain areas of the company, including some of our regional organizations and corporate functions and redesigned our procurement organization to generate further savings opportunities in several areas of spend.

Additionally, we realized a $21 million net after-tax gain for adjustments to the fair value of contingent consideration and impairments of intangibles relating to some of our 2015 acquisitions.

Lastly, in the fourth quarter of fiscal 2017, a favorable change in the tax law in China expanded the corporate income tax deduction limitation for advertising and promotional expenses.

As a result, the company released into income its previously established deferred tax asset valuation allowance of approximately $75 million related to its accumulated carryforward of excess advertising and promotions expenses.

In fiscal 2017, we generated $1.8 billion in cash from operations, representing a slight improvement over the prior year.

Excluding the cash costs of Leading Beauty Forward, cash from operations increased 7%.

We utilized cash generated as well as $1.5 billion in new debt to repay $300 million in senior notes that came due in May, to acquire Too Faced and BECCA and to make a minority investment in DECIEM, a multi-brand beauty company.

We also spent $504 million on capital improvements, primarily for retail stores, e-commerce support and counters.

We continued to return cash to shareholders, repurchasing 4.7 million shares of our stock for $413 million and paying $486 million in dividends.

We increased our dividend rate by 13%, the eighth consecutive year of double-digit dividend increases.

Overall, the 7% sales growth and 11% EPS increase in constant currency we delivered in fiscal 2017 is in line with our long-term goals.

Our increased balance and diversification by geography, channel and brand helped us to sustain growth above the industry and deliver our profit objectives.

Looking ahead, we expect global prestige beauty to continue to rise 4% to 5% annually, barring any significant economic downturn.

Our goal is to grow at least 1 to 2 points ahead of the industry by continuing to balance our distribution with higher growth channels and markets and at least generate 1% of that sales growth from acquisitions over the next 3 years.

We continue to pursue efficiency and effectiveness in everything we do so we can both reinvest into our key strategic growth drivers, especially consumer-facing activities, and achieve our financial objectives.

Our Leading Beauty Forward initiative is well on track and expected to deliver $200 million to $300 million in annual net savings by 2021, as we told you previously.

Through the redesign of certain areas of our company, the program has already enabled us to accelerate the changes we needed to support stronger digital consumer engagement, enable greater cost leverage and more aggressively reallocate resources into stronger growth drivers.

The Leading Beauty Forward program, combined with our ongoing cost management efforts, allow us to support continued top line -- strong top line growth and to target average annual margin improvement of approximately 50 basis points and double-digit EPS growth over the next 3 years.

Over the next 3 years, we will also continue to pursue working capital improvement to free up cash.

In fiscal 2017, our inventory days to sell increased by 12 to 201 due largely to the new acquisitions, and we did not achieve the improvement we expected.

And while higher sales growth in certain fast-growing regions and channels next year could create higher inventory in our distribution networks, we have developed more robust action plans to drive improvement in slower-moving SKUs, and the acquisition impact should diminish.

We now aim to reach approximately 150 inventory days to sell by the end of fiscal 2020.

So now let's take a look at our expectations for fiscal 2018 full year and first quarter.

For the year, sales are forecasted to grow 7% to 8% in constant currency, with contributions from all regions and product categories.

We expect growth to be led by many of the same drivers we saw accelerate over the past year: travel retail in China, which are expected to drive improved momentum in skincare; the makeup and fragrance categories; and the online and specialty-multi channels.

Additionally, Too Faced and BECCA will contribute higher incremental sales through the first half of the fiscal year until they lap their acquisition dates in the latter part of the second quarter.

For the full year, they are expected to contribute approximately 2 percentage points to our overall sales growth.

Aside from these strong growth areas of the business, we are also expecting some improved momentum in our large brands.

Currency translation is finally expected to be favorable in fiscal 2018, following several years of a strong dollar depressing our results.

Based on August 1 spot rates of 1.14 for the euro, 1.30 for the pound and 1.12 for the yen, we expect currency translation to benefit reported sales for the full fiscal year by about 1 percentage point.

We continue to achieve cost savings through indirect procurement, A&P effectiveness and demo selling within our ongoing programs, and we expect to see initial net benefits from Leading Beauty Forward as overhead savings are expected to modestly outweigh reinvestment this year.

Some of the savings will be reinvested in digital marketing and advertising, supporting increased activity for many of our brands.

Leading Beauty Forward provides us with the flexibility to invest more in advertising globally and also support consumer-facing IT and brand expansion in fast-growing channels.

And our effective tax rate is expected to be approximately 27%.

The impact of a new accounting pronouncement for stock-based compensation is not included in our estimates at this time.

Diluted EPS is expected to range between $3.87 and $3.94 before restructuring charges and other adjustments, including approximately $0.09 of accretion from currency translation and $0.01 accretion from the fiscal 2017 acquisitions.

In constant currency, we expect EPS to rise by 9% to 11%.

In fiscal 2018, we expect cash flow from operations of approximately $1.9 billion, an increase of 6% compared with last year.

Capital expenditures are planned at approximately $600 million or 4.5% to 5% of sales, primarily to support counters, gondolas, stores and e-commerce, general infrastructure needs in our supply chain and new technology to enable our digital-first and analytical efforts along with the Leading Beauty Forward initiative.

Our sales in the first quarter are expected to rise 9% to 10%.

Key drivers include approximately 4 percentage points of incremental sales from Too Faced and BECCA; expanded consumer reach for many brands, particularly in specialty multi, online and in our international freestanding stores; continued momentum in China, online, travel retail and some European markets, like Italy and Russia.

In the U.S., we expect a continued challenging brick-and-mortar environment in certain channels.

We expect first quarter EPS of between $0.94 and $0.97, growth of 12% to 15%, including dilution of about $0.01 from acquisitions.

Currency translation is forecasted to be neutral to both sales and EPS in the first quarter.

In closing, we are pleased with our results over the past year and the momentum we gained on our strategic objectives.

Given the rapidly changing world of global prestige beauty and the dynamic macro environment we operate in, we are thrilled to be creating additional momentum for the future by accelerating the execution of our strategies while delivering strong result.

And that concludes our prepared remarks.

We'll be happy to take your questions at this time.

(Operator Instructions) Our first question today comes from the line of Faiza Alwy from Deutsche Bank.

So Tracey, first, I just wanted to follow-up on the margins.

You mentioned 50 basis points per annum for the next 3 years.

But just putting in the guidance for fiscal '18, it looks like margins are expected to be flat for '18.

So, one, is that right?

And could you just expand sort of the reasons for why that is the case?

So on a constant currency basis, we expect that margins will be -- will improve about 30 to 50 basis points in fiscal '18.

What I said, Faiza, was that, on average, we expect about -- to deliver about 50 basis points over the next 3 years.

So that could be 30 basis points 1 year, and it could be 70 basis points another year.

But the average we expect to achieve over a 3-year time horizon is 50 basis points.

And obviously, that will depend on where our sales growth ranges.

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

I actually have 2, sorry.

One is can you talk a little bit more about just the cadence of growth between the first half and the second half of 2018 given BECCA and Too Faced acquisition timing?

Are you including any acquisitions in the guidance?

And especially kind of your -- curious about your view on the Americas because ex-BECCA and Too Faced that 3.5% for the company for the quarter was down 2% or 3%.

So just kind of cadence of how you roll off successfully in those the acquisitions?

And the second one, just to take advantage, Dennis, of you being on the call.

For a while, we've asked about Amazon, how that fits into your online strategy.

And it sounds like we're continuing to say that Amazon is not part of the strategy at this point.

But my concern, obviously, is that, and I think many people's concern, is that you might be essentially abdicating your brand and price management on Amazon to third parties who are selling your products.

You might not be selling but Estée Lauder can be bought on Amazon.

So what would you have to see from Amazon to decide to sell there?

So let me start with the acquisitions, and Fabrizio might add on to this.

But we called out, obviously, that they will contribute 4% in the first quarter.

And again, we're speaking about Too Faced and BECCA.

Different lines or different product lines of ours have a somewhat different seasonal cadence in terms of their growth algorithm, so.

And for the full year, they will contribute 2%.

So we acquired Too Faced and BECCA in the November, December time frame of last year.

And so certainly in the second half, we would expect for total company our growth to moderate about 1 point or 2 from the first half due to the fact that we will have Too Faced and BECCA in our sales growth numbers from prior year.

Yes.

And on the [contour] of the cadence, in fact, the activity, also the base of the second 6 months, will be stronger than the base of the first 6 months.

As you remember, we had the first quarter last year at a plus 2%, 3%.

And so that's the other factor that we will need to expect.

So in our estimate, we do expect a stronger top line in the first 6 months from the second 6 months, but we expect also very strong and solid second 6 months.

And as we said, it's 7% to 8% for the year.

In -- on the second question on your question on Amazon.

I mean, we distribute into brand-building distribution which exercise the key drivers of our prestige beauty, including High-Touch services.

And so we are ready to distribute in channels where those criterias are fully respected.

We do distribute in some global e-commerce platforms, like Tmall, where those criterias are respected.

At this point, we do not distribute in Amazon.

And in our fiscal year '18 plan and estimates, there is no distribution in Amazon included.

Your next question comes from the line of Bonnie Herzog from Wells Fargo.

I was actually hoping you guys could comment on any effect you might have seen from department stores such as Macy's rolling out discounts on cosmetics?

First, have you seen a lift in your sales from this?

And then second, what is your view on this strategy?

And how have you been working with some of your retail partners as they're facing headwinds?

Fabrizio, you touched on this a bit, but I was hoping you could drill down a little further on some of the strategies that are being implemented to offset the weak foot traffic.

Yes.

No.

Absolutely.

We are really strongly collaborating with our (inaudible) in department stores to increase traffic.

And I mentioned -- but I mentioned merchandising.

We are relooking at merchandising activity, and we are relooking at our counters, at our system of engagements in store.

And we are making some progress, in my opinion.

But obviously, most importantly, is the way innovation gets executed, the way social media gets executed on the innovation is also an important element to contribute to traffic building again.

The third big factor, we are working very aggressively with the -- with our partners with online.

And they're making excellent progress online, and we are making on our business very good progress on e-commerce with them as well, and that's also important.

The other important thing that e-commerce is increasing the frequency of purchase of our consumers because the repurchase is readily available.

And sometimes in the past, people would have waited to repurchase their regular preferred product to the next visit.

Now they don't need to wait.

So basically, all the gaps of people in usage or repeated usage of product are being filled by the use of online.

That's also very true also in the department store channel, and we are leveraging this reality.

We are seeing some initial progress in the strong doors.

And as I said in my prepared remark, the problem remains in the smaller malls where traffic for the moment is not yet strong.

But I'm optimistic that we may see -- we may have in front of us a moment of improvement in this area in fiscal year '18.

Your next question comes from the line of Mark Astrachan from Stifel.

Maybe just a follow-up and then another question.

So just back to the Amazon question.

Would it be fair to look at it sort of a different way and say you may be more willing to put select brands like Clinique, which has struggled a little bit in North America, on a platform like Amazon to potentially help to get the brand to more consumers?

I guess, what would be your thoughts on that?

And then just more broadly on Asia Pacific, so obviously really strong growth.

I'm curious if you could quantify, if possible, the benefit from geopolitical issues between China and Korea, for example, that has contributed just to the overall category accelerating in terms of the results from yours and some of your large competitors and thoughts on the sustainability of 40% type growth in China?

Yes.

On -- so on the first question, as I said, all of our brand, our company is 100% focused on prestige luxury beauty, meaning that all of our brands, without exception, are distributed in brand-building distribution, proven to have all the drivers of prestige.

So there will not be exception for brands like -- any brand.

And Clinique, by the way, is very much a key prestige brand in our portfolio.

On Asia, yes, 40% is a big number, so I'm not going to say 40% is sustainable.

But a double-digit continuous growth in this moment looks very sustainable because there are several dynamics that are playing in the China situation.

First of all, the growth in China is depending a lot from the lower import duty that's been passed on to pricing into the local product.

This has pushed the market.

Then the second big dynamic is that the Chinese consumers are passionate about makeup and fragrances more and more.

So China, historically, was really driven by skin care.

Today, China is driven by 3 engines, 2 of which on a very dynamic growth.

So this is proven by our retail growth in quarter 4 where we had, for example, some brands, like M-A-C, that just doubled the business in 1 quarter, now obviously helped by the Tmall launch.

But still, the growth in the same door brick-and-mortar was outstanding.

And the same for our Bobbi Brown and the same from our Estée Lauder makeup part, where, historically, Estée Lauder was very successful on skin care only is now adding a very important leg in makeup.

This phenomenon is going to continue in our opinion and that's why it would be sustainable.

Third point in China, we see growth from department stores, from Sephora, from freestanding stores, from online is really across and is across all the cities.

We are in 170 cities.

When we look at our online sales where the purchases come from, an enormous amount to these purchases come from cities we do not operate in brick and mortar, which makes the distribution in China efficient but also the opportunity to grow new consumers coming from cities where we do not operate today.

And then finally, the portfolio of fragrances is giving a good traction for the industry and for us, particularly Jo Malone and Tom Ford at this point.

So I believe there is a lot of traction, and there are a lot of fundamentals in China in this moment which is very strong.

Now you asked about Korean brands.

Yes, in this moment, Korean brands in China are weaker than usual, and this may not be the sustainable part of the story.

But that's why I want to first to explain the sustainable part of the story because I believe that even when the Korea brands demand had to stabilize, I think we will continue to see good traction in China.

Your next question comes from the line of Erinn Murphy from Piper Jaffray.

I guess I just had a question on Asia, in particular, from an operating income perspective.

Tracey, could you just speak to some of the drivers in the quarter that led to the slide in profitability?

And then if you go into fiscal '18, what's assumed in profitability of this region?

So in the fourth quarter, one of the things that we saw was great new product launch from some of our brands.

So the Estée Lauder brand, as Fabrizio mentioned in his prepared remarks, launched their Double Wear Cushion Compact.

There were new launches against Nutritious.

M-A-C had their -- the launch of Tmall.

So we had a fair amount of advertising investment in the fourth quarter to support new product launch activity in China and in some other markets in the Asia-Pacific region.

The Asia-Pacific region is a strong and profitable region for us.

And to the extent that we have new product launches, and certainly you've seen this from us in the past.

One of the ways that we -- given our new product launch cadence, one of the ways that we certainly start the year strong is by investing at the end of the year against momentum launches that we see.

The other new product that we expect to support in Asia Pacific this year is the Fresh Pressed launch from Clinique, which also has had tremendously strong momentum, and we expect that to continue.

Your next question comes from the line of Nik Modi from RBC Capital Markets.

This is Russ Miller on for Nik.

Just wanted to ask on the M-A-C U.S. business.

Can you provide any more details of the state of business there?

Is M-A-C U.S. meeting your expectations?

And what are the plans to further improve the business looking forward?

Yes.

No.

M-A-C U.S. is improving but has still been declining in the last quarter.

So our expectation is that the brand will improve by better innovation, stronger social media, improvement in store and obviously activities, which are about the assortment and the marketing plans of the brand, which are in evolution to better match the consumer expectation and the consumer evolution and also the distribution.

M-A-C is still very much exposed in the U.S. to the foot traffic of brick-and-mortar department stores, and so this will be for some time.

And so we will -- we are working to improve M-A-C trends in the U.S. as well.

But for the moment, we are assuming that M-A-C in the U.S. will get the majority of the improvement from the marketing, as I said, and from the Ulta distribution that I quoted in my prepared remark.

The rest of the benefit will come from the international business.

Most importantly, I want to underline that M-A-C online in the U.S, as was explained in the prepared remarks of Dennis, grew 29% last year, and we are expecting this to continue.

So in summary, better marketing, better in-store activities, more social media, Ulta distribution, strong online are the positives that should create the improvement of M-A-C.

And we are, for the moment, not assuming an enormous improvement in the brick-and-mortar department store part in our estimates, but we are working on it actively.

Your next question comes from the line of Andrea Teixeira from JPMorgan.

It's Christina Brathwaite on for Andrea today.

Just wanted to dive in a little bit more on the skin care business.

Can you talk a little bit more about the accelerators?

Are there drivers of acceleration there?

With skin care being less strong more recently than historically, are you seeing a pickup in the underlying market that's helping the growth acceleration?

And how are you thinking about that market going forward within your expectations for the 4% to 5% growth globally?

So skin care has been picking up and certainly very strongly in the fourth quarter.

And we do have higher expectations -- some higher expectations for skin care growth this year than we've seen certainly in the last couple of years, and there are a few things driving it.

The first, I would say, is strong innovation.

So Clinique, La Mer, Estée Lauder all have strong innovation programs that they've launched and products that they've launched in fiscal '17 that we expect to carry into fiscal '18, along with new innovation that they have planned.

The other driver is obviously the momentum that we're seeing with Chinese traveling consumers, both in China as well as in the travel quarters, and that is driving a lot of skin care growth and consumption as well in various channels of business.

We're also seeing a bit of a pickup in Russian travels -- travelers as well which helps our skin care business.

Your next question comes from the line of Dara Mohsenian from Morgan Stanley.

A few questions for Dennis.

First, just detail-wise, can you give us for e-commerce profitability relative to the rest of the Estée organization, and then within e-commerce, the difference in margins between DTC versus your partner business?

And then the broader question is, and this will build on some of the earlier questions.

But conceptually, there are a number of online retailers, some fairly sizable, that have this open-architecture beauty assortment, so not just premium brands, but mass brands also.

Can you give us more insight on how you decide which online retailers you're willing to partner with or not given your prestige positioning?

And if there are large e-tailers you're not exposed to, does that create risk longer term from a market share perspective?

And then within the e-commerce sites you're at, how do you protect the prestige positioning given obviously ordering off a website is very different than purchasing a product at a department store.

So how do you kind of manage to keep the prestige positioning within e-commerce?

Okay.

Let me address a lot of that.

First of all, the margin is accretive to the company.

In total, it's accretive across our own sites in our direct-to-consumer businesses and it's accretive in our retailer business as well.

So all the components of the business is accretive to the company.

Obviously, it varies by business around the world.

We operate over 700 sites around the world, so depending on how long the site has been launched and what sort of scale we have in that particular business or that brand in that country.

But we're really happy with the profit accretion of the channel.

That's number one.

In terms of the amount of retailers we work with, we work with over 200 retailers around the world.

I personally spend a lot of time with department store CEOs, with the heads of e-commerce businesses in different markets around the world.

And frankly, the #1 consideration in which ones that we focus our effort on are 2 things: where is the consumer going?

And secondly, what is their ability to help build our brands and to build our brand equity?

Okay.

In terms of prestige, we focus a lot on building the beauty expertise of what consumers expect in -- historically, in the real world or in the brick-and-mortar world.

And we bring that expertise online by marrying both real people with real expertise and technology to help them provide really, really outstanding makeup, skincare, fragrance advice online.

So we do not believe that it is all about putting up a website and letting people order and then processing packages.

The expertise and the people part of it is as important to our brands and to our prestige positioning as anything else that we do on the technology side.

Your next question comes from the line of Olivia Tong from Bank of America Merrill Lynch.

Great.

First, in terms of just back to the U.S. and promotions.

I mean, how do you -- obviously a lot of that is being funded by the retailer at this point.

But how do you protect against the potential that the end consumer starts to get used to accepting discounts or delays purchases waiting for a deal, which does ultimately impact the health of the category for you guys?

And then on margins, specifically for fiscal year '18, I guess I'd like to better understand what kind of benefits you expect from Leading Beauty Forward for this year?

Because you had said that you expect the benefits to outweigh the reinvestment.

But 30 to 50 sounds a bit light, relative, obviously, to your 50 basis points annual expectation, especially given that FX is turning from a tailwind into -- from a headwind into a tailwind and the hit from M&A should lap as the year progresses.

Yes.

I'll start with -- to say your question is if the consumer will get accustomed to promotions.

I mean, there are -- consumers are segmented, and there are certain consumers that do wait for promotional opportunities to buy, and this is not new.

This has always been the case.

There are other consumers that don't.

But on average, I just want to make you think that the growing part of the business is the non-promoted one.

And the growing -- the fastest-growing channels are the channels that promote the least.

And so in total, I would say that prestige beauty is -- from a consumer standpoint, is an industry that need a moderate amount of promotions.

And then where there are excessive promotions is a short-term event that generally doesn't generate a change in consumer behaviors.

And then I think Tracey will address Leading Beauty Forward.

Yes.

So Leading Beauty Forward, when we announced the program last year, one of the things that we said was, fiscal '18, we would start to see some of the benefits of the program.

We expected that we would reinvest those benefits back in talent, in some areas and capabilities.

So we talked a lot in our prepared remarks about the digital technology and skill sets that we are enabling in the company that are important for us to drive the growth of our brands, certainly in fiscal '18 and beyond.

So net-net, we are not seeing a flow-through of any of those benefits of Leading Beauty Forward because we are reinvesting them in fiscal '18.

You will start to see more of a flow-through in future years in '19 and '20 and obviously the full benefits of the program in fiscal 2021.

Your next question comes from the line of Rupesh Parikh from Oppenheimer.

So I also wanted to touch on the U.S. prestige category.

So clearly, we're seeing more discounting from the department store channel.

So I was just curious, from your perspective, has anything changed for the category fundamentals?

And as you look at your results recently, have the growth rates -- I guess maybe not your results, but within the industry, at all changed in prestige beauty the past few months?

So I'm not sure I understand completely the question.

But no, we don't see any change in the dynamic of the industry.

Actually, let me take the opportunity to explain one important thing.

Obviously, the industry is based on trial and repurchase.

What the change of the last few years is that the trial activity has become more competitive.

There are more brands.

There have been, in some cases, promotions.

There have been more activity.

And so the world of trial has become more competitive.

But the world of trial tends to be an investment.

The world of repurchase, loyalty, actually has not changed a lot.

The loyalty level on our brands are improving in some cases, stable in other.

The repurchase rate remains very high for our hero SKUs.

So what's happened is that the repurchase is still driven by product quality and by product performance, by brand loyalty, and those things are changing much less.

Now it happens that the majority of the profitability is in the repurchase game.

And so the brands and the companies that own the repurchase game are owning more of the profit and more of the cash.

And the trial game, which is becoming more competitive, is what we are all reacting to, improving our social media activation, our innovation, our activation in store and all the rest.

Promotion is only one element of how this is evolving, and frankly, not the biggest one, in my opinion.

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

I guess everyone else has done 2 things.

So I'm going to go with 2 things.

First was just on Clinique.

So one was just performance in the quarter.

But more specifically, I was curious if you could parse out Clinique's performance, say, in the channels where there's traffic, so whether it's specialty-multi, Ulta specifically, online, things like that.

And anything you -- whether you feel like there are green shoots or examples of where Clinique is improving outside of the Fresh Pressed or if the brand still kind of needs a bit more love and attention.

M-A-C freestanding stores, I don't think we got an update there on the U.S. performance.

I know you talked about brick-and-mortar challenges ongoing.

And then the final thing was on SMI.

Tracey, I think you said that the savings were over $200 million this year.

I believe the guidance was $150 million.

So I just want to confirm that SMI came in above plan and if you were willing to share anything on the outlook for 2018.

So on our stats, and then Tracey will take SMI.

So on Clinique, Clinique is growing in Asia.

Clinique is growing in Europe.

Clinique is growing in Latin America.

I'll ask Dennis in a second to speak about Clinique online.

Fresh Pressed has been a success.

There are several aspects of the Clinique business which is growing.

Clinique in brick-and-mortar U.S. department store is declining.

And since this is still an important part of Clinique business, obviously it's offsetting some of the positive movements.

I'm sorry, then you asked about specialty.

Clinique is growing in specialty in the U.S. Dennis, on online?

So Clinique in -- first of all, online Clinique is our second biggest business.

It's been the first business and first brand that we ever launched in the company, and it is growing over 23% globally.

So it's very strong for us.

Yes.

So -- and then on M-A-C, again, as I said before, I already answered the question of what type of positive signs for M-A-C, which is M-A-C international, M-A-C online, Ulta, M-A-C in the U.S., the improvements in M-A-C marketing activity, et cetera.

But yes, the 2 areas for M-A-C which are still taking the brand down are brick-and-mortar department store and freestanding store U.S. While freestanding store outside of U.S. keeps growing profitability.

So those are the 2 areas where we are working to further turn around the M-A-C.

However, to be clear, the expectation in fiscal year '18 is M-A-C to grow.

Because between the positive and these 2 areas still to be fixed, the positive are much bigger than these 2 areas still to be fixed.

And then on SMI?

So you're right, Lauren.

On SMI, we did deliver over $200 million in terms of savings this year, and our -- and we did expect $150 million.

So we were able to drive additional cost-saving programs in certain areas.

Next year, we're expecting around the $150 million to $200 million savings as well.

Some of the programs under SMI are dwindling a bit in terms of the opportunity.

Some of the actions and programs under Leading Beauty Forward allows us to reignite some of those areas.

Indirect procurement would be one of those areas where we managed to get a fair amount of the lower-hanging fruit in the last few years.

We've expanded the number of categories now that we are focused on with standing up a new organization, and that should allow us to continue to drive savings in that particular area.

So the classification in total, both in terms of our ongoing cost-saving programs and what Leading Beauty Forward is enabling, we expect to have continuous improvement in not just annual cost savings but certainly the leverage of the company as our sales grow.

Your next question comes from the line of Jason English from Goldman Sachs.

I want to come back to margins as well.

Congratulations on the 100 bps of underlying margin growth you achieved last year.

But it's gotten you to the point where you're kind of roughly parity with where you were in calendar '13, so kind hovering around that 15.9%.

Now I know there's been a number of extraneous factors that have battered margins or proven to be headwinds the last couple of years you've had to overcome.

But many of those issues sound like they're dissipating, right?

FX, no longer the same headwind.

Skin care, acceleration through the year.

You're talking about more acceleration next year.

A number of times throughout the call, we've touched on the channel shift and acknowledged that much of that channel shift is margin accretive, and you've got Leading Beauty Forward coming at the same time.

So why couldn't there be a bit of a catch-up here after the stagnation for a number of years?

And is there conservatism kind of embedded in maybe the average 50 bps of expansion over the next few years?

Or are there other offsets that we need to be contemplating, whether it be -- they be in the form of how the business is changing, shifting, cost to compete, reinvestments, et cetera?

Can you help me understand that?

Sure, Jason.

So in terms of over the next 3 years, you're absolutely correct that we should -- I mean, hopefully, and the macro environment is quite volatile.

But as we see currency now becoming more favorable, if currency rates are better than what we have anticipated and reflected in our guidance, there will be upside related to margin.

And we certainly would hope to recover some of the margin that we've lost from some of the currency hits that we've taken over the last few years.

In terms of the acquisitions, yes.

Our acquisitions, if they actually outperform what we have anticipated, then that, too, will allow us the greater margin expansion.

Right now, as you've heard, we're expecting about a $0.01 of impact from Too Faced and BECCA.

If they perform better this year, that will improve our margins as well.

And then Leading Beauty Forward, to the extent that some of those savings get realized earlier, and we have a tremendous amount of momentum against this program.

There has been adoption across the company.

To the extent that we can actually start realizing some of those savings earlier, then that will -- that also will impact.

So I think we're pretty confident that we have a lot of irons in the fire in terms of improving margin.

What we're not confident of, and hence the reason why we are saying around 50 basis points of margin expansion annually, so that's an average over the 3-year time horizon.

Again, it could be 30 bps, 1 year and 70, or as you indicated, 100 last year, excluding some of those items.

What we're not confident of is the macro environment.

So we have experienced a fair amount of geopolitical tension and volatility, whether it's in our travel retail channel or in many of our markets.

And so we don't think it's prudent for us to not consider that, that could be a factor this year and over the next few years.

So that -- whether you call that conservatism or whether you call that prudent, that is certainly contemplated in our guidance.

The last thing I would say is we do have a number of new brands that we are building.

We've done several acquisitions, as you indicated, over the last few years.

And we are supporting them in terms of distribution growth, and in many cases, building their presence in markets that -- new markets that they're entering globally.

And so that is factored into our guidance as well.

Your next question comes from the line of Steph Wissink from Jefferies.

Just a real quick question on your channel mix.

I think you indicated department stores were about 17%, online about 20%.

I'm just wondering if you can help bridge the balance across specialty-multi, freestanding and some of the other venues where you're distributing.

So just a reminder that, that 17% was U.S. department stores.

Our department store mix now is about 40% globally, a little over 40% globally.

So -- and so this is one of the first years where actually our overseas department store business is larger than our U.S. department store business.

Specialty-multi, we talked about on the last call.

And with Too Faced and BECCA and the -- and what they have added to the specialty-multi channel given their presence, we're at about 11% in terms of specialty-multi is where we ended the year.

And then Dennis talked about where we're at online, which is in the 9% to 10% and expecting 11% in this upcoming year.

So that generally is where we're at.

Yes.

I would like to take the opportunity of this question to make one thing noticeable that we have double-digit growth in many of these channels.

But if you just take the combination of travel retail, specialty-multi, online, you arrive, just with these 3, well above 1/3 of the company.

And this is growing very strongly and very double digit, more than 20%, each one of these channels, et cetera.

So we are in a situation from a channel diversification that we have more than 1/3 of the company growing in the high 20s, and that's very, very strong.

So the channel mix is actually a great point of our strategy of multiple engines of growth and diversification and is one of the key elements which is building momentum.

Your next question comes from the line of Steve Powers from UBS.

So just a couple of quick follow-ups on the U.S. business, if I could.

As you look forward to the second half when BECCA and Too Faced become part of the base business, do you expect U.S. growth to return to positive territory at that point?

And can that continue?

Question number one.

And then just to clarify on your '18 outlook, do you expect new door openings versus closings to be a net tailwind to the U.S. business in fiscal '18 because there's a lot of stuff that you're putting in motion?

Or are you still factoring in some net headwind from department store closings?

Just some clarity there would be great.

So yes.

In our plans, there is a stabilization of the U.S. business without BECCA and Too Faced (inaudible), absolutely.

That's what we are aiming for and working for.

And the second question, we believe that we can open more distribution points than what will be closed.

And so that this will be -- is in our numbers.

There is still a net improvement of consumer reach in our plans.

Your next question comes from the line of Dana Telsey from Telsey Advisory Group.

As you think about the freestanding store footprint and how it's growing relative to online, what do you think the potential is for freestanding stores and also specialty-multi channel?

How does that penetration develop?

And then new product launches.

As you look going forward, what brands do you think we'll have the most impactful launches of in fiscal '18?

And is there any quarters we should look to for that?

So freestanding -- go.

Yes.

So Dana, we expect that freestanding stores will continue to show strong growth.

And one of the things that Dennis spoke about is how we are enabling more productivity in our freestanding stores through linking them to more omnichannel capabilities, whether it's loyalty programs or other things that we are doing to try to keep the consumer in a branded experience, leveraging technology, and we will continue to do that.

So we certainly recognize that even though online represents 11% of our sales mix, that means 89% is in brick and mortar somewhere.

And freestanding stores are still -- play an important role.

There is no question that we are making sure, as we look at opening new freestanding stores, that we are contemplating the online growth in the region and how many points of distribution we need in a particular market, so that we can make sure we are not oversaturating any market with brick-and-mortar distribution with the fast growth of online.

So that is factored into our retail plans.

As it relates to specialty-multi, specialty-multi has continued to grow quite strongly, both the online side to specialty-multi, which Dennis talked about how he works with all of our retail partners with their online business to make sure our brands are represented well online.

But we're also seeing strong growth in specialty-multi in the U.S., certainly Ulta and Sephora, but also in our international markets as well.

So we expect that, that, too, will continue as a great alternative for our consumers.

One of the things that we see, and again, as both Fabrizio and Dennis mentioned, we are getting much better at tracking our consumer and utilizing our consumer information for decision-making.

And we see that, whether it's Millennials or Gen X or Gen Z or we ageless consumers like to shop multiple channels.

And so there's more choice than ever out there in terms of shopping.

Online is very convenient, but in store offers a different experience.

And certainly, freestanding stores offer a different experience than specialty-multi, than department stores, but she likes to shop multiple experiences.

And so we are certainly focused on making sure all of our points of distribution, including online, are well represented from a branding experience.

In terms of innovation, we have one of the strongest innovation pipelines.

The -- as I said in my prepared remarks, the innovation is also, in fiscal year '18, will be also very focused on reinforcing the existing, very strong franchises, which are in all brands, Too Faced, Peach or Better Than Sex, Estée Lauder Advanced Night Repair or Double Wear, Clinique taking the Fresh Pressed concept to the next level, et cetera, et cetera.

So there is a lot of buildup of brands.

You are now going to see one blockbuster, which is a high return, high risk.

You are going to see every brand to have 3, 5 big serious initiatives, well focused by category, and the portfolio of innovation of the company to cover all the opportunity by subcategory and region in a much more sophisticated way than we did in the past, thanks to better analytics and better preplanning.

Your final question comes from the line of Ali Dibadj from Bernstein Research.

Just wanted to go to the impairment charges of $31 million on Parfums Frédéric Malle and olio lusso.

What percentage of the purchase price of those brands did that represent?

And clearly, that's typically because the business didn't perform quite as well as you'd thought, so I'd love to understand why, and if it's helping you think about future acquisitions in any way?

No.

Frankly, this is very small.

I mean, only one small fragrance brand is really in this impairment and then one very small brand that was part of the acquisition before.

And most of the other brands are growing double digit, triple digit.

Out of our acquisition, but including the small brands where we have an impairment on, they are all growing double digit or triple digit.

And in the case of the impairment, this actually is a timing issue.

So frankly, no.

We believe our acquisitions have been very successful.

And if there is only one brand that has a small delay, we feel, in the contrast of the many acquisitions that we have done, is frankly not relevant.

We are very satisfied with the acquisitions, and we believe that BECCA and Too Faced and the other acquisitions we have done, particularly in the fragrances or GLAMGLOW, for example, are extremely successful and will continue to be a big part of our growth.

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

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That concludes today's Estée Lauder call.

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