Estée Lauder Companies Inc. Earnings Call Transcript

| About: The Estée (EL)

Estée Lauder Companies Inc. (NYSE:EL)

F4Q10 Earnings Call

August 12, 2010 9:30 AM ET


Dennis D’Andrea – Vice President, Investor Relations

Fabrizio Freda – President and CEO

Rick Kunes – Executive Vice President and CFO

Greg Polcer – EVP, Global Supply Chain


Alice Longley – Buckingham Research

Wendy Nicholson – Citi Investment Research

Andrew Sawyer – Goldman Sachs

Nik Modi – UBS

John Faucher – JPMorgan

Bill Schmidt – Deutsche Bank

Linda Bolton-Weiser – Caris & Company

Chris Ferrara – Bank of America/Merrill Lynch

Ali Dibadj – Sanford C. Bernstein

Lauren Lieberman – Barclays Capital

Joe Altobello – Oppenheimer

Mark Astrachan – Stifel Nicolaus

Connie Maneaty – BMO Capital Markets

Victoria Colin – Atlantic Equities


Good day, everyone. And welcome to the Estée Lauder Companies Fiscal 2010 Year End 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.

Dennis DAndrea

Good morning, everyone. On today’s call are Fabrizio Freda, President and Chief Executive Officer; and Rick Kunes, Executive Vice President and Chief Financial Officer. Also with us is Greg Polcer, Executive Vice President, Global Supply Chain, beside from his responsibility for the entire supply chain, Greg oversees our SMI program and Co-Chairs the project management team with Rick, which is responsible for our savings program.

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. You can also find a reconciliation between GAAP and non-GAAP results in our press release and in the Investor section of our website.

With that, I’ll turn the call over to Fabrizio.

Fabrizio Freda

Good morning. Thank you for joining our fiscal 2010 year end conference call. My remarks this morning, I will discuss the company achievements during the past year and how we intend to continue our momentum in fiscal 2011. My first year as Chief Executive Officer, I’m extremely gratified that our company performance was outstanding in so many respects.

Last year, we laid out our plans and you will see that we have delivered and in most instances exceeded our goals. Our first major accomplishment was successfully launching our four-year strategy and we made excellent progress. We accounted our strategy is sound and sustainable. Our senior management team and entire organization are aligned behind it and our initial results show we are winning.

In addition, our performance was strong. Many financial measurements hit all-time highs. This is even more extraordinary considering that our results were achieved during one of the most difficult economic times.

We also made great strides evolving our organization and strengthening our capabilities to build our brands, fully leverage our innovation and improve profitability. But it is important to note that even as the company reorganized and changed its processes we held on to our core family values and historical strengths, creativity and interpretation speeded are ingrained in our heritage and culture.

Now, let me highlight some specific financial results. These numbers are before charges for restructuring and the retirement of some debt. We announced this morning that full year sales were $7.81 billion, up 7% from the year before. Earnings per share were the highest ever at $2.75, nearly double last year results.

Many other financial metrics also set records, including net sales in global skin care, the Asia region and our travel retail businesses. Cost of sales at a low of 23.3%. Operating margin increases of $420 basis points returning of $552 million. Cash flow from operation of $957 million and inventory of solid improvement.

The backbone of our strategy is to be more competitive against share by growing sales at least 1% ahead of global prestige beauty every year. By increasing our share in many of our largest countries in channels, including US prestige department stores, travel retail, the U.K., China, it’s clear, we have achieved that goal.

In U.S. department and specialty stores tracked by MPD, our shares standard (inaudible), excluding a prescriptive brands. The gain was led by Clinique, the biggest U.S. beauty brand, which has increased share the last two years. Being able to grow such a big brand is a major achievement. M A C, Bobbi Brown, La Mer and Origins also gained share.

In other objective we increased profits in a sustainable way. In this first year we reached an operating margin of 11.2%, a big jump from 7% in fiscal 2009. All of our costs declined as a percentage of sales, except advertising.

To further diversify we set out to generate more than 60% of our sales outside of the United States and this year we achieved already the goal, hitting 62% of total sales. Our brand has strong organic growth, expanded into more countries and opened overseas doors. Also, our travel retail business far exceeded our expectation, driven by successful conversion of travelers into buyers.

We also established broader objectives U.S. to better complete -- compete globally. In terms of product catalysts, our focus is more on skin care, particularly in Asia, again, we had a great success. In local currency our skin care sales grew 9% globally and 11% in Asia, where skin care counts for approximately 60% of our sales.

As a result of this focus, skin care is now our largest category in both sales and profits. The skin care gains were led by two high profile launches. Estée Lauder reformulated Advanced Night Repair was biggest launch in the company history and had tremendous acceptance, particularly in Asia, China and other retail. The brand recently introduced a complimentary product, Advanced Night Repair for eyes. And the two are being marketed together to continue the franchise momentum.

Thanks to an effective new formula supported by an integrated marketing campaign, encompassing TV, digital and print. Clinique new Even Better Clinical also became a hit in the U.S., U.K. and Europe. As an example, after its launch, it quickly became the best selling prestige skin care product in the highly competitive French market. It’s doing so well because it is the first beauty product whose results rival a prescription strength product for treating uneven skin tone, a universal concern that wasn’t being adequately addressed by existing products.

Our innovation also extended to our in-store services. We evolved our high-touch model at Bloomingdales where Clinique offers service as you like it including a fresh replenishment and do it yourself computer skin analysis. This concept is so successful that the brand expect to expand it to 60 more doors this year worldwide.

In terms of our regions, sales in Asia climbed 10% and five markets posted solid double-digit growth. We are also thrilled that Estée Lauder became the best selling prestige brand in each distribution in the region. We plan to accelerate our business in Asia where most economies are strong, consumer spending is growing and we have opportunities to expand distribution.

The company also set out to improve our underperforming brands in an effort to boost overall profitability. We took many steps to address different issues and as a group, this turnaround brands improved sharply.

As you are likely aware we closed Prescriptives wholesales business and did so at less cost than anticipated. We’re also leveraging some of its best assets in other brands. Based on strong consumer demand we continue to offer Prescriptives up-selling products online for now.

Our Aramis and designer fragrances division showed great improvement, a significant turnaround was driven by fewer more impactful product launches supporting its classics, improving its mix of business and distribution, tightening inventory and numerous savings in cost of goods. In up coming Tommy Hilfiger fragrance called [Loud] is expected to be a major addition to its portfolio.

In fiscal 2010, we saved $364 million from various cost saving initiatives, far greater than our original estimate of $175 to $200 million. At the same time, we continue to invest in our business and increase our advertising, merchandising and sampling costs by approximately 7%. Also, we believe we increased return on this investment by focusing on our biggest initiatives and improved media efficiencies.

We also improved our strategic modernization initiative forward by successfully implementing it across all of our North American manufacturing facilities. SMI will enable many of our future cost savings. Greg will go into more details about cost saving in SMI in few minutes.

So as you have heard, we made fantastic progress in the first year of our full year strategic journey, which is providing a solid foundation as we continue toward our goals. Our early success reinforces our vision and gives us confidence in our ability to execute our strategy with excellence.

Looking ahead, we believe we are well positioned. Global prestige beauty is predicted to return to mid single-digit growth over the long-term. Research shows that women income is expanding around the world and beauty is the category they are most likely to spend money on after food and clothing.

In fiscal 2011, we estimate global prestige beauty will rise 2% to 3% at retail and we intend to exceed that pace, again, picking up share. For us, the stronger growth is expected to come from Asia, skin care, hair care and online, through both higher same-store sales and new distribution, as we continue rolling out our brands globally to meet increasing demand.

M A C for instance planned to open about 140 doors this year across a variety of retail formats, including department stores, its own freestanding stores, private retail locations and perfumers. The vast majority will be in international markets.

We have gained share against prestige competitors in every region for the last two years. However, in some markets and categories, mass brands have grown faster than prestige behind heavy advertising, broad distribution and lower prices. We consider all brands both mass and prestige to be our competitors, as many consumers buy beauty product across various channels.

We feel confident that [holding] and communicating our unique strengths, including a long history of aspirational brand equities and innovationing products, packaging, any store services will make us an even stronger competitor across the entire beauty landscape. This characteristic will allow us to attract consumer to prestige distribution channels around the globe where women are looking for aspirational brands and the latest innovation, combined with our high-touch services. We can perfectly fulfill their cosmetic needs and provide them with the shopping experience they deserve in the time they choose to dedicate to themselves.

We are deepening our consumer insights, ramping up our creative energies to be even more locally relevant and furthering our new strategy for launching fewer bigger products. We learned last year that effective advertising on aspirational brands focused on fewer winning product, build strong awareness and is more effective drawing traffic into our distribution.

Once consumer come out to our doors or websites, our high-touch services create a personal connection and in still brand loyalty, which we leverage to sell even more product. For example, Clinique unprecedented national print, TV and digital campaign for Even Better Clinical brought thousands of new consumers to U.S. department stores and specialty stores, who purchased skin care products there for the first time.

Our product introductions will be supported up to their full potential with our new launch and leverage approach. We will introduce fewer products, support them with aggressive advertising and use them to accelerate sales by leveraging the power of our high-touch service.

We have identified several new initiatives that will be launched in this way. Our plans call for us to expand our advertising budget this year and we expect to continue investing significantly in print, TV and digital to support innovation.

We also are tailoring our in-store high-touch service to different kinds of channels. Our retail brands experts at more than 5 million face-to-face interaction with consumers everyday worldwide and provide personalized information and education. This is a powerful asset that isn’t generally available in mass channels and we plan to build further on this point of differentiation.

Let me give you a few examples on how we are adapting, how that service beyond the traditional department store count to other channels as well. M A C new Time Square flagship, already its largest freestanding store, is staffed with 60 multicultural makeup artists who together speaks nine languages. It also features touch screen computers and video for the latest makeup looks.

In European pharmacies, where we do not usually have brand specific advisors, we have put in testers and consumer information on shelves for Darphin skin line, improved merchandising in senior explains how to use the product, which ones are new and which ones are best sellers.

In travel retail we created a private prestige space within airport stores to present Estée Lauder to new client and started with a specially trained ambassador for expert consultation. And we are launching Spanish language e-commerce sites in the U.S. for Clinique, M A C, Estée Lauder and Bobbi Brown in building on our mobile e-commerce initiatives in the U.S. and Japan. About half of our online visits and sales in Japan came from mobile phones and devices.

North America department stores remain our largest and most critical channel. Thanks to our new North America affiliate, we have a stronger internal structure and are building builder consumer plans with our important retail partners. So together, we can attract new shoppers and grow beauty sales in this channel.

Our efforts are working. In the last several months, prestige beauty sales in North America department stores have made significant improvements as consumer spending has picked up. Some of our best initiatives like Clinique, Even Better Clinical have attracted users of mass brands to department and specialty stores. Encouragingly, sales of our luxury brands, including Bobbi Brown and La Mer accelerated as well in the second half of the year.

We are also strategically expanding our presence in faster growing alternative prestige channels. Bumble and bumble will initially open in 10 U.S. separate stores, with modern brand equity building high-touch elements, such as interactive touch screen and fashion week videos and it won’t be simply another retail location. Consumers also will be directed to Bumble’s network of salon and get a $20 gift card for salon services when they buy products.

We’re also planning to aggressively build our hair care brands’ presence in prestige salons, while staying highly selective and we’ll increase our penetration over the next few years. Since consumers spent an average of 45 minutes in a salon during each visit, this channel is well-positioned to deliver the next level of high-touch.

Our recent acquisition of the makeup brand Smashbox was also driven by its expertise in alternative channels including several all direct response television and online. We plan to use the brand’s talents and experience in these channels as we expand our presence in the fastest growing areas for beauty. We expect Smashbox will be a wonderful addition to our portfolio.

Another important growth vehicle is emerging markets, particularly China. Our sales in China grew 29% in fiscal 2010, to maintain the momentum and gain share, we plan to open more than 90 doors in department stores and separate.

Also, Origins, our newest brand in China will continue to open more doors. M A C will launch an e-commerce site in January and we will continue using TV to advertise in major skin care products. China is growing so fast that it’s planned to be our second biggest Asia market this year overtaking Korea. We are also looking to capture sales from ever Chinese beauty users outside their own market. Travel retail expect to capitalize on the growing number of Chinese citizens who are traveling and shopping, 50 million Chinese traveled abroad in 2009, a number that is expected to rise to 90 million by 2013.

We are also strengthening our capabilities. We established a new corporate marketing center of excellence to give our brands and regions greater consumer insights and improved access to best practices, which they can use to create more targeted products, services and stronger marketing plans.

In concert with this effort, we are completing the task of our staffing of our regional R&D centers in Europe and Asia, which we are expanding to get closer to our consumer local preferences. Regionally developed products with widespread appeal will eventually be sold in other geographies too.

With the digital universe growing in importance, we will continue strengthening our many capabilities in this area, ranging from e-commerce to mobile commerce and online advertising to social media engagement.

E-commerce sales are expected to climb strong double digits for the foreseeable future and part of that growth will come from new sites. This year we will launch e-commerce in Brazil, Austria, Denmark, Sweden and Norway for the first time and add more brand sites to the nine countries we’re already in.

In closing, we are extremely proud and pleased with our major accomplishment during the first year of our long range plan. We stuck to our strategy, it paid off handsomely. Our efforts made us stronger, leaner and more profitable, enabling us to add several billion dollars in stakeholder value.

Our employees deserve a huge thanks for their tremendous efforts. We relied on their talents, deep knowledge, innovative thinking and dedication to the company to move forward and create new ways of working together. I know at times it wasn’t easy and we are extremely grateful for the hard work that was required.

I also want to acknowledge my appreciation to William Lauder and the entire Lauder family for their guidance and encouragement during my first year leading the company. With their support, we have been able to implement many worldwide changes while maintaining and leveraging the company’s strengths, historical values and long held principles. This has been unvaluable.

In order to reach our ultimate goals, much work still remains and some of it would be harder to achieve. However, our initial results make us confident we can attain our goals, so we are raising our 2013 operating margin target. We now expect to achieve a 12.5% to 13.5% operating margin by fiscal 2013. We will regularly review this target as our strategy evolves.

The global beauty industry is becoming more complex and competitive by the day, but it is also an exciting place to be and we are confident that anchored by our diverse brand portfolio, vast geographic region, passionate and creative workforce, we can come on the challenges and exploit the opportunities that will arise.

We are a creativity driven consumer-inspired company. This unique balance will help us deliver sustainable profitable growth and enable us to be the global leader in prestige beauty for years to come.

Now Greg will speak to you about our cost savings and strategic modernization initiatives. Greg?

Greg Polcer

Thank you, Fabrizio, and good morning, everyone. For those of you who don’t know me, let me give you a little background. I joined the Estée Lauder company two years after having worked at several consumer product companies during my 30-year career. I held leadership positions in supply chain area, as well as brand and finance.

In my current role, I lead the company’s end-to-end global supply chain, which ranges from procurement, manufacturing and distribution to planning and quality assurance. I also oversee the strategic modernization initiative and Co-Chair the program management team with Rick.

I was attracted to Estée Lauder because of the passion, creativity and energy of its people, its fabulous portfolio of brands and the opportunity to help design and implement the new strategies, and the reality has been even better than I expected.

Joining Estée Lauder offered me the opportunity to use my skills and experience to help lead the supply chain and take it to the next level, while also being able to learn from my colleagues as we work together to improve integration and alignment. Improving integration and alignment from the very beginning of our creative and innovation approach, right through execution to the market really does had a value to our brands.

I’m pleased to say we’ve made tremendous progress in a short time and created a partnership between the brands, regions and functions, which has helped make the company more efficient and supported our growth. The high quality of our products continues, of course, to be paramount and our R&D packaging supply chain and innovation teams are all included early in the development process.

I’m equally excited by the opportunities for additional cost savings and other improvements in my head. By continuing to create more efficiencies and drive costs out of our supply chain, we’re able to channel it back into needed capabilities to grow the business and also increase returns to the stockholders.

As Fabrizio mentioned, thanks to the collective efforts of our employees across brands, regions and functions, the company saved $364 million in fiscal 2010 from our cost savings programs. These initiatives are being led by the program management team, an executive leadership group that is developing new processes, alignment and capabilities to enable sustained savings. The PMT also helps to determine the ideal pacing and sequencing of various projects to ensure the best use of our resources.

The major cost savings for fiscal 2010 occurred as follows. The largest piece, accounting for about half the savings came from cost of goods at $171 million, which is the area I’ll discuss in more detail in a minute.

Next was resizing and restructuring in a company-wide salary for each, which contributed approximately $145 million, and lastly, in indirect procurement and distribution, we saved about $33 million.

The company had its lowest cost of sales -- cost of goods as a percentage of sales since it went public in 1995 and this was achieved in several ways. About one-third came from mix, mix by category, region and brand.

Skin care is our category with the lowest cost of goods and by emphasizing this area across our relevant brands, we increased our skin care sales as a percentage of our overall business. We also sold more products in Asia and that region has the lowest cost of goods as a percentage of sales. Skin care comprises the largest percentage of sales in Asia. We also successfully sold more products from our high-end brands that have the lowest cost of goods.

The other two-thirds of savings came from cost efficiencies including material costs and productivity. We work together to make all of our brands more profitable. Much of these accomplishments were possible because of supply chain teams worked collaboratively with the cross functional brand teams, both before and after launches, to examine all the costs involved in a particular product.

Joining forces and prospective at the start of the innovation process creates a capability to bring more products to market in a more efficient manner. Although, this is a cultural change, I believe the integration and interaction has been valuable to the supply chain as we get a better understanding about our brands. We’ve been able to launch more products with higher margins right from the start, which obviously frees up resources to invest in marketing and building brand equity.

Let me give you an example. When we were developing the pure DKNY fragrance, a cross-functional team which included members of the supply chain was integrated into the innovation process early on. The entire package and other elements of the mix were created with our consumer in mind, offering outstanding quality and sustainable environmentally friendly platform but also included the expertise of suppliers, manufacturing and distribution, who were all at the table.

The result is a great product with high consumer satisfaction at a cost that’s 22% less than planned. Also contributing to the improved cost of goods was a lower cost of material, which we accomplished in part by being more collaborative with suppliers.

Again, as an example in the case of fragrances, we created a new business model that he assures a select group of suppliers’ greater engagement in developing our product, a new way of helping to drive more efficiency in the end-to-end development process and a longer view of our brand and innovation plans.

Obviously, this helped to create a more efficient way of working for us and our suppliers, which will not only help improve margins but add even more fuel to our innovation capabilities. We plan to broaden this concept across our supply base and in other product categories as we work to improve the total systems cost and streamline our supply chain.

However, as we improve the way we work with our suppliers, we also need to continue to enhance our internal processes and capabilities. We’ve also begun to drive improvements in logistics which contributed to our overall savings effort. We’re working to create an upgraded and consolidated global distribution network.

In Europe and Asia, we’ve already closed or moved several distribution centers and have started the work required to implement SMI. We’ve seen savings in the distribution center network and transportation and continue to analyze this area for further efficiencies in the coming years.

For the second year in a row, we made considerable progress on another important front. Reducing the number of stock keeping units, which we shrunk 10% in fiscal 2010 after an even bigger drop in 2009.

We have eliminated less profitable SKUs and creating fewer less productive ones which obviously contributes to a more efficient portfolio. Fewer SKUs also improves our productivity in buying and manufacturing and greatly contributed to improving our obsolescence.

Thanks in part to trimming the number of SKUs and by working closely together in a more formal sales, inventory and operating plan process, we’ve lowered our obsolescence expense by about $35 million this year which includes taking back large returns of stock from Europe that provide a better assortment in the perfumery channel.

In fiscal 2011, we expected to reduce these costs even further. We’re also refining our manufacturing strategy to produce our products closer to our consumers where economically logical. This reduces transportation and distribution costs and lead times.

We’ll continue to study our network to find greater efficiencies and enhance productivity. All these savings -- cost savings and improvements are great successes, but one of the changes I’m most proud of is that we’ve made great progress toward building an inter-dependent organization where people realize their actions, have a ripple effect and impact more than just their piece of the business.

We’re working collaboratively and making decisions for the good of the company as a whole, not just for a particular brand or a region and using leverage across brands and geographies to improve our results. We’re still relatively early in this journey but from my experience the amount of progress we’ve made in creating this interdependent organization could only be accomplished because of the quality of the people in our brands, regions and function.

Their commitment to this company is amazing. Despite the changes required to be more integrated organization, we’ve managed to maintain the high quality, uniqueness and equity of each of our brands.

We’ve learned we can drive innovation and creativity while still finding and leveraging synergies. This new approach and way of thinking is evident in the company’s stellar results this year.

In fiscal 2011, we expect our PNT-led programs to save between $130 million and $140 million, about half of that sum again is expected to come from cost of goods. Now, let me turn to SMI, our strategic modernization initiative which is one of the company’s biggest undertakings ever.

At its most basic level, SMI is about creating common and more efficient processes where logical and as appropriate, supporting them with technology. SMI is key to enabling the implementation of various parts of our company strategy and helps to ensure that we can sustain the progress.

This year we’ve succeeded in implementing SMI and the technical solution of SAP in nine manufacturing facilities and did so without any major issues or disruptions to our business. This again is a real credit to our global and regional SMI teams, the support of our partner IBM and the focus of the leadership on this initiative.

More than 80% of our in-house production is now using SAP software. Previously, we launched SMI at our Aveda operation in Minnesota and our U.K. manufacturing facility and in North America, we implemented the financial backbone and demand-planning functions.

Launching SMI throughout our North American manufacturing was a major milestone and it went just about as well as we could have expected. We continue to gain important knowledge and expertise and we will leverage that knowledge in the next wave, which rolls out for multiple affiliates and regions in the second half of fiscal 2011.

At that time, we expect to implement SMI in the U.K., Germany, Singapore, Malaysia, Vietnam, Indonesia and the Philippines. We are now carefully planning and testing the technical implementation, working on the change leadership and organizational design and sharing the lessons learned from our previous experience in advance of going live.

Christopher Wood who was named Senior Vice President of Global SMI several months ago brings strong international affiliate and brand expertise, which will be critical as we further integrate SMI into the commercial side of our business. He has hands-on knowledge of what it takes to provide high-touch service to our local markets, while ensuring that through SMI we are taking full advantage of the common processes and technology for speed, efficiency and the transparency of information.

We expect to have the majority of our operations on the SMI program by the end of fiscal 2012. We’ve seen some early benefits from the implementation of SMI but the major and sustainable efficiencies will come after a bit more real-life use in the manufacturing network and after the majority of the companies using the same system supporting our objectives through fiscal 2013 and beyond.

The SAP technology will reduce the number of applications, we have from approximately 700 down to 100 when finished and dramatically, simplify the number of (inaudible) systems interfaces from about 3800 to 300. For the first time, we’ll have a single source of data across the world which will enable globally consistent and reliable information.

SMI will continue to enable improved supply chain leverage, back office and indirect procurement savings, speed to market and ultimately our bottom line. SMI is a key enabler to help us unleash and importantly sustain a significant piece of the savings we expect to reap now and for many years to come.

In closing, we’re working hard on many fronts to improve our cost structure, assure the superior quality of our product, streamline our entire supply chain from customers through suppliers and to modernize our systems. All of these efforts should greatly contribute to the Estée Lauder company’s sustained profitability this year and long into the future and will continue to liberate resources to invest in our growth. Thank you.

Now, we will turn the call over to Rick.

Rick Kunes

Thank you, Greg, and good morning, everyone. This morning, I will briefly cover our fiscal 2010 fourth quarter and full year and then focus my discussion on fiscal 2011. My commentary will reflect our results before restructuring and special charges which I will cover separately.

The fourth quarter capped off a terrific year. Sales in the quarter grew 9% as reported, 8% excluding currency. Strong new product launches backed by more significant growth in advertising, merchandising and sampling expenses fueled the increase and attracted more consumers to both our brands and our distribution. These investments should help us continue our sales momentum into the first half of fiscal 2011.

All regions grew in the quarter led by Europe, the Middle East, and Africa, with nearly 14% organic growth. Asia Pacific rose 8% in local currency and the Americas region grew 3%.

In the Americas and Asia Pacific regions, operating results declined as we spent heavily to support major launches. In line with our strategic priorities, skin care again led category growth followed closely by makeup.

For the quarter, there was 11% and 9% respectively and grew in each region. Gross margin improved 240 basis points, which includes about $46 million in PMT savings. Operating expenses increased 290 basis points for the quarter.

PMT savings of approximately $54 million and lower impairment charges of $46 million helped the expense margin. However, we strategically increased advertising merchandising and sampling by over 35%, leading to an operating margin decline of 50 basis points to 3.7% for the quarter.

Our fourth quarter tax provision included a $31 million credit resulting from a reduction in our reserves primarily related to favorable tax settlements. The fourth quarter performance was the culmination of a year that saw a modest recovery in the U.S., a sharp rebound in travel retail, and a continuation of growth in key marks around the world despite weak business in Japan and southern Europe.

The combination of faster than expected recovery, the rapid realization of our strategic priorities and the fact that significant risks didn’t materialize allowed us to increase our guidance twice during the year.

For fiscal 2010 full year, sales rose 5% versus last year in local currency at the top end of our most recent guidance range. Favorable currency movement added nearly two percentage points of growth resulting in a reported sales gain of 7% to $7.81 billion. Net earnings for the year were $551.7 million compared with $280.1 million last year. Diluted EPS was $2.75, almost double the $1.42 reported last year.

As Fabrizio noted, we achieved all-time highs in a number of key measures including operating income, EPS and cash flow. Our sales growth was broad-based with every region and nearly every product category contributing. Asia Pacific once again led growth with net sales rising 10% in local currencies. Every country in the region except Japan grew and many markets saw double-digit gains.

China led the region with growth of 29% on increased consumption and distribution. Hong Kong rose 23% on tourism. Korea, Taiwan, and Malaysia grew double digits on stronger consumer demand. Japan continued to suffer with a local currency sales decline in the mid single digits for the year.

In Europe, the Middle East and Africa, local currency sales gained 8%. Our travel retail business recovered quickly in fiscal 2010 rising 27% as international airline passenger traffic improved, retailers restocked and we implemented programs to increase conversion and improve the in-store experience.

Sales in the U.K. remained a bright spot, rising 7%. The growth was due to robust London tourism, high demand for makeup and strong double-digit growth in our online business. Among developing markets, Russia and Turkey grew over 20% in fiscal 2010. The Middle East grew 7% and India jumped over 40% off a very small base.

Southern Europe remains weak and Greece declined sharply as consumer demand dropped in the wake up of steady measures. Trade de-stocking continued this year primarily in areas hard hit by recession.

We estimate that de-stocking reduced regional sales by approximately 2% equal to about two weeks of retail inventory. The Americas turned the corner in fiscal 2010. According to NPD, excluding prospectives, beauty sales and department stores and support declined less than 2%.

Our retail stores on the same basis declined less than 1 -- our retail sales rather on the same basis declined less than 1%. And our share rose 50 basis points for the year. Beauty sales growth in department stores are primary channel of distribution began to outpace beauty sales growth in mass channels during the second half of our fiscal year.

For us, the regions also saw a nice recovery during the second half of the fiscal year, ending with full-year net sales slighting better than last year. Sales in alternative channels were mixed. Salons and company-owned retail sales were flat and online sales grew 15%. Sales in Latin America rose more than 15% and Canada grew modestly.

By category, skin care sales rose 9% this year excluding currency leading growth in all regions. Estée Lauder’s Advanced Night Repair and other key products were the biggest contributors, especially in Asia. Clinique product also resonated particularly in the U.S. and Europe, Even Better Clinical and Youth Surge Night led sales with new products while the core three-step franchise continued to grow.

Makeup grew 4% in custom dollars led by M.A.C. The brand added about 100 new doors reflecting the strategy for international expansion. Additionally, this year’s Viva Glam campaign with Lady Gaga and Cyndi Lauper was the most successful ever. Bobbi Brown also contributed to growth on the success of its pretty powerful campaign and strong basic business.

In fragrance, our goal was to improve the business model before focusing on top-line growth. That said, sales in the category declined only 2% while profits swung dramatically from a loss last year to a profit this year, thanks to the hard work of our fragrance task force.

Our newest scent, pure DKNY, was well received in Europe, and we just launched it in the U.S. Sales of hair care product rose 2% primarily from Aveda. The brand benefited from salon expansion and new products.

Operating profit in this category was adversely impacted by impairment charges recorded in December for Ojon. However, Aveda and Bumble and bumble saw improved operating income. Gross margin expanded 220 basis point to a record 76.7%.

Favorable product mix added 70 basis points, lower obsolescence contributed 60 basis points, favorable manufacturing variances were 40 points and positive currency and lower promotions garnered 10 points each. For the year, our PMT initiatives improved cost of sales by $171 million.

Operating expenses as a percentage of sales fell 200 basis points to 65.5%. We achieved $193 million in operating expense savings from our initiatives, which contributed about 250 basis points to the reduction. Higher impairment charges in the prior year resulted in an additional 20-basis-point decline and currency contributed 10 basis points.

These savings were partially offset by higher advertising, merchandising, and sampling investment of 20 basis points where we spent approximately $120 million more than fiscal 2009 and strategic investment spending of about 10 basis points. Operating income rose 71% to $874.6 million and operating margin rose 420 basis points to 11.2% compared to last year.

We are proud of this tremendous accomplishment and we believe it is sustainable. We expect to continue to improve our operating margin but not at the same rate. The savings going forward are expected to be more measured in their pace.

Net interest expense was slightly lower at $74.3 million compared with $75.7 million in fiscal 2009. The effective tax rate for the year was approximately 31%. The rate reflects a significant reduction, primarily attributable to favorable tax settlements.

During fiscal 2010, we reported $84.7 million in returns and restructuring charges. We have now recorded a total of $176 million of the $350 million to $450 million we originally expected to take through fiscal 2013. The charges primarily reflect employee-related costs, asset and inventory write-offs, contract terminations and other special charges. Additionally, we recorded a charge of $27.3 million related to the repurchase of debt. These costs were equal to $0.17 per share for the fourth quarter and $0.37 per share for the year.

Now, moving to operating cash flow, for the year ended June 30, 2010, operating cash flow increased to a record $957 million compared with $696 million the previous year. The increase primarily reflects the substantial improvement in earnings.

Day sales outstanding improved to 36 days compared with 45 days at this time last year. We benefited from tightened receivables in emerging measuring as well as the timing of sales in the fourth quarter. Some of this benefit is like toll reverse itself in the first quarter of fiscal 2011.

Inventory days rose to 166 compared with 155 days last year. The increase reflects the planned inventory build ahead of the North American SAP implementation and the expectation of strong 2011 first quarter sales. We spent $271 million for capital expenditures this year reflecting continued investment behind SMI and information technology with some of our planned spending delayed into fiscal 2011.

During the year, we repurchased approximately 4.7 million shares of our class A common stock. Through June, we repurchased 70 million shares and had 18 million shares remaining in our current authorization.

We ended the year with $1.1 billion in cash on the balance sheet. In fiscal 2010, we maintained our $0.55 per share dividend rate paying out $109 million. On January 1, 2010, we completed the acquisition of Smashbox which reduced our cash balance.

Additionally, we expect to continue to return cash to shareholders through a combination of share repurchase and/or dividends. We are currently re-evaluating our uses of cash in light of our relatively low dividend payout ratio. Our board typically approves the annual dividend in November.

Now, I will discuss a few assumptions for the coming fiscal year. In fiscal 2011, we plan to build on the success of the solid foundation we have created for sustainable continuous progress towards our long-term goals. We expect global prestige beauty to expand by 2% to 3% at retail and we continue -- as we continue a slow economic recovery in the U.S. and Europe.

Our own sales are forecasted to grow 6% to 8% excluding currency but including about a percentage point of growth from the acquisition of Smashbox. Currency translation could decrease our reported sales growth by about two to three percentage points. Euro based countries represent about 12% of our total sales and our assumption for the euro is approximately $1.25.

U.K. is currently 8% of our sales and our estimate assumes about a $1.50 for the pound. Japan is now 4% of sales and we are using approximately 85 yen to the dollar. As you know, if the dollar strengthens or weakens against these major currencies, it will further impact our financial results.

We expect gross margin to improve by 50 to 70 basis points for the fiscal year driven by the cost of goods improvements Greg discussed earlier. Operating expenses should benefit from improved leverage of our savings initiatives mostly offset by a ramp-up in investment spending behind capabilities including digital, global R&D, SMI and consumer insights, targeted advertising spending and equity compensation costs related to the higher stock price.

Let me give you some details behind the incremental savings we are expecting this year. Organizational restructuring and resizing while nearly complete could add $15 million to 420 million in savings this year. As Greg mentioned, cost of goods activities primarily mix reduced inventory related costs and supplier consolidation are forecasted at around $70 million.

We expect to save an additional $45 million to $50 million in shared services and indirect procurement. We expect to achieve fiscal 2011 savings of between $130 million and $140 million with about $30 million to $35 million expected in the first quarter. The savings should be relatively evenly spread by quarter this year.

We are reinvesting some of that savings back into the most promising and most profitable areas of our business. We expect an approximate 50 to 90 basis point improvement in operating margin this year, which brings us closer to our long-range targets.

The improvement would also be about 30 to 40 basis points higher excluding Smashbox and the effect of currency rate movements. We have changed our processes to institutionalize continuous productivity improvements by limiting the growth of overhead in any given year to a percentage of sales growth.

This systemic approach should help us ensure not only sustainability but continuous improvements. Our savings initiatives are reflected in substantial projected growth of pretax earnings.

The natural tax rate based primarily on projected geographic earnings and statutory rates is expected to be between 32% and 34%. The rate may be influenced by changes in tax rates, mix of earnings and fluctuations in the amount of tax reserves and can vary by quarter.

Diluted EPS for the -- for fiscal 2011 is expected to be between $2.80 and $3.05. Included in this estimate are Smashbox integration costs, the impact of currency movements and the anticipated increase of the effective tax rate which combined reduced EPS by approximately $0.25.

We anticipate working down the inventory as we build for the SAP rollout and continue to pursue inventory improvements in other areas of the business. This should result in a 10% improvement in inventory days year-over-year.

With rising earnings and a solid improvement in inventory levels partially offset by the reversal of the timing of receivables, I just mentioned and about $50 million cash outlays related to restructuring, we expect to generate between $825 million and $875 million in cash flow from operations. We plan to use approximately $350 million of cash for capital projects including some spending carried over from fiscal 2010.

In fiscal 2011, we expect to take restructuring and other special charges of $45 to $55 million with about $13 million in the first quarter. We will update these estimates if necessary on future calls. Our first quarter will have a tough comparison to the prior year, when we more than tripled EPS and grew the operating margin by almost 10 percentage points. Nonetheless, we expect to reap the rewards of the fourth quarter marketing spend and new product launches to grow sales between 11% and 13% in local currency.

Adverse foreign exchange could impede growth by 2 to 3 percentage points. We expect gross margin to decline during the quarter and support spending should revert to more normal levels compared to the relatively light spend in the year-ago period. EPS for the three months is expected to come in between $0.67 and $0.80, reflecting a more normalized spending level.

Regarding restructuring plans, from fiscal 2009 to fiscal 2013, we said we expected to report $350 to $450 million in restructuring and other special charges and derive $450 to $550 million in savings. At this time, we feel comfortable we can hit the higher end of the savings target while incurring the lower end of the charges. We continue to expect incremental savings in each year. I just want to remind you again that our guidance for fiscal 2011 for first quarter and the full year does not include restructuring and other special charges.

And that concludes my comment for today and we’d be happy to take your questions now. If you can queue up our question, it would be terrific.

Question-and-Answer Session


(Operator Instructions) Our first question today comes from the line of Alice Longley with Buckingham Research.

Alice Longley – Buckingham Research

Hi. Good morning. Could -- in your guidance for fiscal ‘11, could you take -- you said that the integration costs, FX and the tax rate are responsible for $0.25. Could you just break out the three components, please? Thanks.

Rich Kunes

Sure. The smash box integration cost is about $0.05. The impact of the tax rate differential is about $0.10 or $0.11. And the other $0.10 is due to exchange and that’s based on the most recent forecast that we’re using, but as we say that can obviously fluctuate during the year.

Alice Longley – Buckingham Research

Okay. And if I could slip in just one other, you told us about the U.K. travel retail and alternative channel for the year. Could you tell us what they were in the fourth quarter alone? Thanks a lot.

Rich Kunes

Okay. Travel retail was -- I know was tremendous improvement, about 44% but you have to take that in the context of what was it in 2009 and our business was way off, so compared to 2008, that sales growth of TRD was high single digit, 8% to 10%, somewhere in there. The other two pieces, I am sorry, I don’t have for the quarter, but perhaps Dennis can get you those offline.


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

Wendy Nicholson – Citi Investment Research

Hi. Could you talk a little bit more, kind of, just longer term about your outlook for operating margin by region? Because, even though you made some progress for example in the Americas region for full year fiscal ‘10, that business is still so much less profitable than the international businesses. So what’s the outlook for that? And do you think you’d get back to a high single digit margin for the U.S. business. And then secondarily, did you set a new target now that you’re above your 60% for the international business? Do you have a new target for us for that? Thanks.

Fabrizio Freda

Okay. First of all, let me answer immediately the second question. Yeah, we believe we will continue to increase from 60 to very gradually overtime, but we hope to increase now at a slower pace because we believe we’ll go back to more different growth, also in our North American business. In fact, our estimate already for 2011 is to start growing again also in the U.S. So the pace of change between International and U.S. is supposed to change from now on, given this result.

The second, our margin long term will continue to grow in every region and we will continue to make improvements in North America region, but some of our International regions, namely Asia and some of our division, namely travel retail, will continue to be on very important, because they have margin accretive overall and will continue to be margin accretive for the long term.

Rich Kunes

Yeah. And in the U.S., as you know, Wendy a lot of our turnaround brands are located, most of the business is in U.S. so as we improve those we should see some good movement in profitability of the Americas, but as Fabrizio says the fast growth of our Asia region, which is highly profitable, the fast growth of our TRD will somehow mitigate the development between the U.S. and those as regions but we should see some good movement in North America.


Our next question comes from the line of Andrew Sawyer with Goldman Sachs.

Andrew Sawyer – Goldman Sachs

Thanks, guys. I was just hoping that could you give a little more context around the advertising spending outlook. I know earlier in the year you had said you’d pull back some and hadn’t really seen competitors out there. As we look ahead, could you just comment on how the competitive spending dynamics have changed, how advertising inflation might work into the mix?

And then also you mentioned on the call some efficiencies that you’re getting. I was wondering if you could just elaborate on ad spending outlook in light of those three dynamics. Thanks.

Fabrizio Freda

Yeah. As you know, we spent not a lot of -- we did increase advertising, in the first six months we increased advertising more aggressive in the second six months of this fiscal year. In the last quarter we increased advertising very strong 35% as we communicated this was due to a couple of things.

First of all, because we had some important initiatives concentrated in the period and second, because we were learning and testing some new way to advertise, the better way proven to be very effective. So for the total year, we grew advertising about 7% and we believe that in 2011 we continued in that direction. So we plan to continue increasing advertising on the high single digits. So this trend with advertising growing in line with sales was slightly ahead is probably the trend that we are going to see.

But obviously we are still in the middle of our learning process, so these numbers are subject to be adjusted and changed as we learn. The key learning here is that as I have explained, I think in my speech is that we have learned that having some high quality and high advertising and some great initiative is essential to attract new users to our distribution and to our concept. And there we are able, thanks to our high-touch service to sell more products and to create better loyalty to our brands and to retain those consumers.

So the combination of our business model is proving to be enhanced importantly from focused high quality advertising on key initiatives. And I think we will be more and more able to exploit this new learning in the future year, spending in advertising at a decent level.


Our next question comes from the line of Nik Modi with UBS.

Nik Modi – UBS

Yeah. Good morning. Just a quick question, just a follow-up on what Andrew was asking about from a competitive standpoint have you seen generally across the prestige area a step-up in competitive spending, if you can give us context on what areas, pockets of real deep spending by your competitive pier group. And then the second question, just quickly, on the next quarter, how much of that 11% to 13% is from smash box? Thanks.

Fabrizio Freda

So yeah, we have seen our competitors increase advertiser spending this is very different by region and very different by category. There has been some intense spending from prestige cosmetics competitors, particularly in skin care, mass competitors, also advertising make-up and then we have seen some competitors investing more in Asia, other competitors being much more aggressive and concentrated on Europe, so it’s a very, very different by region and by competitor. But the key point is yeah, competition is also increasing advertising spending as the economy recovers and as consumers become more sensitive to spending again.

In terms of our growth in July, September, Smashbox will be accounting for one point out of 11, 13 points. The rest is really organic growth of our business and so our business really growing fast in this quarter. As we said, as a result of the fact that the key 35% increase in advertising in the last quarter this year was mainly focused on some key initiatives which are winning big and we’re mentioning in our note that the Clinique Even Better Clinical or Estée Lauder advanced night repair or DKNY pure, we had numbers of very successful initiatives driven by advertising and now are not finish to grow and not finish to bring new fresh volume and new consumers into our portfolio.


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

John Faucher – JPMorgan

Yeah. Thanks. Continuing on that theme, as you look at your organic, your local currency sales on a two-year basis we did see a little bit of a slowdown here so I guess are you trying to say that your sort of philosophy around advertising is moving a little bits more longer term and we should expect some of that advertising kick in, to be a little bit more focused on driving volume three, four quarters out and is that why, when we look at the organic guidance on a two-year basis, it’s going to be pretty much dramatically higher in the first fiscal quarter? Is there some sort of change in the advertising philosophy there?

Fabrizio Freda

No. I’m not sure I understood the question, personally the question. The change in advertising is only a specific learning that advertising focused on our best initiatives, is more rewarding for our business, because it’s able to attract consumers, thanks to this new very interesting innovation that we bring to a very high level of awareness in the key countries.

We attract new consumers to our counters and the fact that we are investing, improving our high touch services with all our retail partners, this combination is proving to be share and to be win where we exercise it. So what the real change of philosophy is that there will be fewer bigger initiatives supported by heavy advertising as an alternative to many small initiative each one of them supported by a little bit of advertising. That’s the real change in philosophy.

And the other change in philosophy that then we had identified in each one of our key brands, some very interesting new initiatives or re-launching of assisting with assets for the next three years, that we plan to support with this new model of advertising. And so we believe that we will continue to have for the next two, three years, similar success that we’re having today with advance Bill Lauder opening to make it even better, DKNY pure on every single brand of the company and on many new promising initiatives in the future few years.

John Faucher – JPMorgan

Okay. And then a quick follow-up. Does that mean that we should expect the top line to be sort of a little bit lumpier from that standpoint and maybe a little more quarter-to-quarter volatility? Again, only because if you look at the fourth quarter on a two-year basis it was kind of flat in local currency and then next quarter you’d be looking at sort of 11% growth on sort of a two-year basis. So that’s a pretty big acceleration, is it the spending and sort of the big ticket items that you’re talking about that’s driving that quarter-to-quarter volatility?

Fabrizio Freda

Yeah. I think the quarter-to-quarter -- the point is quarter-to-quarter, yeah, quarter-to-quarter may be slightly more volatile, because depending on where the big initiatives will be launched this will create some volatility in the quarter, that’s correct. But year-to-year, actually, I believe it’s not the case, year-to-year, where we consistently grow and consistently deliver better growth then what we could have delivered with a different model.


Our next question comes from the line of Bill Schmidt with Deutsche Bank.

Bill Schmidt – Deutsche Bank

Hey, guys. Good morning. What kind of clarity do you have on the retailer ordering pattern going into the year, I mean, obviously the number is pretty big in terms of organic growth in the September quarter. So do you guys have a pretty decent read through in what people want or is there like a mass of new pipeline product line and then sort of how long does that pipeline go into fiscal ‘11?

Fabrizio Freda

No. Bill this is not pipeline, really this is consumption. The pipeline on most of the initiatives, for sure in skin care and makeup, happened actually during the last six months. This launches are ready out there, so these launch is now with the more marker, there will be more impactful, they are attracting a lot of consumers to start repeating purchases. So it’s about growth. The other aspect that I think for the quarter, July, September we should keep in mind that July, September last year was still impact by pretty low economy and by very weak markets in many countries of the globe.

We started seeing some recovery of the markets as of October and more importantly, particularly in the U.S. as of January. So it’s also true that in terms of market power, the base of July, September was an easier base, so the combination of strong initiatives and easier base is giving us a very strong quarter.

It’s in the about pipeline. In terms of stocks and stocks build up in the market what we see is that in North America and in Asia, the stock seems to be pretty stable we don’t see any more big stock -- neither for us, nor the market in general. While we continue to see actually some destocking in Europe and we start seeing other countries some restocking is in travel retail. Those are phenomenal that we are assuming in our numbers.

Bill Schmidt – Deutsche Bank

Okay. Great. Thanks very much. And then just on the fragrance business, when are we going to get the margin inflection, another category still stinks and you know volumes is bad and its been driving all by pricing, but even from profitability front it looked like it was pretty lousy in the quarter?

Fabrizio Freda

Again, on the year, you’re seeing a very big improvement in profitability of fragrances. So I believe that our fragrance business has developed the best in one year as that you know is a four year plan so our fragrance team is focused to continue improving profitability also over the next year and this will -- and we are very committed to this progress. But the progress in one year has been amazing, it’s been driven by many factors. We were losing money, before now we are making money and as the important first step. But the journey will continue.


Our next question comes from the line of Linda Bolton-Weiser with Caris & Company.

Linda Bolton-Weiser – Caris & Company

Hi. If I understood your commentary correctly about the guidance for FY ‘11, it sounds like your operating margin expansion will be about the same as the growth margin expansion implying about a flattish SG&A ratio. Can you just explain why that would be, because you have already said the advertising and promo ratio would be roughly flat or maybe up a little bit. So why wouldn’t you have a reduction in the ratio due to your cost savings imitative and operating leverage as you achieve sales growth? So why would the SG&A ratio be flattish in FY ‘11?

Fabrizio Freda

I think we’ve said our guidance for gross margin was 50 to 70 basis points. Our guidance for operating margin was 50 to 90 basis points so there is a little bit of a differential. In our operating expenses, you are exactly right, we are making savings and there will be savings reflected in those numbers. But we’re also investing in capabilities and we’ve talked about that for some time. The biggest impact of that financial impact is felt in fiscal 2011. Those capabilities around R&D, consumer insights, digital or the main themes of that, so those are big numbers that we’re in there.

And there’s also, I mentioned in my prepared remarks that there’s a cost related to equity based compensation based on the higher stock price as well. So those are some of the things that are offsetting, if will you, some of the savings, but our operating margin after coming off a year of 420 basis points, then to grow another -- between 50 and 90 basis points, we’re moving towards our long range target, which we took up to 12.5% to 13.5% and we’re making pretty good progress, so we think so we’re going in the right direction.

Linda Bolton-Weiser – Caris & Company

So just as a follow-on, I think when you originally laid out your restructuring plan, you’ve said only I think $50 million of the cost savings would be reinvested. So are you now saying that more will be reinvested into things like R&D, gaining consumer insight capabilities et cetera?

Rich Kunes

No. It’s just a big bulk, the $50 million has hitting our P&L in fiscal ‘11 so a lot of the investment and changes we’ve made have been during the course of fiscal 2010, but the dollar value impact of those is not as great in 2011 and the full impact actually hits us in 2010 and the full impact hits us in fiscal 2011.

Fabrizio Freda

But if I can add one thing is, you are essentially right, I said that we would have invested about $50 million in new capabilities during the two year plan and by the end of 2011, we will have finished this meaning the entire 50 will be spent. The majority of this 50 are impacting for the first time in 2011 and that’s what you see.

But by the end of ‘11 we will have spent an entire 50 and that will be it. As you know, we have added a new productivity rule that we’ll already start using in 2011 where from now onward, we will increase people resources and spending at a level which is well below saves and in this way we will continue increase productivity for the years to come.


Our next question comes from the line of Chris Ferrara with Bank of America/Merrill Lynch.

Chris Ferrara – Bank of America/Merrill Lynch

Hi. Thanks. I’m just looking for some color around the 2013 savings targets. And I know you said the savings are going to be more measured from here, but just pushing the savings target up to the high end of 450 to 550 really implies that they kind of, come to almost a halt or at least to a crawl beyond.

I just want to make sure that I’m understanding that correctly, especially considering that you’re investing in capabilities in that $50 million in spending is hitting only in fiscal ‘11 and I know some of that is top line, it’s not just savings, but can you just kind of work through that a little bit, I guess is it really realistic that you’re doing $500 million of your total 550 in target in the first tow years and it’s not much more to be expected after that?

Rich Kunes

Hi, Chris. I’ll address that a bit. I think you saw a -- we had an amazing progress in the first year of our strategy. Much of the savings came from things that weren’t reliant on real big structural changes or on the implementation of SMI. And we still have quite aggressive targets for the remaining of the strategic period. Much of that will come, again through things that take a bit more time and a bit more energy and structure, like redesigning our distribution network and reshaping our supplier network and things like that. In addition to that, some of the savings will really be driven by the full implementation of SMI. So we expect to continue on the journey through the strategic timeframe and beyond.

Gregory Polcer

Also, Chris, our target for savings 550, not 500 and we said we’d be towards the high end of our range so we’re pretty confident in getting close that 550 savings. And if you look at that on an annual basis, its $50 to $70 million a year I think when you do the math and just because, but the way that we -- just like our operating margin target, just because we save 550 we don’t stop looking for opportunities. We intend to continue to pursue any saving that is we can find and hopefully we’ll be able to add to that overtime. But right now we have clarity to get to that 550 and just like we have clarity to bet to that 12.5% to 13.5% operating launch.

Fabrizio Freda

And also, this is Fabrizio. What I want to add is that, after we have reached the 550, we will not stop looking for savings. And as Greg has explained, by 2013 we should have almost completed also our SMI project. And the fact that will be SAP across the globe, the fact that we will have SMI finalized, which includes a lot of new more modern processes and the way of managing our business, this in our opinion will liberate the opportunity to look for even more savings after that.

So when we say that now we are confident to reach the maximum of 550, we many by 2013. We don’t mean that this is the end of the opportunity and SMI that we have building the next two years will be then enabler of the important next steps that we are working on.

Chris Ferrara – Bank of America/Merrill Lynch

Yeah. And I guess following up what I’m struggling a little bit with is that, if you look at what the fiscal ‘10 savings have been and what the fiscal ‘11 outlook is, its $500 million, so right there’s another 50 to come, so it’s not essentially a smooth realization of these, it’s way up-front, almost all of them, you get another 10% coming in the years after that, yet SMI isn’t even there and you are only raising the full 2013 out margin target up by 50 basis points. I’m just trying to make sense of that, right, because most of those savings are going to be realized in the next couple years, right?

Rich Kunes

Right. You have to look at where the savings came from to-date as well, Chris. Some of what was resizing and restructuring around an organizational change which is 90% completed at the moment. Some of it -- a big portion of it was around managing a few of our cost of goods and mix and getting our SKUs in line and we have further progress to go in some of those areas but we’ve made a tremendous change in a short period of time and we can’t -- obviously there’s not that much more to go related to those two opportunities so it is heavily weighted and they are sustainable, but they’re not replicable, if will you. We can’t continue to take -- improve our operating margin 400 basis points a year.

So the pace does slowdown. And a lot of it, as Fabrizio mentioned earlier, is enabled and Greg mentioned enabled by the implementation of SAP and that’s a process that we’re going through and we have a ways to go yet.


Our next question comes from the line of Ali Dibadj with Sanford .C Bernstein.

Ali Dibadj – Sanford C. Bernstein

I’d appreciate some clarity on what you think the momentum of the company is at this point. Some might say that it wasn’t that long ago that you really grew topline pretty handily at a much lower cost expense, beating EPS guidance 15% operating margin was in some people’s expectations by 20 12, not that you said that, but some people had expected.

Now, arguably some of that is already -- or still in the stock. On the flip side, you could also say that you are growing organic sales, sure, but it is decelerated on a stacked basis and your operating margin this quarter suggests that a lot of spend back for, again, deceleration and topline.

Next year doesn’t look like you’re growing praying margins that quickly. Aim just trying to get a sense of what you think the momentum is. Feels like you’re really slowing down here going forward. Just want to understand why that is, if just the cost savings were easily gotten up-front and it’s going to be harder going in the back end. When should we expect some stability in your growth again from an operating margin perspective? And I do after follow-up.

Rick Kunes

Let me tell you where I believe the momentum is. First of all, I think we are delivering what we said. I said that we would have been growing 1% ahead of market in sales and reached by 2013, 12 to 13 margins and that was the first pace. Then I said after we would have clarified the plan how to reach a 15% margin, but this was premature for the time being.

Now, vis-à-vis these goals, the thing is our goals, we and the entire organization has been focused on. Vis-a-vis these goals, we are growing more aggressively than that. We are growing more than 1% ahead of market and particularly in 2011, our 6 to 8% growth is going to be well ahead of this in addition goal and well ahead of the average of the market.

So we are continue to be, but you are right, historically, we have been a good growth company and we are actually becoming an even better growth company, in my opinion, thanks to the new ability to use innovation and high touch in new ways and thanks to the important contribution of some new winning regions lake Asia or -- second, we have delivered our savings, proving to ourselves what will be a year -- a year ago was not so obvious that we can ex call it with excellence and proving to ourselves that we can deliver and over deliver our cost savings as we become focused on them.

And not only cost savings, but we have proven that we can also manage pretty aggressively over our cash elements that we have reduced inventories, amazing work on receivables, so I think that the financial and operation a.m. discipline that was discussing in the beginning of this journey seems to be really proven after the first year of going.

Then we also are saying that this initial identified cost savings are going to be delivered top range and we are saying that then we are creating a new element of sustainability like SMI that that will produce the next group of saving. we today don’t feel yet we can deploy and commit to because the work is not finished, but we are working on it. And finally, we are seeing that because of the first year, it’s only one year, by the way, the first good year of this journey, we are really in a position to commit on the high end of the cost savings and important to commit to as a point more, margin target for 2013.

And I know that this brings to us 13.5 and not to 15 as some of the market believes. But also I said that the $15 is something we believe one day we can reach, but today is a bit too early to create a new target before we have proven sustainability of the initial target now increased and before we had really demonstrated that we can also execute some of the other elements of the plans that we are in the process of analyzing.

So we believe that the momentum come from growth, the momentum come from our financial discipline, ability to deliver the savings we commit to, the momentum comes from the fact that we are actually increasing our commitment for 2013 and that we are confirming that thanks to SMI a more long-term approach we have visibility in the long-term for the 15%. So we are a growth company which is becoming a better growth company and we are a company which is proving to be able to grow step by step the margin over the few short years which is, in my opinion, the idea of sustainable profitable improvement.

So in terms of step by step, we spent a lot of time on this conference call, helpfully, I might add, on cogs and some cost savings to get gross margins up but don’t you think there’s a certain limit there? I mean at 7, 7% plus gross margin perhaps I’m too simplistic even misguided, but 77% gross margin, 4% operating margin this quarter or even 12% operating or 12.5% operating margin going forward. It doesn’t seem it is much more bang for the buck on G&A, on more overhead, on more ROI analysis in some of the spending is and more, maybe sophistication than what you’re describing, I was just spending more on big endeavors?

And I wonder whether that’s something you guys will focus on. I guess I say in that the context of step-by-step. I think for its worth to get to the 15 or get to something more sustainable from a momentum perspective, continuous improvement in G&A may not be enough. It may be something more like immediate improvement or something wicker. Aim just trying to get a sense of your philosophy on that aspect of the P&L which has barely been really touched, in my opinion.

Fabrizio Freda

This is a very good question. My philosophy I think I explained, I said that I believe that after this first step, we he will continue to improve. That’s why I said step-step, with productivity. In other words, the combination on productivity rolls and continuing managing our organization in efficient ways and accelerated sales, topline sales, will create year-after-year strong productivity improvements that will continue bringing us in the right direction there.

The second thing that you comment on is that some of the savings will be enabled by things that today we don’t have yet. I keep saying that, but SMI is a very important enabler, is very difficult to restructure distribution centers around the globe without the right systems and without the right processes. It’s very difficult to get many of the savings that we had in the very accomplished international set of 45 without the right system and the right project to get there.

So obviously there is a next step of savings available when we have concluded that, but in order to access the next step, we will need to add the right system, the right processes and this will take the next couple of years to be finalized. So while those couple of years will go, we will be focusing on the save that is we communicated to you and then we will he continue focus on productivity and on the rest of the savings. Thanks for the SMIzing.

The investment, I think I’m pretty clear on what is the deal and this is also reflected in the fact that let’s not forget we have dramatically improved our return on invested capital. I’ve been saying from the first day that I was bringing in this measure into our way of operating and we are making progress on returning invested capital. This should also reassure that you step by step we are getting the right direction.


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

Lauren Lieberman – Barclays Capital

Thanks. I know the call is dragging on at this point but I’m still honestly a little confused about what should have been or should be evidence of significant re-levering of the P&L. There was 300 basis points of lost profitability during the recession, obviously very understandably as sales fell off, but sales are now just about back to where they were before the recession really impacted your business.

Theoretically, there was the bent tightening and I’d love to get an update on to what degree that spending has started to roll back into the P&L, but in aggregate it certainly does feel like there’s a significant increase in the amount of sort of planned and already going on incremental spending to drive growth. Maybe that’s not a bad thing, but it does feel like something has sort of changed in your view of the support needed to drive well above market growth over the long-term. So maybe you can help me sort that out a little bit.

Rick Kunes

Lauren, I think -- when you look at one of the comments that was in Fabrizio’s prepared remarks, he mentioned that all expenses other than advertising merchandising and sampling decreased year-over-year as a percentage of sales. So we are taking costs out of things that really don’t build brand equity, don’t build the future, don’t support that growth that we’re looking for as a company and don’t support, if you will, the build the improvement of our profitability target.

And I think that’s a clear indication of sort of our longer term strategy, which is take things out of the way we run our company that are inefficient, take things out that do not drive topline sales growth that do not drive brand he can, make our profitability targets and continue to grow our company faster than markets and I think we’ve given an illustration of that in our first year and our guidance next year is built around that same philosophy.

Thanks So regarding, see if will, belt tightening expenses, we said that 70% or so of those expenses will come back into the P&L and they did, but we more than offset those expenses coming back by $364 million of permanent savings around our savings targets. So those expenses are a thing of the past, if you will, that belt tightening is over with and are taking permanent costs out of the organization

Lauren Lieberman – Barclays Capital

So the belt tightening, that 70%, did it all kind of come back through this fiscal year as we expected, so that’s already in there?

Rick Kunes



Our next question comes from the line of Joe Altobello with Oppenheimer.

Joe Altobello – Oppenheimer

Thanks, good morning. Going back to your earlier question, you talked about the growth in fiscal 11. First, what was that number in ‘10. Second, just to be clear, it sounds lake you’re expecting shipments to exceed that given the modest rebuild in retailers throughout the world. Is that the case?

Rick Kunes

I think the overall cosmetic market growth in our fiscal 2010 was up around 1% to 2%. So we exceeded that number this year and next year as we said we’re expect 2 to 3% for the overall global prestige market and our growth guidance is 6 to 8%. I’m sorry, the second part of your questions was?

Joe Altobello – Oppenheimer

In terms of the inventory retail levels, do you expect a bit of a rebuild next year to accelerate the shipment growth?

Rick Kunes

I don’t think we’ll see much of a rebuild. The only rebuild activity would be around some of our significant maybe product launches where obviously we ship in, in anticipation of a launch, but other than that, I don’t see retailers taking -- building their stocks back up from this point, but with the exception. Most of them are back to a level that’s probably where they want to be and we think they are going to be a little bit more cautious based on history than they maybe were in the past.


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

Mark Astrachan – Stifel Nicolaus

Hey. Good morning, everyone. I guess you are trying to build on the questions about revenue growth I’m still trying to figure out some of the disconnect between your views on global category growth and what your expectations are for fiscal ‘11, then sort of related to that and maybe this helps answer the question a little bit, or at least frame it, in terms of the incremental spending for advertising, merchandising, sampling, et cetera, just curious how much of an impact that is having on your business and will continue to have, meaning that you have increased that over the last couple quarters, therefore the September and December quarters are better from a revenue standpoint, then it sort of de sell rates but still grows nicely in the back half of the year and that’s sort of consistent. I’m just wondering if you need to sustain a greater level of spend going forward as a result and if not why do you have confidence that you don’t have to do that?

Rick Kunes

No. I think we will, as I said, we will continue to increase advertising, more or less in line with the growth of the company, so we don’t -- we believe that we need just to continue to grow advertising. The only cost in which we are increasing is advertising. In other words, we are taking out costs from every single point of the company, costs that were not adding value and we are reinvesting part of in this advertising. So that’s what is working for us. And that’s what I believe will continue working for us.

Fabrizio Freda

And one thing to keep in mind as you remember that, in fiscal 2010 we really were -- we cut back on our spending until we saw clarity to the year so when you look year over year you would naturally assume there would be some higher spending growth in the first half of our year around a lot of areas versus fiscal 2010, but that’s really just a reflection of the conditions of the market that we were in early in the year when we were very conservative in fiscal 2010, some of that coming back to more normal levels in ‘11.


Our next question comes from the line of Connie Maneaty with BMO Capital Markets.

Connie Maneaty – BMO Capital Markets

Hi. Good morning. Fabrizio, I was interested in your comments early on that you were talking about how aggressive mass has been, some of the mass players have been. I have to say that over the summer as I was leafing through women’s magazines, I saw very little advertising from Estée Lauder, but pages and pages from L’Oreal and Procter & Gamble so my question is in the U..S, did you gain in the total market or just in the prestige and how do you view in this particular market sort of rates for dollars by the mass players?

Fabrizio Freda

We grew share in prestige aggressively. We know that we don’t have the doctor and the number to make it an official claim on total market. We believe that we have been probably stable on total market in our assumptions and that’s exactly the point. You are right. I think that over the years, mass in some economies like the U.S. has been growing faster than prestige. And I think that what we have learned is that when we use the new model that we can compete more effectively against.

First of all, not in every market of the world this is happening. There are many markets around the world where, as we speak, prestige is being consistently growing faster than mass. There are other markets, namely US, when the last five, six years this isn’t happening. Now, the good news is that as of January, we really tested our new way operating meaning, this launches and this excellent initiative, like Even Better Clinical, supported advertising, print advertising, but honestly also for the first time TV advertising, print advertising and an a normal amount of digital activities.

So the combination of new TV, print and digital, this is the first time that we have done, for sure the first time in the US. As in combination with our renewed high-touch services, meaning our better way to provide seat and services in store to our consumer has generated impressive growth, also faster than mass. In the January-June period, the first time in many years in the U.S. where the skin care category in prestige in department store and specialty stores has been growing faster than in mass.

And we believe this has been also for -- because of the contribution that our special initiative has given to our department store and specialty store to attract back users that may have chosen to shop also in mass in the past. So this is just the beginning of a journey, but I believe we can compete more effectively with mass as well. Again, consumers in the U.S. have 12 products on average at home between makeup and skin occasions and these 12 products for the large majority of consumers comes from any channel.

So the real competition is competing for market share of the consumer bag or whatever the consumer had in their bathroom. That’s the real mark share that win-to-win and the model that we are learning to use I think will be capable also of beg more efficient on that front, on top obviously of continuing building aggressive market share within prestige.

Connie Maneaty – BMO Capital Markets

And if I could just ask Rick a follow-up, a quarter or two ago there was some mention about an IRS program that would, I don’t know, kind of normalize through the quarters the way the tax rate got reported. I don’t know if I understood that right. But what’s the status of that program?

Rick Kunes

It’s a cap program, Connie and we enter it as of July 1st of this fiscal year.


Our next question comes from the line of Victoria Colin with Atlantic Equities.

Victoria Colin – Atlantic Equities

Hi, Rick. Hi Fabrizio. Apologies for being backward looking question but I wonder if I could ask about the Americas and Asia Pacific region in Q4. Was the performance there in terms of operating profit in line with your expectations at the start of the quarter or did you find that you were sort of increasing your advertising spend ahead of your initial expectations to support the brand launches?

And if that was the case, is it because you were getting better than expected traction with the market, or was it a kind of step change relative to other competitors that you were trying to make a definite shift away from competitive behavior in the marketplace? Thank you.

Rick Kunes

Which region?

Fabrizio Freda

In Asia and Americas you said, right Rick?

Victoria Colin – Atlantic Equities

Yeah. That’s right. In the Americas and then also in Asia Pacific, which is sort of -- the Americas faces the loss in future.

Rick Kunes

Yeah. Just want to say one thing. We are a very different strategy depending by region and by brand. So I cannot make a generic statement. It is a fact that in Asia Pacific, particularly in markets like China, or in other marks like Russia, we have made the explicit decision to grow to market share leadership some of our key brands and in Asia, as I have said in my prepared remarks that Estée Lauder is now market leader in our distribution.

That’s a mega achievement. Having the market leader in the fast growing market of the world is an important achievement that is a very strong asset for our future. And so we have gone for it. We have gone for it, with the right approach meaning supporting the brand equity and the key initiatives, making them as local as possible in their execution, which goes to the other point I covered about local relevance, new R&D centers, Asia, et cetera, et cetera. So this is the aspect.

And in order to finance these aggressive initiatives, management is spending, we have capped other activities, namely promotions. We have been capping promotions. We have been capping repurchase, for example, in many brands around the globe in order to finance more equity building and share leadership building activities. So I believe that this has happened in a pretty healthy way.

Fabrizio Freda

And Rick, the total spending was exactly in line with what we had anticipated for the fourth quarter. But I think one of the beauties, if you will of, the process that we have now, that Fabrizio has described, is our ability to see an opportunity for us and to move monies into where the biggest opportunities are or in the best markets or the best categories of business, on a relatively quick basis to be able to take advantage of things that we see in the marketplace. So we’re maintaining a high level of flexibility, but we’re also obviously trying to achieve our financial targets in their totality.

Victoria Colin – Atlantic Equities

Okay. That’s great. Thank you very much.


That concludes today’s question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1:00 PM Eastern Time today through August 26. To hear a recording of the call please dial 800642-1687, passcode number 913015450. 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.

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