雅詩蘭黛 (EL) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2018 Fourth Quarter and Full Year Conference Call.

For opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Investor Relations, Miss Rainey Mancini, please go ahead.

Good morning.

On today's call are Fabrizio Freda, President and Chief Executive Officer; Stephane de la Faverie, Global Brand President of Estée Lauder; 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, the commentary on our financial results and expectations is before restructuring and other charges, the impacts of the recently enacted U.S. tax law 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 the call over to Fabrizio.

Thank you, Rainey, and good morning, everyone.

Fiscal year 2018 was an outstanding year for our company.

By focusing on strategic priorities, and investing in our multiple engines of growth, we delivered double-digit sales and earnings per share gains in all 4 quarters.

In constant currency, full year sales rose 13%, nearly twice the rate of global prestige beauty and diluted EPS increased 24%.

This was the ninth consecutive year of record sales and one of our best performances in the last decade.

Coming off an excellent fourth quarter, we expect our strong growth to continue in fiscal year '19.

Our success last year was broad-based with higher sales in every region and every major product category, which is consistent with our long-term growth strategy.

What made our performance particularly strong were our over achievements in Asia and in skin care, globally.

We strengthened our hero franchises with new products, expanded in fast growing brand-building channels, and invested in the areas that touch younger consumers.

Our growth was all the more remarkable given the challenges we faced.

Competition intensified from new brands and business models and doors closures and weak traffic affected certain brick-and-mortar department store in the U.S. and U.K.

On a macro level, Brexit and other tensions caused the greater political and economic volatility.

Our results speak to the soundness of our strategy, the sustainability of our business and the resilience of our organization.

Sales climbed globally in virtually all our brands.

La Mer reached an exciting milestone.

Its net sales topped $1 billion for the first time.

We have now 4 brands in our portfolio whose net sales have crossed the $1 billion threshold and each grew globally.

Estée Lauder had a stellar year, achieving record global sales and growing an outstanding 22% in constant-currency, demonstrating its huge worldwide appeal.

Estée Lauder generated strong growth in skin care and makeup, and across markets and consumer groups.

Stephan will elaborate in a few minutes.

Clinique's growth was driven by solid global skin care gains, particularly moisturizer, its largest subcategory and its hero franchise Moisture Surge.

Clinique has strong gains in many emerging markets in Asia, where its hero franchises grew more than 30%.

Clinique continue to diversify its distribution and Tmall became its largest door in Asia.

We are upbeat about Clinique's outlook.

Its skin care innovation program this year will be especially strong and leverages trends of growing consumer interest.

M·A·C delivered global growth, which was supported by strategic investment in advertising to accelerate the brand in fast-growing areas of Asia and travel retail.

This winning strategy is similar to the approach we took with our Estée Lauder brand several years ago, which is paying huge dividends for the brands now.

M·A·C sales in China more than doubled.

In its first full year on Tmall, it was the top-selling prestige makeup brand.

Although, M·A·C continued to struggle in North America, we actively began turning it around by expanding it further in specialty-multi retail in the U.S. and Latin America, strengthening its innovation program.

We are optimistic about M·A·C's future, expected to deliver stronger global growth in fiscal year '19.

Many of our small and midsized brands grew sharply, and several are on track to become billion-dollar brands within the next few years.

We grew our recent acquisitions with successful new products and expanded distribution, which attracted new consumers.

We increased our focus on innovating in skin care, believing there would be a resurgence in the category.

As consumer demand grew, we were ready, with products for different concerns and age groups, and products with instant benefits, which made the compelling visuals online.

Our effort resulted in skin care being our fastest-growing category, fueled by La Mer, Estée Lauder and Clinique as well as Origins and GLAMGLOW.

Much of the category's growth came from Asia Pacific and travel retail where we gained share.

Many of our brands also grew in North America, La Mer creative digital content and authentic storytelling helped to build greater awareness, which led to shared gains in every region and channel.

Importantly, in markets where we can accurately measure, more than half of La Mer consumers were new to the brand.

Estée Lauder strong sales boosted its global rankings to #1 in prestige skin care and #2 in total prestige beauty for calendar year 2017.

Our makeup business remain healthy with Tom Ford and Estée Lauder leading the growth along with M·A·C in Asia.

Our newness brands Too Faced and BECCA expanded internationally mostly in specialty-multi retailers.

And Too Faced opened its first freestanding store, which is located in London.

With improving retail trends and a greater presence in direct-to-consumer channels, Too Faced grew 22% in fourth quarter.

And with strong innovation, it is well positioned to post strong results globally in the year ahead.

Our luxury and artisanal brands continue to drive our fragrance growth, led by Jo Malone London and Tom Ford, which introduced successful scents and opened new doors.

Jo Malone solidified position in the U.K., its home base, where it gained share.

Just last week, Jo Malone launched on Tmall, and sales during the first few days have been very strong.

Combined our newest brands, Le Labo, Frederic Malle and By Kilian, contributed already approximately 1/4 of the total category growth.

We renewed growth in hair care as Aveda tapped into the natural wellness trend with its plant-based product.

Successful launches in hero franchises, such as Invati, played a key role.

Our innovation was concentrated on fewer bigger launches in the largest subcategories, with the focus on supporting our best-selling hero franchises.

This strategy produced terrific results.

Sales from our top 30 new skin care product and initiatives rose more than 30% from the year before.

We continue to expand in the fastest-growing prestige channels, travel retail, online, specialty-multi.

In travel retail, in calendar 2017, we gained share across all categories, became the top ranked beauty company in Asia-Pacific airports and reinforced our global leadership position in skin care makeup.

Our successful travel retail strategy benefited from high global passenger traffic.

Chinese travelers are important shoppers in the channel, and their increasing travel helped in meet growth across our portfolio.

Once again, our online business thrived.

With our own brand sites, retailer size and third-party platform, all growing.

There were more than 430 million visits to our brand .com sites this year.

And these sites have become more than just point-of-sales.

They are also influential editorial platforms, an equity building vehicles.

During the year, we opened 200 new online doors globally and launched e-commerce in 5 new markets.

We truly are a global enterprise and nearly 3/4 of our markets generated gains.

As sales outside North America had expanded, our international business has become one of our best growth engines, now accounting for nearly 70% of our sales.

Emerging markets around the world have been a significant growth vehicle.

Sales in our emerging market jumped 24% and accounted for 15% of our total business.

We intend to continue to invest in many of these markets in fiscal year '19, laying the ground for our continued growth as the purchasing power of their middle classes continue to increase.

Our Asia-Pacific region generated the fastest growth led by an acceleration in China and the resurgence in Hong Kong.

Our China business grew rapidly in every category, every channel and in virtually, every brand.

China net sales well-exceeded $1 billion for the first time.

The country's prestige beauty growth is benefiting from heightened interest from Gen Z and millennial consumer who have considerable spending power and in appetite for high-quality luxury product, and we tapped into that opportunity.

For example, more than 40% of Chinese consumer who were new to La Mer are in their 20s.

We had mixed results in Europe, Middle East and Africa, with strengths across developed markets like Italy as well as several emerging markets like Russia.

We gained share in Western Europe and in Eastern Europe, but sales fell in the Middle East where our results were also affected by our decision to adjust inventories on multiple brands.

The U.K. market slowed as Brexit affected consumer confidence, which primarily impacted certain brick-and-mortar department and freestanding stores.

We increased investment in new winning channels.

Online was a bright spot driven by retailer.com.

M·A·C was our first brand on ASOS, an online company that caters to younger consumer.

It was followed by GLAMGLOW, Too Faced and others.

Prestige beauty was buoyant in North America.

And in each major category, we had brands that gained share in the U.S., La Mer and skin care, Estée Lauder and Too Faced and makeup and Jo Malone and Tom Ford in fragrances.

We have been pivoting our distribution towards faster-growing channels and the scales started to tip in our favor.

Our incremental sales in specialty-multi and on our brand .com sites were greater than the decline we experienced in brick-and-mortar department stores.

Our business trend in U.S. department stores overall showed improvement from the year before, and our sales on their online sites are rising rapidly.

However, total U.S. department stores sales declined mainly due to the liquidation of Bon-Ton.

Over the past 2 years, we have successfully offset the loss of more than $150 million in annual net sales in North America from the closing of Bon-Ton, Sears Canada and other department store doors.

Despite these challenges, we had growth in North America in fiscal year 2018.

Our Clinique brand was the most impacted by the loss of Bon-Ton, and closing of other department stores doors.

Nonetheless, Clinique recouped a large portion of the business by staying in touch with consumer, immigrating them to other Clinique doors.

In total, Clinique North America retail sales increased by focusing on fast-growing channels, product categories and new consumer segments.

Our strategic investment in advertising spending on all of our brands helped get our product noticed.

Now each brand has a digital presence, and digital accounted for nearly 2/3 of our ad spending, up sharply from about 50% the year before.

People are the heart of our company, and we announced our benefits to build loyalty and attract the best talent.

We expanded our benefits around adoption, child and elder care and awarded a special bonus to employees who don't receive equity-based compensation to recognize their terrific contribution.

As we realigned the company focus to strengthen our position in the areas that will lead the future growth, we hired and developed talented employees with the skills needed in these new areas.

We also began offering learning and training opportunity online throughout LinkedIn Learning, helping our employees build competencies in a variety of areas.

We are proud that our commitment to our employees is being recognized.

Our company was named the top-rated workplace by the job site Indeed, and recognized by Forbes as one of America's best employers for women.

Fiscal year '18 gave us a lot to celebrate, but we are now focused on the future.

To that end, we updated our 10-year compass which identifies industry and demographic trends.

These insights confirmed the strategic focus areas where we have invested to build growth and where we plan to continue over the next few years, including skin care, online, traveling consumers, digital marketing and omnichannel retail.

We will continue to seek growth globally among a more diverse and growing middle-class, especially in growth markets like China and in our U.S. home market.

We are the #1 prestige beauty company in the U.S., which still remains the largest market and where we are focused on regaining share.

We continue to build distribution in high-growth channels and leverage better data and analytics to tailor our products assortment by retailer and by specific doors.

This helps us address hyper-local demand by having the right products on the right shelves with relevant messages.

We forecast continued growth in our EMEA region, with strengths in both Western Europe and emerging markets, along with the return to growth in the Middle East.

Our innovation pipeline is powerful and focused on hero franchises, innovative packaging, and new technologies deployed against key subcategories.

We expect this will help our growth become more balanced across our 4 product categories.

Fast-moving technology innovations continue to enhance the luxury beauty experience, and we are advancing features like augmented reality and voice-assisted shopping, which are gaining favor among consumers.

Behind the scenes, we are focusing on improving our capabilities in data and analytics.

Using cutting edge tools and techniques, we are connecting data and insights to measurable actions across our brands.

Now I want to update you on the review of certain testing related to product advertising claim support that we discussed in our last call.

The review is ongoing.

And based on the review to date, the company does not believe that this matter will be material.

In addition, we are closely watching the evolving global issue concerning tariffs and trade, including Europe and China important markets for us, where we intend to remain focused on our long-term growth.

We believe we will have some flexibility to address the potential impact of existing and proposed tariffs and remain committed to satisfying global consumers with our quality products.

Our strategy is solid, has been validated by our updated compass and should allow us to continue to deliver strong top line and double-digit EPS growth over the next few years.

Our growth will be supported by Leading Beauty Forward, which is projected to deliver greater savings than originally planned.

We will invest a portion of the savings in area driving the next stage of growth, including digital advertising, social media, talent acquisition, technology and other capabilities.

At the same time, we are driving efficiencies throughout the organization and leveraging growth, enhancing our profitability.

Tracey will give you an update in few minutes.

Global prestige beauty is exciting, dynamic and fast-growing.

With a proven successful strategy and brands and products that coveted around the world, we expect to continue to drive industry-leading sales and gain share.

I want to thank my leadership team and all the company global employees for truly remarkable results, even in the midst of ongoing challenges.

We look forward to delivering another year of strong top and bottom line results.

I'm happy now to introduce Stephane de la Faverie, Global Brand President at Estée Lauder, who will discuss our iconic brand's stellar year and the strategies that have kept it relevant to a new generation.

Thank you, Fabrizio.

Good morning, everyone.

I joined the Estée Lauder Company over 7 years ago and was honored to become the Global President of the Estée Lauder brand 2 years ago.

Today, 72 years after its founding, our flagship brand is not only the largest in the company but one of the fastest-growing as well.

Estée Lauder is stronger than ever and demonstrates that our authentic roots make the brand relevant for women of all ages, backgrounds and ethnicities around the world.

The brand strategy, which is fully aligned with the company 10-years' compass, has resulted in accelerating growth.

The fourth quarter of fiscal '18 was the fifth consecutive quarter of double-digit sales increase, cumulating in growth at nearly 22% in constant currency for the full year.

The brand gained share in virtually every market around the world.

The main element of our success, our focus on hero products, digital marketing and social engagement and fast-growing channels.

Our winning strategy is also concentrated on the turnaround of our home market, the U.S., and the acceleration of our business as we sell and delight emerging middle-class Chinese consumers around the world.

The first element of our strategy is our focus on hero products, which has reinvigorated the brand, generated strong double-digit growth in both skin care and makeup globally.

Skin care outpaced the growth of the overall brand for the year, the brands largest franchise Advanced Night Repair has been growing high double-digit in virtually every market and channel.

The July 2017 launch of Advanced Night Repair Eye Matrix Concentrate has been a resounding success and have solidify our leadership in the eye treatment subcategory.

Every one of our top 5 skin care franchise is growing and addressing different consumer benefits and needs.

Makeup grew at about the same rate as the overall brand, enabling Estée Lauder to gain share globally, largely driven by our Double Wear foundation franchise.

The collection has been supported by newly activated communications around the wider range of shades and forms, such as cushion compacts, to address the need of consumer worldwide.

Our success in the recruitment and retention of all consumer age group is evidence that our strategy to modernize the brand has paid off.

Today, Estée Lauder consumer are about 1/3 millennial, 1/3 Gen X and 1/3 ageless, this mix puts us in a strong position to continue to win in all prestige channel and in our key product categories around the world.

In addition, the brand global spokesmodel celebrates women of all ethnicity and ages to help the Estée Lauder brand win in virtually all markets.

Our newest face is Anok Yai, a Gen Z, who was born in Egypt of the Sudanese descent.

She joins millennial actress Yang Mi from China and our long-standing American model, Carolyn Murphy, to name just a few.

The second part of our strategy is our focus on being a truly digital-first brand.

About 2/3 of our global midyear spend is in digital and social, helping us to reach new consumer on platforms such as Instagram, Facebook, Weibo, WeChat and KakaoTalk.

We are partnering with major digital and social players worldwide to leverage input consumer insights and data to enhance our storytelling, connect in a deeper way with consumers and build campaign with even stronger returns on investment.

In addition, we have activated the use of influencers.

We have super influencers, including our latest celebrity model Karlie Kloss and Violette, our digital native Global Beauty Director.

We utilize influencer in many markets and leverage our beauty advisor who've been trained to become, what we call Estée micro-influencers.

Taken together, the voice of the brand has been unleashed in a more authentic and powerful way.

The strategy has helped us to better connect with younger consumer at the point-of-sales and decision-making, which is done on social and digital platforms.

And further, we continue to evolve our distribution.

In fiscal '18, over 50% of our business came from fast-growing channel, which include specialty-multi, online and travel retail.

In specialty-multi, our expansion into Ulta in the U.S. has allowed us to you to reach younger consumer, many of whom are new to the brand.

Today, half of our consumers of Ulta are millennials.

Our global online business grew 60% and represent more than 10% of our total sales and even more than 20% in the U.S. and China.

Online is growing from our own brand .com sites, retail .com and third-party platforms like Tmall, which allows us to connect with new consumers every day particularly in smaller cities where we have less physical presence, which makes our consumer reach extremely efficient.

We are also experiencing a rapid acceleration in travel retail where our team are doing exceptional work to support the desirability and the equity of the brand by connecting with consumer throughout their journey, standing at home into the airport and at their final destinations.

From a geographical standpoint, I am proud to say that net sales in every regions are growing, including a solid performance in North America for the year.

In fiscal '18, the Estée Lauder brand passed $1 billion mark at retail for the first time in the U.S., and gain share in makeup in 10 out of the last 12 months.

In the U.S., we're the #1 prestige beauty brand in over 350 department stores and a #1 brand on retailer .com, nationally.

In addition, we continue to hold top ranks in skin care and in the age specialties and foundation subcategories.

Thanks to a laser-focus strategy on hero franchises, online acceleration and the rapid diversification of our distribution, we gained over 1 million new U.S. consumer who are younger, more diverse and more affluent than the average existing consumer of the brand.

We believe we have successfully turned around the U.S. business and are poised for continued growth going forward.

The Estée Lauder brand now generates 80% of its business outside of North America and we've been particularly successful in Asia-Pacific.

We continue to be the #1 luxury beauty brand in the region, led by exceptional performance in China.

For the second consecutive year, we were the only brand ranked as genius by the L2 research firm, which place us as a top brand in digital IQ.

These top performances are fueling our already strong brand equity and desirability with Chinese consumer around the world.

In addition, we continue to serve Chinese consumer with a deep understanding of their needs and diversity by creating relevant products and communication uniquely designed for them.

Estée Lauder is also outperforming in the U.K. growing 5% to the context of a flat prestige beauty market.

Our Double Wear liquid foundation is the top luxury beauty SKU in the market.

We also have strong momentum in our markets in our Europe and Latin America region, thanks to the consistent global strategy.

Last but not least, as part of our Leading Beauty Forward initiatives, our teams around the world have been relentless in reallocating resources effectively to focus on consumer engagement activities while delivering increased profit margin to the company.

We reduced certain selling cost by increasing productivity in profitable distribution channels, rationalizing nonprofitable doors and accelerating our distribution shift to less costly models.

Our promotion expense has also been significantly reduced as a percentage of net sales as a result, we dramatically increased our advertising spend, especially in digital.

In addition, we continue to price in line with inflation and further improve our gross margin.

In summary, thanks to a strategy aligned with the company, we believe our success is a repeatable and sustainable.

Our great progress in fiscal '18 was largely driven by same-store growth, no distribution expansion as well as an increase in repeat purchase from existing consumer, high new consumer acquisition, especially among younger one, and strong creativity and innovation.

All of it taken together makes the Estée Lauder brand a sustainable and profitable growth engine for the company and at the same time, demonstrate that big brands can grow fast while building desirability and exclusivity around the world.

I would like to personally thank my extraordinary boss Jane Hertzmark Hudis, my amazing team and my colleagues around the world for the commitment to the iconic Estée Lauder brand and to our success.

And now, I will turn the call over to Tracey.

Thank you, Stephane.

And I believe many of the elements of the strategy you just articulated our already inspiring the plans of our other big brands.

My commentary today excludes the impact of restructuring and other charges and adjustments including those related to our Leading Beauty Forward initiative and the new U.S. tax legislation.

All net sales growth numbers are in constant currency, unless otherwise stated.

Starting with the fourth quarter, net sales rose 12% to $3.23 billion compared to the prior year.

All regions grew with the largest contribution coming from Europe, the Middle East and Africa.

Net sales in the region rose 16%, led by a strong double-digit increase in global travel retail.

The momentum achieved in the travel retail channel reflects a 6% rise in international passenger traffic, share growth in all travel retail regions as well as double-digit gains across virtually all of our brands.

In addition to travel retail, the EMEA region also benefited from double-digit sales growth in Greece and India as well as solid growth in Italy, Russia and Benelux.

This growth was partially offset by weaker results in other markets notably, the Middle East, the U.K. and Germany.

Our business in the Asia-Pacific region rose 24%.

Continued momentum in China and Hong Kong, both with strong double-digit growth, largely drove these results which was broad-based across brands, product categories and channel.

We also achieved solid sales growth in Japan, Australia and Thailand.

Net sales in the Americas grew 2%, Latin America rose 8%, led by double-digit increases in Mexico and Colombia, which were partially offset by a sales decline in Brazil.

Sales in North America rose 2% as growth in Canada, brand .com and specialty-multi retailers were partially offset by continued softness in department stores, including certain door and retailer closures, as previously discussed.

The continued rebound in skin care led product category growth this quarter.

Skin care sales grew an outstanding 26% with strong contributions to growth from innovation within key hero franchises such as Estée Lauder, the Estée Lauder brands Advanced Night Repair franchise, La Mer's The Moisturizing Cool Gel Cream and Clinique's Dramatically Different and Moisture Surge franchises.

Origins and GLAMGLOW also contributed to the growth and all regions grew skin care sales.

Net sales and makeup grew 2%.

Many of our brands reported higher sales.

Estée Lauder benefited from the continued success of Double Wear foundation; Tom Ford, lip and eye products drove growth in Asia-Pacific and travel retail; Too Faced launched super coverage concealer and extended shades in its Born This Way foundation line; and La Mer launched its luminous lifting cushion compact in Asia.

These gains were partially offset by declines from M·A·C and Clinique.

M·A·C's outstanding growth in Asia in travel retail was offset by continued weakness in the U.S. and U.K. in brick-and-mortar, as well as inventory rebalancing in the Middle East.

Sales of fragrances grew 9%, led by the continued strength of our luxury and artisanal brands.

Jo Malone's limited-edition, Blossom Girl's collection was popular in Asia and travel retail, and a variety of Tom Ford fragrances resonated across all regions.

While Le Labo continued its strong comp door growth and expanded its reach in the Middle East, Australia, Europe and travel retail.

Our hair care sales rose 6%, primarily driven by Aveda's launch of Invati Advanced, the professional color line Full Spectrum Demi+, and the relaunch of Cherry Almond shampoo and conditioner.

Bumble and Bumble's expansion in specialty-multi retailers also aided growth in the category.

For the quarter, our gross margin improved 20 basis points compared to the prior year due primarily to favorable pricing and mix, partially offset by higher obsolescence and higher cost of some new products.

Operating expenses increased as a percent of sales by 110 basis points, primarily reflecting the significant planned increase in advertising support behind digital activities, partially offset by efficiencies in selling operations.

As a result, operating income rose 3% and operating margin decreased by 90 basis points.

Diluted EPS of $0.61 was 20% above the prior year and grew 11% in constant currency.

Earnings per share for the quarter included $0.05 of favorable currency translation.

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

Net sales grew 13% of which incremental sales from our most recent acquisitions contributed approximately 2 percentage points.

Our gross margin decreased to 10 basis points as favorable manufacturing cost and foreign exchange transactions were more than offset by the full year impact of the fiscal 2017 acquisitions.

Operating expenses as a percent of sales improved 80 basis points, primarily due to greater efficiencies in our selling model.

We strategically redeployed these savings into digital advertising, social media and influencer outreach.

Our full year operating margin rose 70 basis points to 16.6%.

This margin included 40 basis points of favorable currency translation and 20 basis points of dilution from the fiscal 2017 acquisitions.

Our Leading Beauty Forward initiative and ongoing cost-saving programs contributed more than $270 million in savings, which helped offset the strategic investments we made to support future growth.

The changes in our P&L reflect the accelerated restructuring of our cost structure to increase our flexibility to both reinvest in areas of profitable growth and to mitigate risk.

Our effective tax rate for the year came in at 22.3%, an improvement of 540 basis points over the prior year, driven by excess tax benefits on share-based compensation and the lower U.S. statutory rate.

Net earnings grew 31% to $1.7 billion and diluted EPS rose 30% for $4.51.

Earnings per share included $0.20 of favorable currency translation and at constant exchange rate grew 24% for the year.

In fiscal 2018, we recorded approximately $193 million after tax or $0.51 per share in restructuring and other charges for our Leading Beauty Forward initiatives.

We are making remarkable progress on the program and have identified additional opportunities with existing initiatives as well as new ones.

We plan to approve specific initiatives under Leading Beauty Forward through fiscal '19 and complete them by the end of fiscal '21.

We now expect to incur charges of between $900 million and $950 million before taxes in aggregate over the life of the plan.

Through this plan, we've established more efficient and effective shared services and procurement organizations, which are generating savings and allowing us to invest in critical areas of the business for future growth.

We now expect the annual net benefit before taxes to range from $350 million to $450 million, which represents an improvement in the cost benefit ratio.

This will afford us greater flexibility to meet our profit objectives while also continuing to invest for sustainable growth and manage additional risk.

We also recorded 3 items related to the new U.S. tax legislation, which we consider nonrecurring.

These charges, the combined impact of which is $427 million or $1.14 per share, are provisional and are expected to be finalized within the 1-year window allowed by the Tax Act.

Moving on to cash flows, cash generated from operations jumped an impressive 43% to $2.6 billion, reflecting our outstanding earnings growth, improvements in our working capital management and the benefit of certain onetime items related to tax refund.

We utilized $629 million for capital improvements primarily for consumer-facing counters and gondolas, retail stores and e-commerce support as well as supply chain improvements and IT.

We've returned cash to stockholders on an accelerated pace in fiscal 2018.

We've repurchased 6 million shares of our stock for $759 million, representing a significant increase versus the prior year.

We paid $546 million in dividends, reflecting a 12% increase in our dividend rate, the ninth consecutive year of double-digit dividend growth.

In total, cash return to shareholders rose 45% compared to last year.

Overall, fiscal 2008 (sic) [2018] was an outstanding year for our company.

Our sales growth of 13% far exceeded our long-term target of 6% to 8% annual growth in constant currency, and was enabled by our improved insight and analytics on where to invest.

We delivered 50 basis points of organic operating margin growth in line with our objectives, importantly, we did so while making strategic investments to build capabilities and support our brand for the long-term health and sustainability of our business.

We delivered double-digit growth in earnings per share, in line with our long-term targets.

We saw a 12-day improvement in inventory days to sell.

We recruited new talent and invested in our existing employees to align our capabilities to future needs.

So looking ahead, global prestige beauty growth has been exceptional in recent years, and we do expect it to rise in the rate range of 5% to 6% annually over the next few years, barring a significant political or economic macro event.

Our goal is to grow at least 1 point ahead of the industry with possibly 1 percentage point of that sales growth contributing -- contribution coming from acquisitions over the next 3 years.

Our Leading Beauty Forward initiative, which launched 2 years ago, is providing the fuel to innovate, accelerate changes to meet future demand and engage effectively with consumers.

We continue to target average annual margin improvement of approximately 50 basis points and double-digit EPS growth over the next 3 years.

Capital investments had historically averaged between 4% and 5% of sales, annually.

We do expect this level to increase to between 5% and 6% per year over the next 3 years, as we invest more to increase the capabilities and capacity of our supply chain, enable enhanced consumer experiences with our new technology and invest in our facilities to optimize some of our workspaces.

We are dedicated to pursuing working capital improvement to free up cash particularly, in inventory.

Our progress in this area has been slower than expected.

This is partially due to the complexity and the shifting geographic mix of our business.

Our strongest growth is coming from geographies further from our manufacturing facilities, increasing inventory and transit time.

We now plan to reach approximately 165 inventory days to sell by the end of fiscal 2021.

Now, let's take a look at our expectations for the fiscal 2019 full year and first quarter.

We are implementing the new revenue recognition accounting standard beginning in the first quarter of the fiscal year.

We will adopt the new standard on a modified retrospective basis, through a cumulative adjustment to retained earnings.

This method does not require us to restate prior year periods.

However, throughout fiscal '19, we will provide a bridge between the new standard and the old one.

The guidance we are providing today reflects the new standard but we have also bridged to the comparable growth expectations we have for our business.

The new rule will impact where we reflect certain cost in the P&L along with the timing of revenue recognition.

As such, our sales and profit growth as well as margins will be affected.

Additionally, our initial revenue deferral based on this implementation will impact fiscal '19 results.

The main impacts are; the cost for certain promotional goods, such as samples and testers, will be reclassified from advertising and promotion to cost of goods; certain payments to customers, such as the cost of in-store demonstration, will be reclassified from selling, general and administrative expenses to a reduction in net sales; and the timing of our revenue recognition will be impacted primarily by customer loyalty programs and certain promotional goods provided to retail customers.

The overall effect on fiscal '19 is expected to be a reduction of net sales, an increase in cost of goods and a reduction in operating expenses.

This will negatively impact sales growth for the year by approximately 1 percentage point, decreased gross margin by 260 basis points and decrease operating margins by approximately 30 basis points.

Earnings per share growth is expected to be negatively impacted by 2 percentage points for the year, due primarily to the change in timing of revenue recognition on some promotional programs.

The changes in the timing of revenue recognition for certain promotional goods will also cause variability in our quarterly sales this year.

We anticipate that revenue deferrals in the first half of the year will begin to be recognized in revenue in the second half of the year.

For the year, net sales are forecasted to grow 7% to 8% in constant currency.

And excluding the impact of the new revenue recognition accounting standard, at the high-end of our long-term goal.

Pricing and targeted expanded reach are expected to each contribute approximately 2 points to our growth and the strength of our existing business will account for the remainder.

We expect growth to continue to be driven by Asia Pacific, to beginning of a turnaround in the Middle East and improvement in North America.

All major product categories are expected to grow with the greatest contributions from makeup and skincare, our 2 largest categories.

Currency translation is expected to turn unfavorable in fiscal '19 as the dollar strengthens.

Based on June 30 spot rates, at $1.16 for the euro and $1.31 for the pound and 6.63 for the yuan, we expect currency translation to negatively affect reported sales for the full fiscal year by about 2 percentage points.

We expect to continue to achieve cost savings through indirect procurement, A&P effectiveness and selling costs within our ongoing programs and from Leading Beauty Forward which are expected to increase to approximately $350 million this year.

Some of the savings will be reinvested in increased digital marketing and advertising to support strong growth as well as for the expansion of our smaller brands.

Cost savings provide us with the fuel and the flexibility to both invest more in capabilities, advertising and brand expansion as well as deliver margin growth.

As we mentioned on our second quarter call, additional provisions of the U.S. Tax Act become effective for us in fiscal 2019.

We now expect that the fiscal 2019 effective tax rate will be approximately 24%, which includes the impact of a lower U.S. statutory rate as well as our current estimates related to the provisions from the Tax Act that go into effect this year.

The impact of the accounting for stock-based compensation is not included in our estimates.

Diluted EPS is expected to range from $4.62 to $4.71 before restructuring and other charges.

This includes approximately $0.20 of dilution from currency translation.

In constant currency and with comparable accounting, we expect EPS to rise by 9% to 11%.

In fiscal 2019, we expect cash flow from operations of approximately $2.4 billion slightly lower than fiscal '18 due to the prior year onetime benefits for tax refunds and the first installment of the toll tax.

Capital expenditures are planned at approximately $835 million or 5% to 6% of sales, as discussed earlier.

Our sales in the first quarter are expected to rise 9% to 10% in constant currency using comparable accounting for revenue recognition.

Currency translation and the accounting change are each expected to negatively impact growth by 2 percentage points, so 5% to 6% reported, including both of these items.

We expect first quarter EPS of $1.18 to $1.21 including dilution of about $0.04 from currency translation.

EPS growth in constant currency and comparable accounting is forecast to rise by 7% to 10% for the first quarter.

In closing, we are clearly pleased with our outstanding results in fiscal 2018 and are excited about the momentum behind our strategic initiatives.

Global prestige beauty is a fast-moving and competitive industry and the macro environment grows more volatile by the day.

Our ability to adapt in this rapidly changing landscape is a testament to our sound strategy and to our amazing people.

That concludes our prepared remarks.

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

(Operator Instructions) Our first question today comes from Erinn Murphy with Piper Jaffray.

A lot of great content in those remarks.

I guess my question first is on the U.S. You called it out being positive in the fourth quarter.

Can you talk a little bit more about the dynamics that you're seeing between the department stores and then the growth, in particular, you've been seeing within specialty-multi and online?

And then, Tracey, as you think about the guidance for fiscal '19, what are you assuming for the growth rate within the Americas?

So we -- on the U.S., we do see improvements mainly coming from the strong retail .com of our department stores.

And we are encouraged also to see brick-and-mortar business in North America department store doing better than last year.

However, in addition, remember that we are facing the liquidation of 250 stores of Bon-Ton that have significantly impacted our business.

For perspective, Bon-Ton, just in fiscal year '18, was for us $68 million net.

And as I said, we have -- we had to face the closure of the equivalent of $150 million net of department store doors in the past 2 years.

So this has impacted.

But despite that, we have been offsetting this with the improvement in retail .com of department store and via the very good performance that we see in specialty-multi and in our online sites.

So we are committing -- we're really committed to continue collaborate with our department store partners, with our specialty-multi traffic to continue drive traffic.

And also, I want to say that we have -- in the Leading Beauty Forward, we have restructured our field sales force.

And the new field sales force is just being deployed early July.

And we have reduced the paperwork and administration activity, resulting in a 70% increase in consumer-facing activity and product served and more tailored to each store, starting this August.

So we're pretty positive on what we're doing to turnaround the business in the U.S.

And as it relates to the Americas for fiscal 2019, we're expecting low single-digit growth.

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

So first off, Tracey, can you give us the impact to earnings from FX if you used spot rates today, I'm estimating another $0.08, $0.09 of earnings impact for the full year.

Does that sound like it's in the ballpark?

And then, hopefully -- that's just a clarification question, so hopefully that doesn't count as my question.

The broader one, Fabrizio, I wanted to get your thoughts on the potential for tariffs on the U.S. beauty industry in China.

You mentioned, specifically, you've assumed some impact in your fiscal 2019 guidance.

So I was hoping you could be more specific there.

And are you basically sort of assuming an impact just from already announced plans, or are you assuming there may be some factors that emerge that aren't transparent today, either directly or indirectly on consumer spending, whatever it may be, that have an impact on your outlook for fiscal 2019?

Yes.

You start.

So on the currency, I'm not sure I picked up exactly on your question.

But we expect a negative currency impact this year of $0.20.

And obviously, we anticipate -- we experienced a positive currency impact in fiscal '18.

Yes.

On the tariffs.

So we -- the tariffs in China has not been yet implemented, it's only a proposal.

So first of all, it is not clear if the proposed tariffs will be implemented or not.

But for information, currently, less than 1/3 of our products that we sell in China are currently originated in the U.S. On the other side.

If tariffs were applied, we'll be also impacted from imports of components from China into the U.S. The other thing to consider is that we have 80% gross margin.

So the impact on tariffs on this kind of industry will be less onerous than what happens on commodities.

We believe we can mitigate the impact of tariffs, if they had to happen, through some flexibility within our guidance, our manufacturing footprint, our LBF programs.

And we will do our best to manage tariffs, if they happen, without impacting pricing directly.

Because we will stay oriented to the long term, we want to continue serve the Chinese consumer in the long term, to continue grow in market share in China, and we will stay focused on that.

I want to also to clarify that we are already managing tariffs in Europe, which actually is a bigger business, which are fully reflected not only in our guidance and in our fourth quarter, partially, in our fourth quarter but basically in our guidance for next year.

And we are managing this also doing our best not to do price increases because of tariff or relative to tariff.

So that's our situation, but we continue to hope that tariff will not be applied, also because beauty is not a category of tension and represents benefit for all countries.

Our next question comes from the line of Andrea Teixeira with JPMorgan.

It's Christina Brathwaite on for Andrea.

So I just wanted to talk a little bit more about the raise in Leading Beauty Forward savings guidance.

Can you just dive into what the drivers are there where you found some more incremental savings.

And should we expect that to start flowing through in the America's profitability, we were surprised to see that turn negative this quarter?

So any kind of color on when that can stabilize would be great?

Yes.

So let me answer both of those questions.

And as it relates to the Americas, just recognize that, in the Americas segment, we also have our corporate expenses.

So bonus accruals for the corporation.

We have some of our global production expenses related to some of our advertising programs flows through our Americas segment.

So those are some of the drivers along with some incremental spending for programs just for some of our brands in the Americas.

As it relates to Leading Beauty Forward, some of the additional programs that we've added and we've spoken about them before, enabling our creative team to create more digital assets, so really transforming the processes and the technology in our creative areas in order to be able to create more digital assets.

Restructuring some of our field organization to actually create more support organizations for them so that they can spend more time out in-stores, coaching and selling with our beauty advisers and with our selling staff.

In our supply chain area, we're investing to increase the agility and speed of our supply chain.

Certainly, managing all of the complexity that we see in our global network as well as the frequency with which innovation is happening in our portfolio.

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

I have a few questions just about your momentum and just to get a sense of whether that's going to continue, and really along 2 dimensions, one is, I want to get underneath what's happening to your strong top line guidance for next year and your -- at least less-than-consensus EPS growth and I guess taxes, your tax rate's changing and all that.

But what's your like-for-like EBIT margin percentage going to change?

There's a concern among investors that, yes, you're growing but you're buying your growth.

And in fact, your investments will have to continue to increase, whether it be on M·A·C or channel shifts, and not stuff that you shouldn't be doing.

It's just that your margin is going to be under pressure as you invest a lot more.

So that's 1 part of momentum.

And the second one is that do you see anything at all to temper the enthusiasm of the Chinese consumers globally?

Obviously, a big part of your top line and your margin mix across travel retail in Asia-Pacific.

I mean, we've certainly heard some companies voicing some very, very recent, like past couple of weeks, worry about the Chinese consumer getting a little bit more concerned around trade wars, everything else impacting their businesses.

So thanks for those 2 on momentum.

Yes.

Let me start, just the overall, on the first and Tracey will give you also her specifics.

We are really committed to the 50 points of margin growth in the next years.

And we -- all what we see, we will deliver this.

There are impact on taxes, accounting, currencies, and we are managing through this.

And I hope you realize we are trying to put it on the table in the most transparent possible way, the assumptions that we are taking in managing the complex amounts of restatement.

But as far as the ongoing business, the combination of Leading Beauty Forward programs together with the margin-accretive aspects of many of the new channels and markets in which we are expanding should guarantee us to continue increasing half a margin point and invest in growth at the same time.

To be clear, the promotional discounting as percentage of sales is going dramatically down.

So our investment is all about brand equity building.

And we have gone for a few brands that we advertised, with 30 brands in our portfolio advertised.

So creating the power of long-term growth in the new kind of channels that we are addressing.

So to be clear, this wing of channels goes with this wing of support with the consumers.

And they go hand-in-hand and are providing us a stronger engine of growth than in the past.

And as I said, thanks to the other element of margin, the 50% margin.

Tracey, if you want to add?

No.

I think you answered it well.

So if you, Ali, think about fiscal '18, we actually delivered 70 basis points of organic margin expansion.

So we did have positive currency benefit of 40 basis points.

The acquisitions did suppress our margin by about 20 basis points.

So when you look at all of those factors, we delivered about 50 basis points organic operating margin in line with our objective.

So to Fabrizio's point, on average, our model suggests that we can comfortably deliver 50 basis points on average of margin expansion -- operating margin expansion, and continue to invest in all of our growth areas.

That certainly is enabled by Leading Beauty Forward and some of the work that we're doing under that program over the next few years.

On China, we -- today, we do not see a sign of slowdown of Chinese consumer in to sales -- out there, neither in China Mainland, nor in the traveling corridors that we are monitoring.

So, however, we want to clarify that the assumptions in our guidance for the year assume a certain level of normalization of the growth of China and travel retail in the rest of the fiscal.

But in term of the power of the long-term opportunity, I remain completely convinced the China market has the potential of a double-digit growth year-after-year.

Because the fundamental drivers are not changing.

The rising of the middle class, the love of luxury and beauty particularly, the ability of the online execution in China to serve 650 cities, where we do not have physical distribution, and the ability to have our physical distribution designed in the most productive way of the world, with the super high productivity because only focus on high-traffic areas and the rest is served by online.

So that model is extremely powerful and has long-term potential.

Now may it go through up and downs depending on the overall economy trend in the U.S. or other potential thing impacting in the short term, obviously, yes.

That's why we are assuming a certain normalization next fiscal year, but this remains one of the biggest long-term opportunities in front of our company in my opinion.

Our next question comes from the line of Caroline Levy with Macquarie.

Congrats on an amazing year.

I would like to just get your assumptions for what's going to happen in the European department store environments in fiscal '19, and maybe even longer term, it looks like the U.K. is facing a bankruptcy today.

I don't even know if it's a chain that you're operating in, but do you see it going the way of the U.S.?

And are you prepared for that in the way that you've done your projections?

And maybe, just fill us in on how it might be different from what we've seen in the U.S., please.

Yes.

First of all, what is very different from what we have seen in the U.S. is the penetration of department stores in Europe.

So if you mean U.K., I'll talk to U.K. in a second.

But in Western Europe, the penetration of department store is very, very limited.

So the amount of selling square meters per person are really completely different.

So the impact in Europe, even if there was the same warring trend that we have seen in the last years in the brick-and-mortar retail in the U.S., it will not have anywhere a similar impact.

The other thing is that the -- frankly, the online penetration in Western Europe is significantly lower than the one that is in the U.S. And so the ability of moving sales online versus Europe for the moment is been inferior and because of that, the brick-and-mortar is more solid and less exposed to sudden changes in this area.

As far as the U.K. is concerned, there are some department stores which had been affected by crisis.

House of Fraser is the most significant one.

And we are monitoring the -- we are in House of Fraser.

For perspective, in proportion to the U.S., since that's the comparison you are making, House of Fraser is less than 10% of our U.K. business, and is more in proportion is what Bon-Ton was for the U.S. But there is -- for the moment, we don't have signs that this retailer will close.

Actually, we have sign they will be restated, and that some doors will close, it will be rationalized for a business that could be even stronger after this rationalization.

But in the U.K., the same thing is happening.

Meaning, sales are going to the luxury part.

They are growing more in the online area of -- the online channels.

And so the mitigating factor, we are doing so much earlier and better in online there that, obviously, this is compensating.

The other part, which is more specific to Estée Lauder, is that, don't forget, that in the U.K. we have Boots, which is a significant percentage of our business.

And so our business in U.K. is less concentrated in department stores.

Our next question comes from the line of Steve Powers with Deutsche Bank.

So first just a cleanup on the guidance piece and then a longer-term question.

The first one is, you just -- can you talk a little bit more about why the revenue recognition change has a $0.10 impact this year?

Is that something you'll get back in 2020?

Or is that more a permanent step-down or catch-up from where you ended 2018?

That's the cleanup question.

And then, speaking more, I guess, strategically, Fabrizio, I wondered if you could just expand more on what you see as a opportunity in emerging markets outside of China.

Clearly, in fiscal '19 -- usually can tell with a significant amount of macroeconomic volatility, but even with that, I think your guidance implies opportunities for growth in that block of markets.

And as you think about your 10-year compass, recognizing the importance of markets like the U.S. and Western Europe and China, I'm just curious, as for your expectations for other emerging markets as a driver of growth for Estée Lauder.

Okay.

So as it relates to revenue recognition and $0.10 of EPS impact, it is an accounting and reporting issue only.

It is a shift in terms of when we can recognize revenue relative to our promotional program.

So it requires us to defer a portion of our revenue until a certain promotional activities have occurred, which is different than how we were accounting for it in the past.

So it is a shift forward, and we would expect, though, being under this guidance.

Next year will be comparable, but it will also shift some revenue forward.

But at least, fiscal '20 and fiscal '19 will be comparable.

Our commercial activities will not be impacted.

There is no change to our shipping patterns or to actually the timing of promotional activities.

Just -- and the spend related to those activities will not change as well.

It's just the recognition of revenue.

So it is a shift.

And as far as emerging markets, now we really believe that the emerging markets will continue to be a driver of growth.

However, emerging markets are, by definition, more volatile, and that's why, we look at it as a portfolio where we have several emerging markets.

We are building in each one of them at a different speed and with the flexibility of allocating resources every year to the one that represents the best opportunity, not only of growth but also return on investments.

So it is the portfolio markets where we use enormous amount of flexibility depending on the situation, with a clear long-term goals to have strong market share in each one of them in the medium term.

So today, we have reached already 15% of our business.

As we said before, growing 24%.

We expect this to continue.

In the next year, what we have in mind is that we see continuous accelerating opportunity -- actually exciting, I should say, in India where we are going all the way in Russia in this moment is very strong.

We see the opportunity next year to stabilize Middle East that has been a drag to our overall portfolio, and we see the opportunity to restart growth in Brazil.

Obviously, we are waiting to see the elections in October, November, but that could be a great opportunity if this comes.

We expect to continue success in Mexico and in other areas where we are doing really, really well.

And amplify the portfolio in new markets in Asia, like the Philippines, Indonesia, where we are seeing some amazing growth in this moment and great opportunities for the future.

But as I said, there will be, every year, 1 or 2 of these markets that will be an issue and 1 or 2 that will be in those areas a tremendous opportunity.

And you should see us as having the flexibility to direct our investment as needed year-after-year, while we stay focused on the long term.

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

First, I was wondering if you could give a little bit more detail on the investments that you're doing in M·A·C in North America?

And then talk about what your profit expectations are for 2019 in the U.S.?

But more broadly, the U.S. has obviously been a struggle for some time, and I know you're not interested in expanding it to the largest online provider.

But where is the line in the sand on incremental retail expansion beyond, like, the Ultas and the Sephoras and such?

I mean, would you consider partnering with other retailers, potentially specialty apparel, or other ones to sort of spur activity in your home market?

So Olivia, I'll start.

In terms of M·A·C, as you're aware, we have expanded M·A·C, and Ulta is doing quite well.

We will look for further expansion there.

The brand is doing quite a bit as well in terms of their social media programs to improve the productivity per door of the business here in the U.S. And as it relates to specialty and whether or not we would partner with the specialty retailer, I mean, certainly, the M·A·C brand has done that in the U.K. with ASOS if there were one here that had the same type of characteristics that we look for in terms of a third-party presence for our brands online, then we would consider that as well.

But there is a tremendous amount going on with the M·A·C brand in terms of everything from in-store experience to driving their online business more and certainly other considerations.

And again, I want to add just innovation.

So M·A·C is working on innovation in the U.S. It's working on improved digitalization in the U.S. So it's not only a distribution swing.

It's not only an improvement in distribution.

It's an improvement in every single aspect of the brand that we are working on, and we believe we'll deliver results.

In term of which retailers to partner with, frankly, in this moment, in the U.S., we are really focused on growing same door in the best possible way, is a matter of -- as I said, we have the new sales force, with much more attention to consumer-facing activities.

We can improve our activity in stores on all fronts, and we can support our current retail partners to deliver much more from our brands and continue the online expansion, where we are doing fantastic in the U.S., and the current model of brand .com and retail .com is working very well and leads the way of third-party platforms of high quality, we definitely consider them.

And with that strategy, the Lauder brand, if you heard the presentation of Stephane, is exactly the strategy the Lauder brand is following in the U.S. And Stephane just explained what great results the brand had.

Maybe, Stephane, you want to clarify that again?

Yes.

Absolutely, Fabrizio.

I think like in the U.S., like we mentioned in introduction, I think we've seen now a sustainable turnaround of the brand, and actually we see our like-for-like growth in-store being actually super than our overall growth.

So basically the half and the renovation that we've put on our top doors, the shift of distribution for accelerated, like, fast-growing channel, has actually proven that today, there is a sustainable growth without necessarily needed today to increase distribution.

But like Tracey said, if opportunity comes, then we will explore them.

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

I guess I wanted to follow up on Olivia's question around the Americas profitability.

Because maybe I missed it, I don't think you addressed that.

The margins have clearly come under a lot of pressure.

You mentioned that this year you had some of the corporate expense allocation that which was a headwind, particularly in the fourth quarter.

Can you quantify that to give us an underlying read for the business?

And then, thinking on the Forward, we've got growth in online, we've got growth in specialty-multi, but it seems like that's going to be balanced or potentially more than offset by deleveraging your own freestanding stores or department stores.

Is there a path to margin recovery that would get you back in sort of the historical high single-digit range?

Or is this sort of permanently rebased?

Or even worse, is there a glide path where it can continue to be pressured on the Forward?

So I'll start, Jason.

In terms of -- the North America team has done a terrific job in terms of recognizing the retail environment and the declining traffic as well as, as Fabrizio said, the door closures that we've experienced in the U.S., with rightsizing and resizing the business in order to stabilize margin and then start to improve margin.

So in the fourth quarter, the bulk of the decline was related to corporate expenses.

And the North America business was relatively flat in terms of profit.

In terms of what we expect going forward, we do expect, as I said, we do expect North America to deliver -- or the Americas to deliver low single-digit growth.

So we do expect North America as well to deliver low single-digit growth.

And with some of the continuing work that they're doing, as it relates to executing some of the Leading Beauty Forward initiatives and some of the other programs that they're working on to really improve door productivity in the remaining doors and certainly the top doors in the U.S., we do expect to start to see margin recovery in the Americas and in North America for sure.

Yes.

And in term of the balance of the distribution, the question there is a, this year, and I said it in my prepared remarks, the scale is changing in our favor.

So this has been -- fiscal year '18 has been the first year where the extra sales we built in fast-growing channels were superior to the sales we lost in brick-and-mortar department stores and freestanding stores.

So that's the key thing that happens.

So if you exclude the input of the very big door closures from the year, as I explained, $164 million over 2 years, $68 million of Bon-Ton in fiscal year '18.

If you exclude these closures, the scale is in our favor.

I mean, we have now the right platform of distribution to grow same doors in the correct way for the future.

So a lot will be about the power of our innovation, the power of our investment in media, the power of getting traction from the brand.

And then keep in mind that the door closures, also, we are pretty good in maintaining the consumption on our brands even when the door close.

However, there is a transition period when door closed where this has to happen that can have a short-term impact on sales.

It happened already in fiscal year '18.

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

I wondered if you can talk a little bit about Clinique and some of the metrics you give for others like Estée Lauder and M·A·C in terms of their -- of those brand's performance in some of the stronger doors.

So if you were to look at Clinique, I guess, particularly in the U.S., and if it's possible sort of exclude the departments that -- brick-and-mortar departments or channel, are you seeing any sort of positive, encouraging signs on Clinique?

How it's resonating with different consumer demograph -- or cohorts in terms of age group?

I know you mentioned Moisture Surge, but any other franchises, how they are -- how have they been doing?

Yes.

Okay.

Tracey indicates I should answer this one, so...

And I won't, no, I can answer.

I mean, Clinique is doing incredibly well in Ulta.

It's doing very well online.

So in the U.S., Clinique, we are certainly starting to see, as you indicate Lauren, a pickup outside of the department store channel.

The innovation this year and certainly heading into next year is quite strong.

So we're quite excited about what we've seen thus far from Clinique.

Moisture Surge, they continue to innovate under that franchise.

It's doing very well.

Dramatically Different, which is their legacy franchise.

They introduced a new jelly product, which is -- my daughter is particularly fond of.

So that too is doing quite well.

And their Fresh Pressed franchise is also doing well.

So they got a lot of great skin care heading -- innovation heading into next year, and they've got some exciting new innovation that we'll let the brand announce and tell you about going forward.

So we're very encouraged by the signs that we see from Clinique this year.

And again, as Stephane indicated, we certainly have the track record for having a large brand resume growth in North America and in the U.S. even with the current environment.

Yes.

I just want to add, I'm really passionate about the work that Clinique is doing in this moment.

I think, we will see Clinique results in North America in the next years getting better and better.

The innovation, as Tracey said, is really promising in my opinion, particularly the skin care innovation.

And also, I want to remind that Clinique is the most affected of all our brands to these closures.

So the results of Clinique being able to grow retail in the last quarter in North America in presence, of Bon-Ton since April, basically, not taking shipments and not working.

And in the closures of what happened in Sears in Canada in the previous period and in other doors closures.

So Clinique has been able to offset all of this and stabilize or grow, depending by category, in a way that as soon as this negative will moderate, we will see the power of Clinique acceleration.

Our next question comes from the line of Steve Strycula with UBS.

Few questions on China, I wanted to -- first of all, Tracey, give us context as to how large China is.

I know it's growing very rapidly.

Is it around 9%, 10% of company sales?

And what did it grow in fiscal 2018?

And then I have a follow-up.

Okay.

So you're spot on.

China is about 9% -- a little over 9% of our sales now with the results that we saw in terms of China growth.

We don't comment on individual country growth, but rest assured that China grew very, very, very strong double digits in fiscal '18.

So great performance in China.

Okay.

And then a follow-up for Fabrizio.

Just wanted to understand, it sounds like you're getting a lot of incremental consumers across China even with Tmall's presence.

Can you give us a sense as to how Tmall's -- your ramp on that platform has impacted different tiers of cities, like Tier 1, 2 versus 3 and 4?

And how, if at all, has it impacted department store sales within greater China?

Yes.

It is -- you know this -- the growth of China has been extraordinary like-doors.

And so our department store in China have, as we speak, the strongest like-door growth they ever had in the last 10 years.

So Tmall, in that sense, is not negatively impacting the department store growth.

The reason for that is that, as you indicated, we are in about 118 cities, with our physical distribution in China today across all our brands.

Obviously, 118 is the number of Lauder that other brands much less.

When you go to brands like M·A·C or others, we are still in, I think, around 50 or whatever 60 cities.

So there is an enormous amount of physical distribution opportunity within the top 100, let's say, 120, 150 cities of China.

But the Tmall reached 650 cities.

And from the data we see, the large majority of our sales in this area come from the cities where we do not have physical distribution.

And that's the very efficient model because the physical distribution in the 118 cities is very efficient because the productivity per door is high and growing.

And that the new consumers in the city, where physical distribution is not yet there or where the level of productivity would not justify physical distribution for the time being, can access the brands via Tmall or via brand .com.

This model is working and creates this increase of consumers in a very efficient way and also, with reasonable capital cost.

Our final question comes from Dana Telsey with Telsey Advisory Group.

Stephane, just wanted to touch on, as you think about the Estée Lauder brand and the improvement that it's made, how do you think about the distribution channels for this business?

What should it ultimately be?

And how do you see the margin opportunities?

Thank you for your question.

I think what I was trying to highlight in the presentation that we are -- is the -- we've been able to have this amazing growth without increasing distribution.

We have some shift of distribution in some areas of the world, but we really believe that today, our really growth is coming from, on one side, strengthening our position in the existing distribution, especially focusing on all our flagship doors around the world, but at the same time making sure that we serve the consumer in the fast-growing channel, like specialty-multi, online and travel retail.

And we really believe that this new distribution, that is growing faster than the average, is really helping us today to increase the desirability and the equity of the brand overall in the world.

So today, the opportunity is in front of us.

The Estée Lauder brand is basically like building on all this opportunity, and really believe, again, that makes the model a very sustainable and profitable model actually for the company going forward.

And the most exciting things show the path for all big brands actually to be able to just like apply the same strategy and to grow like that globally.

I just wanted to underline that being able to grow 22% without increase of distribution, since our profitability is a lot influenced by same-door sales, that obviously speaks highly for the ability of the Lauder brand to continue improving profitability.

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

If you were unable to join the entire call, a playback will be available at 1 p.m.

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That concludes today's Estée Lauder Conference Call.

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