Estee Lauder Cos. Inc (EL) — Q4 2015 Earnings Call Transcript

Good morning. On today’s call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC where you’ll find factors that could cause actual results to differ materially from these forward-looking statements. Our discussion of our financial results and our expectations are before restructuring and other charges, including the re-measurement charge related to Venezuela. In addition, we will generally discuss the results before the impact of accelerated retailer orders that took place in the fourth quarter of last year due to the July 2014 implementation of our Strategic Modernization Initiative. We will also explain the impact of the shift in sales on our fiscal 2016 first quarter and full year comparisons. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website. And I’ll turn the call over to Fabrizio.

Thank you, Dennis, and good morning, everyone. I’m proud of our strong financial performance in fiscal 2015 which validated the soundness of our business strategy. We achieved very strong results which were fueled by our multiple engines abroad in all regions, despite significant currency headwinds and other unusually strong challenges and volatility. We delivered these results by having developed a more balanced and diversified business over the large years, across brands, geographies and channels. These important characteristics have become the key pillar that will help us continue to deliver long-term sustainable profitable growth. This balance and diversity are important factors that have made our performance more reliable this year, even in the face of situations that arose and were out of our control. Our fourth quarter constant currency sales growth was strong, up 7%, ahead of the industry trends due to the broad global appeal of our prestige brands, and their highly coveted beauty products. That performance capped an excellent fiscal year with constant currency sales growth of more than 6%, and earnings per share growth of 12%. We are celebrating many other achievements as well. One of our most important assets is our prestige brand portfolio, which we continue to strengthen and evolve. Our brands successfully posted fast-growing markets and channels, created desirable products, and attracted new consumers. Makeup is the fastest-growing category in beauty at this moment as it appears consumers are seeking gratification from instant results. As the global leader in prestige makeup, we are capitalizing on this trend, with our brands that are focused on makeup group sales. M•A•C's outstanding performance was driven by its constant creativity and wider distribution. Smashbox, which is strong in the specialty multi-channel, generated exceptional double-digit growth driven by a successful array of product launches. Bobbi Brown expanded its makeup lesson in counters globally, showcasing its unique products and philosophy, supporting its growth. Many of our mid-sized small brands generated strong gains, notably those in the luxury tier. Jo Malone and Tom Ford fueled exceptional growth by adding a terrific range of products to their successful lines of existing fragrances, while La Mer and Origins showed solid growth in skin care. Within these categories, our brands' innovation was a key contributor to our success. Sales for new products accounted for nearly 20% of our business. We launched products that resonated strongly with consumers across the board, including in fast-growing subcategories such as masks and white spaces for us like contouring. Emerging markets remain a major growth engine, constituting 14% of our business. Excluding China, sales in emerging markets grew 26% with the strongest performance in Brazil, Russia, and Turkey. Our China business grew 6% with every one of our 14 brands there posting gains. We now have a presence in nearly 100 cities, having added 18 new cities during the year. We continue to expand our digital presence in China, further penetrating the largest market for e-commerce in the world. Our e-commerce sales there more than doubled. We also expanded a number of brands on Tmall, including a launch for Origins and La Mer. Bobbi Brown plans to join Tmall next month. Our best-performing region was Europe, the Middle East, and Africa, where sales growth greatly outpaced prestige beauty growth, allowing us to gain share in all markets and across most brands. Our UK business grew double digits for the second straight year. The EMEA region's success stems from implementing key corporate strategies such as expanding emerging markets, smaller brands, and direct-to-consumer channels to broaden our reach among a wide array of consumers. Globally, our direct-to-consumer channels are increasing, resonating with shoppers, and contributing to our strong performance. Maintaining strong momentum, e-commerce grew nearly 30% and thrived globally, reflecting higher traffic and conversion. During the year, we opened 130 freestanding stores across several brands, the majority of which were for M•A•C. We now operate over 1,000 freestanding stores, which provide a complete brand immersion, and their sales also rose double digits. Additionally, we have another 360 freestanding stores operated through distributors. We successfully completed the last major wave of our Strategic Modernization Initiative one year ago, which allowed us to focus more fully on realizing value from the additional capabilities. The program delivered working capital improvements we achieved this year, particularly in inventory and payables. Looking at our bottom line, a lower tax rate and share count reduction from our stock repurchase program also helped drive our EPS performance. These were the major elements that led to our results in fiscal year 2015. We also looked toward our future growth and expanded our portfolio by acquiring four brands, which are in fast-growing subcategories of beauty we have identified. We have begun to nurture and integrate them into our business. I believe they have terrific potential for long-term growth. We achieved our performance while navigating numerous micro challenges that included considerable currency fluctuations that caused a shift in travelers’ buying patterns, a lingering downturn in Hong Kong that curtailed travel by high-spending Chinese visitors, continued lower economic growth in China, and a sharp drop-off in travelers to Macau. The travel retail channel was negatively impacted by these factors, as well as the MERS outbreak in Korea. There were also fewer high-spending consumers traveling, particularly Chinese, Brazilians, and Russians. This global issue had a more significant impact on two of our largest brands, Estée Lauder and Clinique, which account for over 40% of sales. They were also affected by softness in certain department stores in the U.S. and China caused by lower spending. The balance of our portfolio collectively grew double digits, allowing us to generate excellent constant currency growth in both sales and earnings per share. We expect continuous strong growth trends in fiscal year 2016, but the growth engines will continue to evolve. We have updated our 10-year compass to position our brands in the most promising and fastest-growing areas for the near and long term. By being agile, we will allocate our resources to where we expect the best returns on our investments. Global prestige beauty is dynamic and highly competitive. It is undergoing unprecedented changes involving how and where consumers shop, and where they learn about the kinds of products and experiences they desire. Our strategy is working precisely because we anticipated many of the opportunities stemming from this environment and invested in the fastest-growing areas to capitalize on new shopping patterns and habits. This is an exciting time to be a major player in global prestige beauty. The industry is expected to grow again by 4% to 5%, driven by favorable demographics, a growing middle class that aspires to prestige beauty products, and a constant stream of increasing launches. As an industry leader with an unparalleled portfolio of authentic, aspirational brands well-suited to consumers around the world, we are uniquely positioned to capture a larger share of consumer beauty choices. We believe that emerging market consumers will continue to be one of the best growth drivers, both in local markets and as they travel along key corridors. As a result, we are accelerating our expansion in key countries such as Turkey, where we are building on our growth and adding seven new freestanding retail stores for M•A•C, Clinique, Bobbi Brown, and Jo Malone in the first quarter alone. In China, we plan to continue strengthening our brand portfolio and accelerating our makeup and fragrance businesses. We expect to enter about a dozen new cities this fiscal year, expand distribution across all channels, and leverage our organization infrastructures and capabilities. Our heritage markets are also essential contributors to our growth plans. Our UK business is expected to remain robust, fueled by continuous trends in our portfolio, including gains from our largest brands, as well as the expansion of new brands in the market. We anticipate solid increases from department stores which have been a strong channel, and we will accelerate our digital initiatives and selectively increase our penetration in smaller cities with freestanding stores. Additionally, we are opening stores in high-traffic locations that aren’t typical retail venues, such as our interactive pop-up shop in the Piccadilly Circus tube station. In the U.S., we are evolving the consumer experience and service model through exciting in-store merchandising in higher traffic locations. We aim to distort and enhance our brand messages to resonate with consumers and drive greater conversion. We are collaborating with our department store partners to attract more traffic to their stores' beauty floors. When we attract consumers to our counters, we expect to convert more of them into buyers by featuring our newest products and personalized high-touch services. Furthermore, the Estée Lauder brand is launching a special collection of makeup and skin care developed for North American Sephora stores, aimed at millennial consumers. This collection is called the Estée Edit by Estée Lauder, and is designed specifically for this consumer and channel, to be supported by digital marketing and social media. The Estée Edit, along with Estée Lauder's best-selling skin care products, will launch in March across over 250 Sephora stores in the U.S. and Canada, and on sephora.com. Regarding our global channels, our online sales are projected to continue growing strongly in double digits. We also plan to accelerate our freestanding store openings worldwide, both directly operated and through distributors. We expect to add more than 250 stores this year, mostly in foreign markets for M•A•C, Jo Malone, and Bobbi Brown. As we expand our retail footprint, we are building capabilities to improve our operations and omni-channel initiatives, as well as our efficiency and productivity. To sustain our growth in specialty multi-retailers, we are selectively expanding our distribution by adding brands that fit well with the retailers that are winning globally. In the U.S., Bluemercury is expected to open more stores in select Macy’s locations. Our luxury brands are well-represented in Bluemercury, and we anticipate benefiting from the chain's expansion. Additionally, we are increasing our presence in specialty multi-retail by acquiring new brands that are strong in the channel, such as GLAMGLOW. Newness has always been paramount in beauty, and in today’s crowded beauty aisle, it is even more critical. We believe this environment favors our respected brands that place premium on creativity and quality. Our innovation pipeline is strong, and we are emphasizing new subcategories, speed to market, and products with widespread consumer appeal. Estée Lauder and Clinique have exciting plans underway to generate improved results this year, which involve balancing their innovation across categories and demographics. Estée Lauder's recent launch of its New Dimension franchise of contouring products is an initiative in a white space area for the brand. This collection rolled out in North America in late July and will be followed by all other markets in September. This fall, Estée Lauder’s top-selling Double Wear foundation franchise will be introducing an innovative new compact called Double Wear Makeup To Go. To build on its successful Modern Muse fragrance franchise, the brand is introducing Modern Muse Le Rouge. The launch will be supported by a TV, digital, and print campaign featuring the brand’s newest model, Kendall Jenner. We plan to leverage her substantial social media presence. Clinique has launched a new global campaign named Face Forward to introduce Clinique's iconic and best-selling 3-Step product to millennials. The campaign focuses on young women influencers who are dynamic, accomplished, and on the cusp of greatness. These influencers inspire young women to face everything in life, and with Clinique, they can face forward. Clinique is undertaking several initiatives to reinforce its authority in the entry price point of prestige beauty and its position in makeup, which go hand-in-hand and should help fuel its total business. Early results are encouraging. In the last two quarters of fiscal 2015, the brand’s makeup sales increased. Clinique is focusing on several of its winning makeup franchises and extending them this year with new products. This includes 3-Step, Beyond Perfecting, Chubby Sticks, and Clinique Pop Lip Colour and Primer. Clinique is also striving to establish its strength in skin care with key launches, including a new moisturizer under the successful Smart franchise. We believe the combination of exciting makeup and skin care launches, compelling marketing targeted to millennial consumers, and focused distribution expansion will work to turn around this large and important brand. M•A•C expects to post double-digit growth by sticking to what the brand is and what it does best: being a fashion trendsetter that creates fun, unexpected, and edgy collaborations and products with a highly talented group of makeup artists in its stores and counters. Our mid-sized brands have a strong trajectory ahead. We have an enviable track record of developing small brands into sizable ones. In the last five years, Jo Malone has tripled in size and La Mer's sales have more than doubled, becoming our fourth largest brand. These success stories inspire our recent acquisitions and the potential we see in them. In our four newest brands, we are connecting creativity with our extensive industry knowledge as we develop new products, expand distribution, and strengthen their digital platforms and communications. Digital marketing and social media clearly continue to grow in importance. Across our brands globally, we are devoting capability-building resources to strengthen our talent in the digital space, creating our ability to further grow via new technology that enhances our storytelling and maximizes consumer engagement. Our brands are also leveraging key influencers online and developing real-time content to create ongoing communication with consumers. The implementation of our SAP platform is enabling greater visibility into various aspects of our business, such as indirect procurement, advertising and promotion, and corporate services. This allows us to analyze our expenses to determine efficiencies and effectiveness and take action where appropriate. The benefits derived from this area are built into our profitability forecast, while continuing to allow for a portion of the savings to be reinvested in additional growth capabilities. This should provide you with a good sense of the many plans we have underway to maintain our momentum in fiscal year 2016. We are well positioned in a vibrant industry that continues to expand even in volatile times. We remain confident about our ability to deliver strong and reliable results, thanks to our well-diversified business and successful strategy. We expect to continue to outpace global prestige beauty growth by at least 1% point annually due to the far-reaching consumer appeal of our brands around the world, and the exceptional quality of our products. Thanks to our multiple engines of strong growth in numerous countries and channels, coupled with the excellent momentum in many of our brands, our goal this year is to again deliver superior sales growth, double-digit EPS gains, and greater stockholder value. Our company made tremendous strides in fiscal 2015. Most importantly, we demonstrated that by being both well-diversified and agile, we can quickly alter our game plan when needed to react to changing market conditions and still achieve our goals. For this, all our employees deserve credit, and I thank them for their dedication and hard work. Together, we have produced another year of excellent results and look forward to a bright future ahead. Now, I will turn the call over to Tracey.

Thank you, Fabrizio, and good morning, everyone. I will briefly review our fiscal 2015 fourth quarter and full year financial results, and then share with you our expectations for fiscal 2016. Please note that my commentary excludes the year-over-year impact of restructuring and other charges, primarily the Venezuela re-measurement charges. Also excluded is the impact of the acceleration of retailer orders that otherwise would have occurred in the first quarter of fiscal 2015 related to our July 2014 rollout of SMI. The impact of that shift was $178 million in sales and $127 million in operating income, equal to approximately $0.21 per share. This shift created difficult comparisons for the first quarter and the full year of fiscal 2015, and will also create comparability issues for the first quarter and full year of fiscal 2016. Now, for the fourth quarter, net sales came in at $2.52 billion, which was 7% growth in constant currency. Acquisitions contributed 50 basis points of this sales growth. Net earnings were $153 million compared with $175.2 million in the prior-year quarter, reflecting increased door openings, investments in information technology, and in R&D and product development. Diluted EPS of $0.40 came in above the top end of our expectations primarily due to continued disciplined expense management. Reflected in the EPS for the quarter was approximately $0.02 of dilution from acquisitions, and currency translation was unfavorable by $0.07. Looking at our business by region for the quarter, net sales in the Americas increased 12% in constant currency. We had strong double-digit growth in Latin America, which came primarily from the continued strong growth of M•A•C in Brazil and also in Mexico. We also had a high single-digit increase in North America, which reflected good sales growth in both the U.S. and Canada, led by the online and specialty multi channels as well as improved sales to department stores. In the EMEA region, net sales increased 3% in constant currency. Many markets in the region benefited from increased tourism, largely due to the weaker euro. We achieved double-digit sales gains in the UK, the Balkans, Benelux, and many emerging markets including Turkey, Russia, and South Africa. The larger markets of France, Germany, and Italy collectively grew low single digits, while we saw softer results in Spain. Our sales in the travel retail channel declined 4%, despite strong retail sales, primarily reflecting the impact of the MERS outbreak on inbound travel to Korea, continued weakness in travel to Hong Kong and Macau, and the related customer destocking and currency-driven softness in other travel retail locations such as Hawaii and Brazil. Sales in the Asia-Pacific region rose 4% in constant currency, led by double-digit gains in China, Australia, New Zealand, and Thailand. Japan contributed solid growth as we anniversary the impact of the VAT increase last year and benefited from higher tourism due to the weaker yen, while Korea grew low single digits. Hong Kong remained weak, reflecting the decline in tourism, while Taiwan sales declined on weak retail trends. Net sales by product category rose double digits in most categories for the quarter. Skin care was the exception, with sales declining 2% in constant currency. Increases from La Mer and Origins, and incremental sales from GLAMGLOW reflected, in part, the continued growing popularity of subcategories like masks. However, these gains were more than offset by the declines in skin care at Estée Lauder and Clinique across serums and moisturizers. Sales in the makeup category rose 10% in constant currency, led by the continued strength of M•A•C, Smashbox, and Bobbi Brown. The expansion and growth of Tom Ford Beauty also contributed to the category. Both Estée Lauder and Clinique posted modest growth in makeup in the quarter as they benefited from some recent new product launches and marketing activities in the category. Sales of fragrance products jumped 26% in constant currency. Continued strength in high-end fragrances from Jo Malone and Tom Ford, combined with incremental sales from our recent acquisitions, were the main drivers. The category benefited also from initial shipments of the new Michael Kors Gold Collection, which launched in July. In hair care, sales rose 10% in constant currency. Aveda launched thickening tonic and new products in its Be Curly line. The brand increased distribution across channels in the UK and Asia and delivered strong salon sales in Western Europe. Bumble and bumble is also seeing continued strength in the specialty multi and online channel. Our gross margin increased 30 basis points to 80.7%, primarily related to favorable currency in some channel mix. Operating expenses, as a percent of sales, rose 110 basis points to 71.6%. The primary driver was higher selling and store operations cost of 100 basis points, largely due to new store openings in the quarter related to our retail store expansion strategy. As a result, operating income declined 9% to $228.3 million, and operating margin decreased 80 basis points to 9.1%. Turning to the full year, as Fabrizio indicated, we delivered strong full year results while navigating a number of challenges, most notably the significant strengthening of the dollar and its multiple impacts on both translation and consumer travel. Net sales rose 2% to $11 billion. Excluding the effects of currency translations, sales grew by more than 6%, even without the acquisitions which contributed 30 basis points. Net earnings grew 2% to $1.18 billion, and diluted EPS increased 3% to $3.05, which includes $0.05 of dilution from the acquisitions. Unfavorable currency translation impacted EPS by $0.24. In constant currency, diluted EPS rose 12% for the year. Once again, our sales growth was broad-based across regions and product categories. Gross margin increased 20 basis points to 80.5%. The increase came primarily from favorable pricing, currency, and channel mix, partially offset by the higher cost of some new product introductions. Operating expenses as a percent of sales rose 40 basis points to 64.6%. The increase was primarily due to the impact of higher retail store operations costs reflecting the increase in the number of company-operated freestanding retail stores, acquisition costs, and investments in information technology. These increases were partially offset by approximately $100 million from our cost savings initiatives and leverage in our overall marketing and advertising costs, reflecting the rapid growth of brands with less traditional marketing spend as well as the shift of media investment from traditional to digital. Operating income rose slightly to $1.74 billion, and operating margin decreased 20 basis points to 15.9%. Our operating margin was unfavorably impacted by 30 basis points from acquisitions and 40 basis points from unfavorable currency. Excluding these factors, our operating margin would have expanded by 50 basis points. Net interest expense improved 10% to $45.7 million, primarily due to higher interest and investment income this year. Our effective tax rate for the year was 30.3%, a 60 basis point improvement from fiscal 2014, driven primarily by a reduction in the effective tax rate related to our foreign operations. All major elements of working capital improved in fiscal 2015 compared to the prior year. This was largely driven by the continued progress in our supply chain service initiatives, which helped improve inventory days to sell by eight days, resulting in 190 days to sell at year-end. The decreased days were also driven by favorable currency translation, which was partially offset by higher inventory to meet demand for our sales objectives for the fall season, an increase in the number of freestanding retail stores, and the addition of new inventory from our acquisitions. For the fiscal year, on a reported basis, we generated approximately $1.9 billion of cash flow from operating activities, an increase of 27% or $408 million versus the prior-year period. We invested $473 million in capital projects, principally in counters, new retail stores, and information technology. We used $241 million for acquisitions, and given that most of our remaining cash was overseas, in June, we took advantage of the favorable rate environment and issued $300 million of 30-year senior notes at 4.375%. We returned more than 90% of our reported free cash flow to stockholders during fiscal 2015 through dividends and share repurchase activity. We repurchased approximately 12.4 million shares of stock for $983 million, reducing our diluted shares outstanding by more than 7 million shares from the prior year period. We also used $350 million to pay dividends to stockholders, reflecting a 20% increase in the quarterly dividend rate, and a payout ratio of nearly 30%. The combination of our increasing dividend and strong stock performance this fiscal year delivered a total stockholder return of 18.1%, significantly higher than the average of our peer group, and more than double the 7.4% return of the S&P 500 over the same period. Looking ahead, our strategic view of opportunities remains unchanged even as we evolve our tactics based on the learnings of the past year. Our goal remains to exceed global prestige beauty sales growth by at least one percentage point annually, and we expect to achieve that goal with top line growth of 6% to 8% annually in constant currency. As Fabrizio said, we achieved above-industry results through the strength of our brand portfolio, investing behind the fastest consumer growth areas and distinctive new innovation. Geographically, we continue to expect rapid expansion in emerging markets, reflecting the increasing disposable income of a growing middle class. In developed markets, we plan to optimize our brand portfolio and selectively increase penetration in smaller cities. Looking at our distribution channels, we continue to see great momentum in e-commerce, travel retail, freestanding retail stores, and specialty multi-retailers. We expect omni-channel initiatives to evolve the way consumers experience brands across all channels and drive higher sales as a result. Importantly, our superb brand portfolio allows us to deploy the right brands with the right products for each channel, geography, or demographic opportunity we see. We are working to stabilize and grow our Estée Lauder and Clinique brands, continue the rapid growth of our makeup and luxury brands, and expand our newest brands. We remain open to further acquisition opportunities and continue to target an average of 1% point of sales growth from acquisitions over the three-year time horizon. Flexibility, agility, and the strength of our execution are crucial for our company to compete in a rapidly evolving dynamic industry. This means that in any year as we have done, we must be able to allocate resources to tools and capabilities to evolving and dynamic geographic, brand, product, or channel opportunities. At the same time, our goal is to produce double-digit EPS growth in constant currency each year. Sales growth is an important driver of our long-term growth and value creation, and it is expected to account for more than half of our expected EPS growth over the next three years. We will continue to annually progress margin expansion, and combined with share repurchase and effective tax rate reduction, we will deliver our EPS goals. When we set our three-year margin goal last year, the currency assumptions were much different from what they are today. As I mentioned earlier, adverse currency movements curtailed our fiscal 2015 operating margin by 40 basis points and will also have an impact in fiscal 2016. Additionally, the four new brands we acquired are expected to be slightly dilutive over the next few years. Over the next three years, we will further leverage our investments in SMI to accelerate cost savings while investing in capabilities needed to increase our competitiveness. We see three major areas contributing to operating margin expansion. About one-quarter of the improvements are expected in gross margin from a combination of pricing, channel mix, and SMI-enabled cost of goods reductions. About two-thirds of the improvement are expected to come from our SMI-enabled cost savings initiatives, including indirect procurement, A&P effectiveness, and other programs targeted to improve the efficiency of our operations, with the remainder expected from productivity improvements. These benefits will be partially offset by investments to turn around our Estée Lauder and Clinique brands, further explore and support our retail stores, further develop our digital and omni-channel tools, and build capabilities and talent across all these areas. Taking all these factors into account, we now expect further cumulative operating margin expansion of approximately 90 basis points to 130 basis points in constant currency through fiscal 2018. The annual improvement may vary by year based on both the momentum of the business and the opportunity for investment to drive profitable growth. Working capital improvement is another goal enabled by SMI. Today, we have greater visibility into our inventory globally and the SMI program, along with other tools, assists us in improving turnover through better forecasting and demand planning, which should also help to reduce out-of-stocks. At the same time, we often get the fastest growth from countries that are more distant from our production facilities, requiring longer lead times for transit. Still, we have already begun to see net benefits begin to accrue from our SMI efforts, and we are targeting inventory days to sell improvement to approximately 155 days by the end of fiscal 2018. While inventory is the largest area of opportunity, we expect improved performance across all of our working capital drivers. If we achieve our goals over the three-year time horizon, we expect to free up approximately $300 million to $400 million in additional cash from our accounts payable, accounts receivable, and inventory levels, greatly accelerating our growth and cash flow from operations. Now, let me discuss our outlook for the fiscal 2016 full year and first quarter. The sales shift related to last year’s SMI rollout will impact comparisons to the prior year in both the first quarter and full fiscal year. I’ll discuss our expectations, adjusting for the impact of the shift. Our forecasted growth rates both before and after the shift impact are available in today’s earnings release for your reference. For the full year, sales are forecasted to grow 6% to 8% in constant currency. All regions are expected to contribute to that growth, led by EMEA; and all product categories are forecasted to grow, led by fragrance and makeup. Pricing is expected to contribute between 1.5% and 2%, while continued distribution expansion for most of our brands is expected to contribute between 2% and 3% of growth. Last year’s acquisitions will add an incremental 50 basis points, with the remainder coming from sales growth and existing distribution as well as new innovation. Currency translation is estimated to negatively impact our full-year sales growth by approximately 3% to 4%. Our estimate assumes weighted average exchange rates for the full year of $1.07 for the euro, $1.51 for the pound, and $1.26 for the yen. We are leveraging SMI to create value for the organization through greater efficiencies and cost savings. We have a strong governance process in place to support our value creation team efforts and ensure continuous cost improvements. In fiscal 2016, we will generate expense leverage through our value creation initiatives that are expected to garner over $200 million in savings, primarily from indirect procurement, A&P optimization, and cost of goods efficiencies. We will continue to look at opportunities that will produce progressive cost savings. To support and sustain our long-term growth, we will reinvest some of the savings behind the turnaround of our Estée Lauder and Clinique brands, further expansion of retail stores, R&D and innovation, information technology, and talent. We will continue to be nimble with our resource allocation, which impacts the quarterly cadence of our spending. For fiscal 2016, we expect our tax rate to be in the range of 29% to 30%. Diluted EPS is expected to range between $3.10 and $3.17, including $0.05 of dilution from acquisitions. Compared to our fiscal 2015 EPS of $3.05, before charges and the accelerated orders, EPS is expected to grow between 2% and 4%. The projected three to four percentage points of adverse currency translation on sales in fiscal 2016 equate to about $0.18 of EPS. In constant currency, we expect our EPS to rise by 8% to 10%. In fiscal 2016, on a reported basis, we expect cash flow from operations to be approximately $1.8 billion. Capital expenditures are planned at approximately 5% of sales, which will primarily support consumer-facing investments in counters, retail stores, and online site development, as well as systems, facilities, and manufacturing. We will review our capital structure annually, and we do not expect any major changes in our philosophy for this fiscal year. We prefer to maintain strong credit ratings, which give us flexibility to access cash at favorable rates. We have distributed an average of 100% of annual free cash flow to our stockholders over the last four years through dividends and share repurchases. We have room to grow our dividend while maintaining a sustainable payout ratio, and as of June 30, we had approximately 28 million shares remaining on our buyback authorization. Looking at our first quarter, we expect sales to rise approximately 6% to 7% in constant currency. Translation can hinder growth by approximately six percentage points to seven percentage points. We will support a strong start to the new fiscal year by making thoughtful investments in our first quarter to achieve this. We expect incremental investment behind new product launches, notably Estée Lauder’s New Dimension, store expansion, and our new brands. We also will make further investments in Estée Lauder and Clinique turnarounds and in information technology. The initial impact of the MERS outbreak in Korea during last fiscal year’s fourth quarter is continuing into our first quarter and pressuring our profitable travel retail business. Also weighing on profits this quarter is continued weakness in some other areas including Hong Kong and Macau, as well as an increase in stock-based compensation and acquisition-related expenses. At this time, we anticipate that EPS will be between $0.66 and $0.69. The adverse currency translation on sales for the first quarter equates to about $0.09 of EPS. In closing, I want to reiterate that we are pleased with the performance we delivered in fiscal 2015 and with the opportunities we just shared with you. With a business that is increasingly more balanced and reliable than ever, we intend to continue to deliver sustainable profitable growth. So that concludes our prepared remarks and at this time, we’d be happy to take your questions.

Hey, good morning. So on the long-term margin targets, clearly FX and acquisitions are pressure points, but I was hoping you could comment a bit on your ability to generate some incremental productivity internally to at least bridge some of that gap from these external issues. And given your efficiency in margin gap versus peers, why there's not more of a sense of urgency in attacking the productivity to deal with some of those external issues? Thanks.

So, when you look at the margin guidance, the cumulative margin guidance that we gave over the next couple of years, if you take into consideration both the foreign exchange impact from last year as well as what we called out for this year in terms of impact and the initial dilution from our acquisitions, which should mitigate in the 2017 to 2018 timeframe, but in 2015 and 2016 we’re seeing dilution. We are actually relatively close to where we had guided to at the end of last year on that 17.5%. So, we do think that given both the currency impact that we’ve had and the acquisitions that we chose to do, we are in line with our prior guidance. Since that guidance, a few other things have happened. Clearly, the strong foreign exchange impact has affected some of our channels like travel retail. The MERS impact is having us start off this year with a bit of a softer impact and we feel it’s very important for us to invest in Estée Lauder and Clinique. So the balance that we have, which is why we’ve actually increased our cost savings plans in order to do some of the funding that we need to support those programs is essential for our long-term growth.

I would also like to add one thing to this question, to this answer, is that as you’ve mentioned, sense of urgency; there is an enormous sense of urgency in the company to continue to grow margin, and we are fully committed to it. In the 17.5% that we communicated at that time, there was a lot of cost savings included. Second, we have increased them, and as Tracey explained, we will continue to look into that and maybe find even more opportunities, but there is commitment to that. The point is, however, that also investment needs and investment opportunities also have been increasing. And our decision is to focus on long-term growth and sustainable growth of the company. We are leveraging cost savings but also continue focusing on the investment needs and opportunities to keep the company growing in the best possible way.

Thank you. Good morning, everyone. Tracey, a question for you. When we were sitting at this point last year and you had guided to 2015, I think you had guided to 5% and 6% top line growth constant currency and EPS growth of 7% to 10%. If we compare that to your growth going forward for 2016, 6% to 8% top line and 8% to 10% bottom line, can you just help us characterize the differences in that top line guidance and the relative flow-through to EPS looking ahead versus hindsight looking to the prior year? Thank you.

Yeah. I mean, the growth levers that we have in fiscal 2016 are much like they were in fiscal 2015. One of the things that we saw in fiscal 2015 that we just spoke about was the tremendous strength of the makeup category. So, we certainly expect continued strong growth out of all of our makeup brands. One of the other things that we saw was more softness in skin care. That certainly affected Estée Lauder and Clinique, and we are expecting better performance in skin care in fiscal 2016 than we saw in fiscal 2015 and therefore better performance for Estée Lauder and Clinique. In terms of the flow-through to profit, with all of the mix impact that we have from channel mix and category mix, we don’t expect a tremendous amount of gross profit margin expansion, but some. So, that leverage that we will get will be in the expense area. And as I indicated, certainly over the next three years, we expect a one-third split between margin expansion and gross profit margin and two-thirds coming from expense leverage.

Hey, guys, I just wanted one clarification and a real question. The clarification remains around the cost-cutting plan, which even if you take out the currencies and take out the impact from acquisition, it just doesn't seem like SAP is allowing you to accelerate much at all, whether it be from margin or whether it be from inventory. So if you just take another shot at helping us out on that, that would be helpful. The other question is to try to get a better understanding on the channel diversity strategy which has certainly helped and I guess I have questions around three areas. One is the travel retail impact from the Chinese luxury tax change. Two is how we should think about your ROIC and margin given the ramp-up significantly now to 1,000 freestanding stores? And then three is how have you guys analyzed the brand risk of Estée Lauder into Sephora? Thanks for all those.

Well, that’s a multi-part question. So, let me start with the SMI savings. Ali, we believe this year based on what we’ve communicated, we had very good results from SMI. As you know, we went live in July of this year. It does take some time for the team to get familiar with optimizing SMI, and our biggest markets went live in July. The fact that we were able to generate $100 million of cost savings, and that we are doubling that next year, we believe is very good progress. As I mentioned in my prepared remarks, we believe that there are more savings out there to gain over the next few years. Our internal plan calls for increasing levels of savings every year related to SMI-enabled programs. As for working capital, going from what was 200 days to sell to 155 days to sell is, in the timeframe that we’re indicating, pretty great progress. We will certainly, as we always do, try to exceed those levels of improvement. Being able to free up $300 million to $400 million of cash over this timeframe is very good for us, very good for our shareholders, enabling us to either invest in more ROIC-driven projects or return more to shareholders. So, we have a very strong program and we certainly, to Fabrizio’s point, are committed to continuing to look for even greater savings.

In answer to your other 3-in-1 questions: on travel retail, we believe there is enough price differential in the travel retail channel to continue growing that part of the business which is driven by price differentials. I also want to underline that a lot of the travel retail business is driven by conversion and marketing and our reports speak particularly true for makeup, where the absolute price differential is significantly lower than fragrances and skin care, and it is actually growing faster than skin care. Therefore, we believe the impact on travel retail due to the tax difference in China will be moderate, and anyway, there are other growth drivers in travel retail that have the potential to more than offset that. Secondly, the impact of freestanding store expansion on margin and ROIC; you should look at the total business. Some of our freestanding stores are very productive, particularly the one on market Jo Malone for the time being. In this case, the impact is actually positive. You need to consider that the overall margin of online is higher, travel retail is higher, some of the more productive freestanding stores are higher; part of the specialty multi around the world is higher. The combination of all these factors makes the channel mix favorable rather than unfavorable if we continue to drive our strategy the way we are. Finally, on Estée Lauder in Sephora, we believe this is an important step forward for the brand. I personally don't believe there is a risk; rather, this is very good news for modernizing and rejuvenating the brand in front of the millennial consumer. That is a specific goal of this action. Sephora in the U.S. has excellent penetration among millennial consumers, and the ability of the Estée Lauder brand to tailor its activity to this consumer will have a positive halo effect on the entire brand nationally in our opinion. We are pretty excited about this move.

Great. Thank you. I want to talk a little bit about the staying power of the impact of brand strength because it looks like your outlook implies that you're expecting local currency sales growth to accelerate as the year progresses, even though the benefit from acquisition laps and the pace of investment spend also decelerates, clearly having a much bigger delta in investment spend at the beginning of the year and less so as the year progresses. So can you talk about the staying power of the impact of brand spend and if your expectations have changed relative to what you've seen in the past and if so what are the key drivers behind that?

One of the things that we’re seeing is quite a shift in terms of how we spend relative to brands. So, we’ve talked a lot, Olivia, about the fact that the brands that are growing right now are the non-traditional advertised brands. They’re the brands that have an in-store presence, a strong digital presence. From a category standpoint, as we said, makeup is growing, but fragrance is also gaining traction. What we are seeing even in our more traditional advertising brands is the impact of TV moderating; it's still important but moderating, while the impact of digital is growing. We have looked at balancing our investment spend across television, print, digital, and in-store for those particular brands. There are also different channels that are growing. We have looked at balancing the channel mix for our brands. The strength of brands is still very strong. We’re seeing, given the online strength of digital marketing, a lot of smaller brands gaining in strength due to that channel of communication with consumers becoming stronger.

On the staying power question, I'd like to add that in this fourth quarter we've been growing 7%, which is faster than the industry and most of our competitors. This has happened despite important challenges for us. We spoke to it but I want to underline that Hong Kong and Macau, or Korea, are very important areas for us, where we have high market shares and profitable businesses. Particularly our skin care brand and category is enormously focused in those regions, and we were still able to deliver ahead of market with 7% strong growth despite these headwinds on top of the currency one. This shows, in my opinion, the staying power and stability of our growth model even in the presence of unexpected challenges which are out of our control, such as MERS in June which had a big impact. There is a lot of staying power, and to Tracey's point, the rebalancing of media spending will likely increase staying power rather than diminish it.

Good morning. Hey, a couple of questions. The first is, have you considered maybe just pulling the margin targets entirely? Because it seems like there's so many growth initiatives. And I think for investors, top line growth and EPS growth is probably more important than a margin ratio, especially given the magnitude of some of the money you could spend to build out stores in some of the other channels, et cetera. And then my second question is, have Clinique and Estée Lauder’s world changed? Because it seems like every five or six years those brands go through a big growth challenge as you spend a lot of money and get them fixed again, and then they start to struggle thereafter. So is that 40% of sales for those two brands like a number you want to stick to? Because as they slow, it seems like the natural margin mix of the business improves pretty dramatically. I do not know the answer, but it seems given what's happening in the prestige cosmetics world broadly speaking, everything is lifting up and to the right and it's hard to take those two brands there. I'm sorry for the long-winded question.

As it relates to the margin guidance, the reason we’ve transitioned to cumulative margin guidance is for the reasons you mentioned. The fact is in any given year, if we have the opportunity to invest in more freestanding stores or invest behind our acquisitions that are going to drive above-industry sales growth and above-industry EPS growth, then that is the right strategy and decision for us, and it’s the right strategy and decision for investors. Having said that, transitioning from annual margin guidance to EPS guidance is a transition. We’re happy to be transparent about our thinking and the fact that we absolutely understand we have margin opportunities and we are progressing forward with our cost savings initiatives and other initiatives. Yet, at the same time, there are some investments we’re making that will be more margin challenging, and others that will be quite margin accretive. We may have a year where we have an 80-basis-point margin expansion and we may have one where we have 20 basis points. What we are saying is we will have double-digit EPS growth, so your comment is well taken.

In this volatile world in front of us, agility is key to success. We wanted to ensure we had multiple drivers for our ultimate goal of double-digit EPS growth. Growth is important, margin will continue to be important, but we have other levers, such as share repurchase and share count. We have different drivers that can deliver more consistently, even in a volatile world. We are stronger, and we believe our strategy is becoming stronger and more reliable every year. On your question about Lauder and Clinique, they remain very important brands for us with excellent equity around the world. We can share their equity results; they are brands with huge appreciation and penetration among a diverse consumer base globally. Given that they are very big brands, they are more exposed to the new volatilities of the world than smaller brands with limited distribution and specific consumer groups that favor them. The challenges, like the crisis in Hong Kong, the crisis in Macau, the slowdown in China, and external factors impacting consumer behavior, made it more difficult to turn around Lauder and Clinique than smaller brands. That said, we are determined to drive them and leverage the great assets represented by their equity.

Hi, there. Good morning. I'm just wondering on pricing given the devaluation we have seen some companies take more pricing. You're sticking to the 1.5% to 2% as a global number, and I'm wondering if you see any upside to that. And then how many standalone stores could you envision on a four-year to five-year basis for company-operated locations? That would be very helpful. Thank you.

In terms of pricing, as we've shared in the past, Caroline, our pricing process is sophisticated. In any year, we review all of our markets, including our travel corridors, and adjust prices either up—mostly up—but sometimes down if needed for currency reasons. This past fiscal year, we actually took pricing up in markets like Venezuela, Russia, and several others. Based on the past year, the 1.5% to 2% reflects a combination of price adjustments both up and down, mostly up. We absolutely consider currency, competition, and various market factors when establishing pricing for all our markets.

On freestanding stores, we will continue to drive them for some of our brands. Not all brands are designed for a freestanding store model as part of the overall strategy. However, we are continuing to expand where high-quality distribution is lacking in specialty or department stores. The other evolution will be to connect the stores with online. Wherever there is insufficient high-end distribution, a freestanding store well-connected to online provides an enormous opportunity for brand success. For example, in Brazil, without a freestanding store and online presence, M•A•C could not become the market leader due to lack of typical counter distribution. Therefore, while we are unable to provide a specific number, we are indeed increasing the number of freestanding stores and will enhance our ability to reach new consumers significantly.

Thanks. I just want to go back to the margin guidance and just make sure I have my facts straight. So you used to be at 17.5% for fiscal 2017 and now it sounds like off an adjusted fiscal 2015 base of what I think is 15.9%... It sounds like you're guiding to basically 17.2% at the high-end one year later. So, I guess just going back to the earlier discussions, how much of that gap is really just the differing FX environments versus something more structural? It sounds like you're investing more in advertising, in new channels. It seems like brands like Clinique and Estée are not quite where you want them to be. So, I'm just trying to figure out the gap there. That's my clarifying question. And Tracey, the working capital improvements that you target, how much of those will accrue to the U.S. versus overseas markets? Because I want to gauge how much of that cash will be accessible without tax implications versus just building on the balance sheet? Thanks.

As it relates to the margin, you are correct that the starting point is 15.9%, and as we spoke in our prepared remarks, currency between 2015 and 2016 accounts for about 70 basis points. Acquisitions account for about 30 basis points. That bridges the difference between our previous guidance and where we stand today. Most of that difference stems from currency and acquisitions, which were unforeseen when we initially provided the three-year guidance for 17.5%. As for working capital and cash generation, we anticipate this will grow across both the U.S. and overseas. However, detail concerning the precise split is not something I can provide at this moment. You have seen from our results that we’ve enjoyed strong overseas growth, and we expect it to continue. Our working capital improvements will be broad-based.

Great. Thanks. Good morning.

Good morning.

I just wanted to understand a bit again about year because I've heard and I think in the press release it was a little confusing, Fabrizio in his quote and on the call has talked about a goal of double-digit local currency earnings growth and then for fiscal 2016 on that basis you're looking to do 8% to 10%... So is the reason it's not solidly double-digit; is it the softness in Asia and that it disproportionately impacts Clinique and Lauder’s skin care, which is higher margin? Or is it that there is also a stepped-up reinvestment this year with the goal of accelerating growth in some way?

Okay. First of all, I'd like to say that 10% is at the top of our range, meaning that we will do our best efforts to reach it. However, the reason this is not in the middle of the range is exactly the reasons you just outlined. There is both high profit pressure in certain external factors, notably Hong Kong, Macau, the situation in Korea, and the slowdown in China. These external pressures particularly impact the skin care part of our business, which is highly profitable and concentrated on Lauder and Clinique. This combination of factors that we do not control shapes our cautious outlook for fiscal year 2016.

Yeah, thanks and good morning, everybody. A question on Clinique and Estée... what was the sales performance in 2015 and if not specific, just broadly speaking? And what are the expectations for the brand in 2016? Maybe if you could just talk about that progression a little longer term? And then differently just switching to emerging markets, so 14% of sales today. Maybe talk a bit about where you can be over the next three to five years on a percentage of business basis. How do you benchmark your exposure versus peers, and then what is the cost on the operating margin outlook to achieve that continued expansion, specifically what categories lead the growth in that channel? Thank you.

In fiscal 2015, Estée Lauder and Clinique were down low-single digits in constant currency. We expect them to be up low-single digits in fiscal 2016, marking a difference compared to fiscal 2015.

Emerging markets today are 14%, and we will continue to grow them in the next years. I prefer not to provide a specific number; you can anticipate our growth is around 6% to 8%. Emerging markets excluding China are growing significantly, and in China we project growth between 6% and 10%, depending on the year. Those are the emerging market numbers. We believe the investments required are reasonably scalable, and we need to commit to our approach gradually to see growth in these markets.

Hi. Just a couple of housekeeping things. Number one, can you give us the like-door growth for your sales in China, not the retail takeaway but your sales into China? Number two, Tracey, you called out lowering the tax rate as a long-term driver of earnings growth, but just looking at the progress that's already been made over the last decade, you're already below 30%. What's the five-year target for the tax rate, if you will, bearing in mind it's subject to geographic variables? But then my last question and broader question is on the travel retail business because this has been a tough year for travel retail. Each of the quarters you've talked about it being down in reported terms or low single-digit growth. It feels like the growth in the travel retail business may have structurally changed. So, just wondering if there are fewer airports opening, is there more competition in that channel because your historically strong double-digit growth seems to have evaporated? Thanks.

Okay. Let me start with your question on the tax rate. As we guided this year, you’re right the tax rate has come down over the last several years. We guided 29% to 30% at this point. I think the low end of that guidance would be what we are prepared for in view of the various contributing factors that affect the longer-term outlook.

First of all, on travel retail, our travel retail business grew 6% at retail this year, a solid performance ahead of traffic trends, and this is still a strong number. I don't agree that there has been an overall travel retail growth evaporation; while it's true that it hasn't reached double digits like it used to, this has been a tough year due to crises in Hong Kong, Macau, and Korea. The result has been a significant impact from external factors that have affected spending habits among consumers. In our fourth quarter, travel retail net sales were down 4%, but retail sales remained strong with a 9% growth, indicating our brand health within this channel. We believe travel retail will remain a very strong driver despite some recent challenges.

Hi. Good morning, everyone. I just would like a clarification in regards to the Americas growth, the 12% adjusted. Can you break it down by North America—how much was from acquisitions? How much was retail sales? And then I was surprised to see that you flagged Venezuela as a contributor because there have been scarcity for currency for necessities and I don't think that your categories qualify for that. That's a clarification. My question is whether you are experiencing margin degradation in department stores in the U.S. and whether you expect, with the launches in Sephora, that margin degradation is going to worsen? If that happens, is it possible that you would shut down the less profitable doors in department stores in the U.S.? Thank you.

In terms of the Americas growth and components, net sales growth showed a 12% increase in constant currency. In Latin America, where sales came from Brazil and Mexico, we were able to see strong double-digit growth, while the U.S. and Canada reflected mid- to high-single-digit growth driven by online and specialty channels. Regarding Venezuela, although there is a challenging situation, we did take pricing, which has contributed to sales growth there. The sales performance for U.S. and Canadian department stores together managed mid-single-digit growth. On margin, our department store business is currently stable and we don't expect the Sephora launches to adversely impact it.

Good morning, everyone. You talked a lot about millennials and different strategies to capture millennials. Where do you see the greatest opportunities? Will the level of product innovation continue to see more newness catering to millennials? Lastly, on the advertising budget, how are you thinking about advertising dollars shifting from traditional to digital in the context of the entire budget? Thank you.

Our focus on millennials is vital. We have brands within our portfolio like M•A•C that are strong among millennials, especially in the makeup category. Our innovation plans are tailored for these brands, ensuring their continued relevance and engagement with millennial consumers. The two brands we are trying to accelerate further in this demographic are Lauder and Clinique. To re-engage millennials, Clinique is revitalizing its approach by launching products and advertising targeted at this demographic, utilizing social media effectively. Estée Lauder's partnership with Kendall Jenner is another step to modernize the brand for millennial appeal. As for advertising budgets, we do already allocate more towards digital than traditional advertising across our brands, and that shift is ongoing with digital growing at about 30 basis points currently.

Thanks. Guys, I guess for Americas, can you talk a little more about the profit decline in the Americas? That 78% number was significant on an adjusted basis. And then for skin down on an adjusted basis, while I understand the Estée and Clinique serums and moisturizers are down, is there anything unusual in the quarter, or is this a way to think about a run rate in any way? Thank you.

For skin serums and moisturizers, Asia's market is heavily focused on skin care, where we have large market shares, making us vulnerable to downturns. Recently, several external factors have affected our growth, particularly in Hong Kong, Macau, and the flu in Korea, impacting our serums and moisturizers significantly. We believe this unique combination of external factors has shaped a short-term challenge for our brand. We are determined to drive improvement for both Estée Lauder and Clinique while maximizing our strong market position.

Hey. Thanks for squeezing me in here. Just a couple of quick ones. First, on travel retail, this is the third consecutive quarter where you've seen a pretty wide divergence between sell-in and sell-through. While I know there’s a lot of destocking going on, how much more time do you think it will take for these numbers to converge? Secondly in China, I think you mentioned it was up 6% last year overall sales for you, and I think Fabrizio, you said that 6 to 10% is where you see growth. Given what's happened with the change in tariffs and the devaluation of the yuan, is that still the expectation for fiscal 2016? Thanks.

Regarding China, yes, we aim to achieve a growth range of 6% to 10% but the current volatility creates uncertainty, making it hard to predict with confidence our exact output for the fiscal year. We are committed to achieving that target despite these challenges. On travel retail, we’ve experienced varied factors of growth involved this quarter; the distinct impact of epidemics, like MERS in Korea, leads to nail-biting adjustments in stock levels from retailers. Some upward or downward adjustments occur quickly in travel retail based on external circumstances; therefore, we continue to find that any impact will affect sell-in and sell-through directly but will normalize in time.