Estee Lauder Cos. Inc (EL) — Q1 2016 Earnings Call Transcript

Good morning, everyone. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, our first quarter and full-year comparisons have been adjusted for the impact of the prior-year implementation of our Strategic Modernization Initiative. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website. I'll turn the call over to Fabrizio now.

Thank you, Dennis, and good morning, everyone. Our fiscal 2016 year is off to a good start. In the first quarter, we delivered excellent financial results, generating strong adjusted constant currency sales growth of 8% and earnings per share growth of 16%. Our winning strategy and business model are at the core of our success. Our strength came from our broad portfolio of prestige beauty brands, which is diversified by category, geography, and channel with multiple growth engines across all these areas. We can accelerate the ones working well and reallocate resources as market dynamics change. These factors continue to make us more resilient and position us for long-term, sustainable results. We are pleased to operate in the global prestige beauty industry, which is growing fast even during volatile times. Within the industry, makeup is today the fastest-growing category, and we are a global leader in prestige makeup. Once again, our luxury and makeup brands were the best performers, fueled by intrinsic brand equity, strong launches, and a solid base of business. Worth noting are Jo Malone London, Tom Ford, and La Mer in the luxury tier. M•A•C and Smashbox were standouts in makeup, a category where consumers are increasingly spending more of their beauty dollars. We are especially pleased with our results in light of the softer retail climate in China and Hong Kong, the MERS impact in Korea, a sharp decline of Russian and Brazilian travelers, and significant currency headwinds. From a geographic standpoint, we delivered a stellar performance in Europe, the Middle East, and Africa. Growth in the region was helped by an influx of travelers attracted by the weak euro. Our midsized brands, notably Tom Ford and Smashbox, had the fastest growth, benefiting from strong retail trends, well-received launches, and new doors. Our growth at retail was robust, and we gained share in prestige beauty in several established markets, including the UK, France, Germany, and Italy. We also had double-digit growth at retail in nearly all emerging markets in EMEA. The online and specialty multi-channels were vibrant in the region. Sales in Boots and Douglas were particularly strong. Freestanding stores are a key component of our expansion in the region, and we added 9 new locations for M•A•C and three for Bobbi Brown during the quarter. We continue to expand and improve our business in travel retail. Our sales at retail rose 7%, with most of our brands and markets growing despite currency headwinds affecting travel from several key consumer groups, including Japanese, Russians, and Brazilians. In line with our strategy to introduce more brands and expand our reach in the channel, we launched Darphin and GLAMGLOW and opened nearly 100 new counters for our other brands. The forecast for international passenger traffic growth is a healthy 7% for fiscal 2016, which we believe will help improve our business in the coming months. However, our net sales declined in travel retail due in part to a tough comparison with the previous year's first quarter. We also experienced a weaker business and significantly lower trade stock in Korea as a result of MERS concerns. Total air travel visitors to Korea dropped about 40% from June to August and continued to be weak in September, even though there were no new cases reported. We expect travel to Korea to improve as fears of MERS subside. In North America, all of our brands grew sales. Makeup continued to be the strongest contributor to growth, up high single digits. Specialty multi remains one of the fastest growing channels, rising double digits for the quarter. Four of our brands opened new doors in Bluemercury, and we had strong sales growth in Sephora. We plan to further broaden our presence in specialty multi. Clinique continues to selectively expand in Ulta, and the Estée Lauder brand is on track to launch its new Estée Edit collection of makeup and skincare products in March in approximately 250 Sephora stores and online. In Asia Pacific, Australia and Japan were strong, and Korea had another positive quarter. In Australia, a weaker currency drove greater local consumption. Distribution is expanding for prestige beauty, and online is growing strongly. Our sales were solid across all channels, and we gained shares in department stores. Our sales in Japan rose high-single digits in the quarter, as the lower yen stimulated greater tourist activity, especially from Chinese consumers. Local demand for prestige beauty was solid. Our business in Korea continues to improve and strengthen. Our net sales grew mid-single digits, and our sales growth at retail exceeded prestige beauty growth as our brand successfully competed with local brands and leveraged new Korean trends. Korea is a trendsetting beauty market known for both rapid innovation and high-quality products. One element of our strategy is to build our presence in the local market to participate in the popularity of Korean brands. Last week, we announced we are making an investment in the novelty Korea Skincare Company behind the brands Dr. Jart+ and Do The Right Thing. This is a strategic opportunity for us to partner with high-growth, distinctive brands that combine Korean innovation with a global sensibility. The investment gives our company an opportunity to support Dr. Jart+'s development and continued success around the world. We look forward to working with the company's entrepreneurial founder as he continues to grow the brands. For us, this investment creates another pillar in our long-term growth strategy for Asia. In China, most of our brands had higher sales, many rising double digits, fueled in part by the increasing demand for makeup. We are accelerating the expansion of our makeup brands to leverage this market trend. M•A•C grew 25% at retail in the quarter, and this year, it's planning to open more doors in more cities. Tom Ford opened its first department store counter in China, with the expectation to add several more during the fiscal year. These gains came amid a backdrop of a soft retail environment in China caused by many factors, including stock market volatility there. The company's retail results in China were overall flat, with lower traffic in brick-and-mortar stores offset by higher volume online, where our sales nearly doubled. Our net sales declined 3% due to lower sales of the Estée Lauder brand, which had a tough comparison with the previous year when its major new introduction occurred on July 1, and this year, New Dimension launched in mid-September. However, the brand remains the largest prestige beauty brand in China in its distribution. Although we are seeing Chinese consumers spending less at home, they are traveling more and purchasing abroad, particularly in Japan and large European cities. For example, La Mer and Jo Malone benefited from the huge rise in Chinese tourists in Paris, which helped drive sales growth of more than 50% for these brands in France. While China's economic expansion is moderating, it remains healthy, and we are bullish on our long-term prospects. We expect to grow high-single digits this year, in line with the industry. Hong Kong continues to be affected by sharp declines in Chinese travelers and weak local consumption. We are the largest prestige beauty company in Hong Kong, and Estée Lauder is the largest brand. But our sales at both net and retail declined in the quarter. Despite this climate, several of our brands grew, including M•A•C, Tom Ford, and Jo Malone. We are pushing opportunities to strengthen our business with local consumers in Hong Kong. However, we do not anticipate a significant pickup in consumption in the near term. Another major growth engine is our e-commerce business. Online sales rose 26%, with excellent growth from brands, retailers, and third-party sites, with particular strength in EMEA and APAC. Mobile sales were vibrant, and now account for more than one-third of our global online sales and more than 50% of online sales in the UK. Overall, orders increased and conversion rose strongly. We continue to expand our online availability and opened 100 new digital brand locations globally, mainly in international markets, on both our sites and retailer sites. For example, in China, Tmall continues to be a strong contributor to our online sales, and Bobbi Brown launched on the platform in September, bringing the number of brands we sell on Tmall to five. We also progressed on our strategy initiatives. Estée Lauder and Clinique are both launching new products across categories and making good progress on their turnaround plans. Estée Lauder grew in several regions and gained shares in EMEA. During the quarter, the brand introduced New Dimension, reinforcing its leadership in serums. It launched in the U.S. and the UK in July, and in the rest of its international markets starting mid-September. The line is performing to expectations and is proving to be a terrific recruitment tool in Asia. In makeup, the brand's new Pure Color Envy Liquid Lip Potion has done really well globally. Clinique's #FaceForward campaign has strengthened the brand's attraction to younger consumers and generated extensive editorial coverage. The campaign has helped improve sales of its 3-Step franchise in North America, the UK, and Asia/Pacific. Clinique also launched a digital editorial lifestyle platform called The Wink, highlighting emerging trends, global influencers, wellness articles, travel, and beauty information, essentially the people and the ideas that inspire the world of Clinique. This platform is intended to help Clinique strengthen its relationship with current consumers and recruit new ones. Our recent and upcoming launch activity is strong across all categories and brands, and we have an excellent selection of gifts for the holiday season. Let me give you a few examples. In skincare, La Mer introduced the Renewal Oil, the first oil formula for the brand, and Genaissance serum essence, which builds on La Mer Miracle Broth technology at the ultra luxury price point. Clinique launched Sculptwear serum and Smart moisturizers, and Origins' New Original Skin Rose Clay Mask strengthened its leadership in prestige masks. Several brands have developed new foundations. A high-loyalty product, Smashbox BB Water, a makeup with a very high-light texture, is off to a great start. M•A•C is launching Studio Waterweight SPF 30, a gel-serum formula, and also Matchmaster cushion compact, the first of its kind for the brand. Building on the success of Beyond Perfecting Foundation and Concealer, Clinique recently expanded their franchise with a powder foundation. We have a full slate of exciting new fragrances in time for the holidays, including the Michael Kors Gold Collection, Tory Burch Absolu, Donna Karan Liquid Cashmere White and Black, and Jo Malone Mimosa & Cardamom. Estée Lauder leveraged the excitement of its Modern Muse Le Rouge launch by live-streaming the event on two popular social media platforms, Snapchat and Periscope. We are pleased with our strong start this quarter. We remain committed to delivering strong constant currency full-year sales growth ahead of the industry and double-digit EPS growth, even though, as I explained, we expect continuous lower growth in some key markets and channels around the world. Our performance this quarter demonstrates our many strengths and is proof that, by staying focused on our long-term strategy, we can successfully navigate external challenges and market volatility to deliver sustainable and reliable results. Now, I will turn the call over to Tracey.

Thank you, Fabrizio, and good morning, everyone. First, I will review our fiscal 2016 first quarter results, and then I will cover our expectations for the second quarter and for the full year. To clarify our underlying business performance, my commentary on comparisons to the prior year excludes the first quarter and full-year impact of the acceleration of retailer orders that shifted sales from the first quarter of fiscal 2015 into the fourth quarter of fiscal 2014 related to our 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. Also excluded for the full year is the impact of restructuring and other charges. Net sales were $2.83 billion for the first quarter, which was 8% growth in constant currency. Last year's acquisitions contributed 70 basis points of this sales growth. From a geographic standpoint, Europe, the Middle East, and Africa had a standout quarter. Net sales in the region rose 11% in constant currency, with double-digit performance occurring in both Western developed markets as well as emerging markets. Strong local demand for our products, as well as increased tourism in Western Europe, fueled double-digit increases in major markets such as the UK, France, Germany, Italy, and Spain. We also continue to achieve strong double-digit sales gains in many emerging markets, including the Middle East, Russia, and Turkey. Our net sales in the travel retail channel declined 7% as we experienced inventory adjustments among retailers in Hong Kong, China, and Korea, as well as anniversaried strong shipments prior to the retail slowdown that occurred in October of 2015. Sales at retail in the quarter were strong at 7%, as Fabrizio mentioned. Net sales in the Americas increased 9% in constant currency. Strong double-digit growth continued in Latin America, led by Brazil and Mexico. North American sales grew mid-single digits, which reflected double-digit growth in Canada and solid growth in the United States. Sales were strongest in specialty multi, online, and department store channels while tourist-driven doors have been meaningfully negatively impacted by the strong dollar. Net sales in the Asia Pacific region were flat in constant currency. Australia delivered another quarter of double-digit sales gain, a sharp increase in Chinese tourists combined with good local demand drove stronger growth in Japan, and Korea generated mid-single-digit growth. This sales growth was offset by less favorable trends in greater China, most notably in Hong Kong. Net sales by product category were led by the 16% constant currency growth in makeup for the quarter. The biggest contribution came from the continued strength of M•A•C. Makeup sales of Tom Ford and Smashbox rose double digits due to brand expansion, new products, and strong same-store growth. Estée Lauder again had growth in makeup including strong demand for its Double Wear franchise. Sales of fragrance products rose 12% in constant currency. Luxury fragrances continued to drive sales growth led by double-digit gains from Jo Malone and Tom Ford alongside incremental sales from Le Labo and Frédéric Malle. The launch of the Michael Kors Gold fragrance collection also contributed to sales. Hair care sales rose 6% in constant currency with growth stemming from both Aveda and Bumble and bumble. Aveda launched a pure dry shampoo and benefited from other recent launches. The brand also delivered strong salon sales in Western Europe. Bumble and bumble continued to generate good growth in specialty-multi and online channels. Skincare sales declined 1% in constant currency, reflecting the current global industry trend favoring makeup. La Mer, Origins, and Darphin generated solid growth, and the category benefited from the incremental sales from GLAMGLOW. These increases were more than offset by Asia-driven declines at Estée Lauder, which are a large part of the brand's business there. This was compounded by U.S. department store weakness at Clinique. Our gross margin of 79.6% was flat compared to the prior-year quarter. Operating expenses as a percent of sales rose 90 basis points to 63.6%. The primary drivers reflect our strategic priorities. We incurred higher store operation costs from the increase in freestanding retail store openings over the past year. The strategic acquisitions we made in fiscal 2015 added 30 basis points to operating expenses as a percent of sales. Our investment in innovation and product development continues to rise at a faster rate than sales, and these increases were partially offset by reductions from our cost savings initiatives. As a result, operating income declined 5% to $453.2 million, and operating margin decreased 90 basis points to 16%. Lower sales from our high-margin travel retail business also affected our operating margin. However, our adjusted constant currency operating income increased 8% in the quarter and resulted in flat constant currency operating margin. Net earnings were $309.3 million, or 14% above the prior-year quarter in constant currency, primarily reflecting the higher sales and a 350 basis point improvement in our effective tax rate. Diluted EPS of $0.82 came in above the top end of our expectations, due to higher than expected sales, continued expense management, and a lower tax rate. Earnings per share for the quarter included $0.11 of unfavorable currency translation and approximately $0.01 of dilution from acquisitions. Continued progress in our supply chain initiatives and favorable currency translation helped improve inventory days to sell by 13 days to 180 by the end of September. These improvements were partially offset by the inventory build necessary to meet our future sales growth objectives and the additional inventory from our new brands. During the quarter, we generated $8 million in cash flow from operating activities, which reflected normal, seasonal, higher working capital requirements and inventory to support the holiday selling period. The comparison of our cash flows versus the prior year was also unfavorably impacted by the cash received from the accelerated orders in the prior year. We invested $90 million in capital expenditures, primarily to support new retail stores and counters. We utilized $387 million in cash to repurchase approximately $4.7 million shares of our stock, nearly double the amount purchased during last year's first quarter. We also paid $90 million in dividends to stockholders. Additionally, this morning, we announced another 25% increase in our dividend rate. Let me now turn to our outlook for the second quarter and for the full fiscal year. For the full year, the sales shift related to last year's SMI rollout will impact comparisons to the prior year. I'll discuss our expectations adjusting for the impact of the shift. Our forecasted growth rate both before and after the shift impact are available in today's earnings release for your reference. For the full year, we continue to expect sales to grow 6% to 8% in constant currency, including 50 basis points from acquisitions. Currency has become an even greater headwind than previously anticipated. And we now estimate that translation could negatively impact our full-year sales growth by approximately 4% to 5%. Our estimate assumes current spot exchange rates of around $1.10 for the euro, $1.53 for the pound, and $1.21 for the yen for the remainder of the fiscal year. However, we are still expecting our diluted EPS to be in the range between $3.10 and $3.17, including $0.05 of dilution from acquisitions. The increased currency headwinds are projected to affect EPS by about $0.24, $0.06 more than we projected when we last gave guidance. Our strong first quarter performance gave us comfort to raise our expected EPS growth to 10% to 12% in constant currency. Regarding the second quarter, our sales are expected to rise 6% to 7% in constant currency. The translation impact of the stronger dollar could contract growth by approximately 5 to 6 percentage points. Activities behind our key product launches and our holiday programs should help drive sales growth. As we have said before, we manage our business on a full-year basis, and for the longer term. And our spending by quarter can vary, depending on the needs of the business and how the quarter progresses. At this time, our second-quarter diluted EPS is anticipated to come in between $1.04 and $1.08 per share, including approximately $0.10 per share of adverse currency translation. As you are aware, the company has been engaged in a multi-year upgrading and modernization of its systems and processes. In a continuation of these efforts, we are transforming our global technology infrastructure to improve the delivery of internal IT services throughout the organization. We are transitioning from a platform of company-owned assets to one that is primarily vendor-owned. We will be utilizing a new third-party provider with an enhanced scalable platform to improve our ability to respond to the demands of the business and leverage more advanced technology. We expect to record restructuring and other charges of approximately $40 million to $50 million, primarily to write off certain IT assets. Implementation of this initiative will take place throughout calendar year 2016. We expect the transformation to increase operational efficiency, reduce future IT service and infrastructure costs, and result in additional future savings, freeing up cash that we may reinvest in capabilities and growth opportunities. This initiative will also be return-generating. We are pleased with our start to the year as we deliver strong sales and earnings growth and progressed well on many of our growth and efficiency initiatives. And that concludes our prepared remarks. We'll be happy to take your questions at this time.

Yes. Good morning. I wanted to talk a little about the gross margin. And as you look out over the next couple of years, as you look at your business mix moving to more of a sort of company-owned store environment, how should we think about the gross margin? Because if you look at this quarter, obviously great top line growth, but not quite as much leverage there as I think some of us had hoped for. So can you give us a little bit of an outlook in terms of maybe is mix having a bigger impact than what we've currently been modeling? Thanks.

Sure. We have different gross margins, depending on the different channels of business. So as it relates to our growth in retail, as we grow our retail business, or our online business, for that matter, we would expect that gross margin to benefit from an overall average company standpoint. There are other channels and brands that have lower gross margins. So, as we've spoken in previous quarter calls, depending on the mix of our business in any given quarter, you will see a range of gross profit margin performance and operating margin performance, which is why we continue to focus on the full year in terms of the guidance that we give and you should expect.

Yeah. Thanks for the question. Just actually two quick questions. Fabrizio, I was wondering if you can give me or give us some thoughts on market share for Estée Lauder and Clinique, just kind of going around some of your largest regions, especially in China. And the second question just so I can understand this whole IT initiative, should we be expecting any disruption related to inventory like we saw with SMI or is this completely unrelated? Thanks.

So I'll answer the second question first. Regarding this shift in terms of our IT infrastructure, it is not like the application that we implemented with the SAP initiative. The SMI initiatives, though, we do not expect to have an inventory build similar to what you've seen. Thankfully, for SMI over the last few years.

And in terms of market share, as you can imagine, we are growing global market share, with net retail sales in the 8% range, and with the market growing at this point, from our estimate, around 4%, we are really growing strongly in global market share. However, in some areas, in Lauder and Clinique particularly, the market share could be flat or declining. For example, you ask about Asia. In Asia, Lauder is the clear market leader in Hong Kong and in China, with the softness of these two markets, obviously, the overall market share in Asia of the brand is under pressure. And Clinique, which is the overwhelming market leader in U.S. mid-tier department stores, with the lower growth in this channel versus the other channels in the U.S., also Clinique's market share overall in that area will be under pressure. But overall, globally, we are making very good progress in market share with the same strategy of a good portfolio by category, and then by channel and by country.

Good morning. Thank you. At one point, the Chinese traveler and locals, I think you believed were about 10% of your business. And with the shifts you've seen, Europe, it sounds like, is attracting more Chinese tourists, but Hong Kong isn't. And I wonder if you could just tell us what you think happened to growth of sales to the Chinese consumer overall? Was it up or down, or what are your thoughts there?

Yeah. Our estimate is our sales to Chinese consumers is up, and it continues to be very, very strong and very solid overall around the world, but as we explained, where this growth happens is changing. Depending on the market share of our brands in the specific area where the Chinese are going, then there could be a bigger or lower impact. The fact that there is an issue in Hong Kong at this moment, obviously, that’s a negative for our sales to Chinese, because we are, as a company, the market leader in Hong Kong. But overall, as you said, we are getting great benefits in Europe, and we see good progress in other markets like Japan, where the Chinese are going and buying a lot. Finally, you see an impact in the U.S., mainly due to the strong dollar. The amount of purchases by Chinese consumers has decreased in the last quarters. And obviously, we have a very high market share in the U.S. and have been penalized by that trend. But all in all, again, we look at the long term; we believe Chinese consumers in mainland and around the world are, and will continue to be, a great source of growth, and a great source of business, and we remain completely focused on them, independently from the mix impacts in the short term. We have been able to deliver great growth in the quarter despite a relatively negative mix impact of the Chinese spending.

Hey, thanks. Guys, I guess I wanted to ask about EMEA, right. And I understand that you had an influx of, I guess, Chinese shoppers in there. I think you cited that as helping. But if you strip out the travel retail decline, it looks like EMEA, excluding that travel retail decline, was up very substantially, right, maybe mid-teens, maybe high-teens? I guess – let me know if that's wrong. And if it's not, how sustainable is that in the near term? And do you get a bounce in Asia before you get what could be a slowdown in EMEA from those giant growth rates? Thanks.

We believe this is a strong trend. We are doing very well in EMEA, and growing market share in many of these markets. We believe we have plans to continue this trend. The UK market is really booming. In the UK market, the market is growing 7% in prestige, more than mass. We are doing a great job in attracting consumers for mass, and in growing market share across all channels. The emerging markets in EMEA, which are a big part of this, we are growing outstandingly. Just to highlight, our total emerging market growth this quarter was 13%, excluding China it was 31%. In the EMEA market, we are growing basically one-third of our business on top of what we had, and this is expected to continue, and we have a very clear plan on that. So, EMEA in total, excluding travel retail, is showing a 23% growth. Overall, this is standing, and there are several reasons why these strengths – I'm not sure if the same identical strengths will be observed in the next quarter, but the good solid trend is expected to continue.

The only thing I'll add to that is, embedded within our guidance for the balance of the year; this was, to Fabrizio's point, a very strong quarter for EMEA, and we do expect that to continue, certainly benefiting from both the tourist as well as strong execution of our brand programs in the region. A bit moderating for the balance of the year, relative to what we experienced in the first quarter, largely benefiting from some of the shifts in the quarter that happened fairly quickly with the MERS situation, as well as the situation that we referred to in China, and people changing their travel plans, in addition to benefitting from the lower currency in Europe.

Hey. Good morning, folks. Thanks for the question. Actually, two questions, if I may. First, a simple one. Travel retail net sales have fallen short of what you've reported retail sales to be by double-digits for two consecutive quarters. So, given that, do you think we're going to see normalization and reversion of net sales, matching retail sales on a go-forward, and do you think this can abate some of that margin headwind? And secondly, Fabrizio, during your prepared remarks, you made numerous mentions of distribution build: new counters, new doors, new stores. Any sense of how much that, in aggregate, is contributing to your growth? Thank you.

Yeah, I'll start with the second question. Contribution to our growth from distribution is about 2%. So, 2 points of growth came from distribution increases we made in the quarter, continuing from what happened in the last fiscal year. In terms of travel retail, as you should expect, first of all, the traffic increase in travel retail today is about 7%, and it remains very solid. But the mix of this traffic, meaning there are fewer Brazilians, fewer Russians, and Chinese are going to different places than Hong Kong; this mix has a negative impact in the short term on conversion, meaning on the number of travelers who buy in a significant way because different populations have different conversion rates. In this global, complex world, you need to keep in mind the mix has a huge impact. So we believe that in the future, the mix impact should improve because, as you know, there is turmoil in Hong Kong that started in October and the MERS impact should get out of the base as well. In travel retail, we, specifically as Estée Lauder Companies, are modifying our portfolio and adjusting our travel retail sales, meaning we are building a stronger business in EMEA and the Americas. We are diversifying our brands. We are launching new brands. We are covering more airports, including tier-2 airports. So we are continuing our strategy of diversification in travel retail, and we expect this will benefit our trend and make us less dependent on short-term mix impacts.

Okay. Thanks. So obviously, some of your Paris-based trends had some pretty negative commentary overall, particularly in travel retail. So can you just give us an update in terms of inter-quarter trends? Did you see any change through the quarter or through October so far? And then just update us on your assumption on industry growth for this year. Is it still 4% to 5%? Thanks so much.

No. I mean, on travel retail, the quarter was tough, obviously. I think we agree with the negative comment on the quarter. Our point of view on the long-term future of travel retail remains, however, very positive, and we believe travel retail is, and will remain, a strong channel of growth and a great opportunity for us. We believe that in the continuation of this fiscal year, in the next 12 months, we should gradually see an improvement of the trend since many negative impacts on travel retail will be coming off the base.

Yes. We do still expect the market growth to be 4% to 5% this year.

Hi. Good morning, everyone. My question has to do with the change – not call it the change, the emphasis on opening stores that you announced in August. If you can tell us how many stores have been opened this fiscal year, 2016, and what will be your corporate like-for-like growth, excluding M&A and new store openings? That will be my question. And a clarification with regards to EMEA, it seems that I understood that – or at least this is what I gather – that excluding travel retail, all the other pieces in aggregate of EMEA could do 23%. So how much of that is a – you mentioned that emerging markets grew 31%, so the Western European piece grew very rapidly as well. Could you tell us what you're doing with Boots and Douglas? It seems that you had mentioned that on the passing. Are you opening more doors? If there is more opportunity to increase distribution in Boots and Douglas? Thank you very much.

All right. So, Javier, let me go ahead and start. In terms of new door openings, for freestanding stores, we referenced both freestanding store and freestanding format openings, as well as some of the openings that we're experiencing in travel retail. But as it relates to retail, freestanding stores and freestanding store formats, we expect to open about 250 this year. As it relates to our growth algorithm of 6% to 8%, how much we're expecting to come from distribution, it's about 2% to 3% of the 6% to 8%. And as it relates to the acquisitions this year, we're expecting about 50 basis points of our growth in that 6% to 8% to come from the new acquisitions we did last year.

Thanks. Good morning, everyone. Congratulations on a nice quarter. Our question relates to your initiative, particularly around the Estée Lauder brand, to broaden the reach to the millennial customer. And maybe you could talk a little bit about your digital content initiative with respect to the brand portfolio more broadly. Thank you.

Thank you for your comment. And, yeah, the Estée Lauder brand, as we explained, is undertaking several initiatives to complete the turnaround and return to long-term growth levels. One of these steps is focusing more on millennials to attract new consumers, particularly younger consumers, to the brand. The key activity recently has been with the new model Kendall Jenner and all the activities behind Kendall Jenner's launch of the new fragrance and new makeup. The daily social media activities behind these new launches have been very successful, and we will continue to build on this momentum. A key part of our plan to attract the millennial generation will be the launch of the Estée Edit in Sephora U.S. with 250 doors in March.

Good morning. So, Fabrizio or Tracey, given the challenging macros out there, I'm surprised you're willing to raise your FX-neutral EPS guidance so early in the year here after the Q1 beat. So, I was hoping to get a sense of what is really driving that. Your FX-neutral sales range remains the same, but maybe you're more comfortable where you're landing within that. Or is it more due to the margin side and maybe the cost of doing business is not as high as you expected? And just to your level of conviction that you can deliver that earnings growth with the global volatility out there will be helpful. Thanks.

Yeah. So, I will start on and I'll let Fabrizio pick up on the environment and our expectation as it relates to sales. But I think in terms of our comfort level with raising our guidance, one of the things that we are seeing is better leverage on some of the initiatives that we were expecting for this year. We've talked a lot about our flexibility and agility as it relates to expenses. And the ability that we have created over the last few years to shift resources to fund the initiatives that are driving more momentum. There was, during this quarter, a tremendous amount of uncertainty, but we bet on strong winners, hence, we were able to deliver the quarter. We think we have better insight into what will work for the balance of the year relative to the initiatives that we started the year with. So, that gives us comfort in terms of our ability to deliver on our initiatives a bit better than what we had initially anticipated.

Overall, I think you posed the question about confidence and the number of things that progressed well in the quarter, like our cost savings and our activity internally as well as to the mix because we were anticipating a softer Hong Kong or softer China, and we have planned to offset that by reallocating resources in EMEA and in other areas while accelerating growth in North America. Obviously, the softer part was more sure than the good part, and the good part was validated by the activity we've done in the quarter. The reassurance we saw in the fact that our strong investments are working well gave us more confidence as we look to the balance of the fiscal year in the direction we just stated.

Thanks and good morning, everybody. I just wanted to clarify. So, is your expectation still that Clinique and Estée brands get back to growth this year? And then, sort of more broadly on the same brand, I guess, investors – it seems to us at least, lump those two brands together. But I'm curious internally how you view the longer-term growth prospects for each brand? And obviously, they're different brands with different positioning. And in terms of the Clinique brand, it seems a little harder to get a sense of how it fits in with a consumer that wants either lower end or higher end, with the entry-level prestige brand perhaps becoming more squeezed from a consumer purchase standpoint longer-term. I'm just curious how you think about that and could there ever be a scenario where you look to dispose of that brand in favor of investing in other things?

So, let me answer your question. There is no scenario in which we would dispose of any of these two brands. They are two core brands of the company and will continue to be our priority. Yes, our goal is to bring these brands back to single-digit growth as soon as possible. Now, the brands are very different, as you noted. The Estée Lauder brand is making progress in makeup. We have already turned around the makeup part and will continue to accelerate that. We have a strong holiday plan on fragrances with the Modern Muse Le Rouge plan, and we expect to continue making progress in fragrances. On the skincare part of the Lauder brand, frankly, with Lauder being the market leader in Asia, where over 90% of the business is skincare, it is difficult to execute a turnaround in this short period of time given the current external conditions. However, we will continue working on it, diversify, and expect to turn around the skincare part as soon as possible, especially as market conditions become more favorable for skincare products. On Clinique, we are seeing good progress on makeup, which is very important to the brand, and good progress in many markets worldwide. For example, Clinique in China has been growing double digits this quarter and is one of our fastest-growing brands there. The challenge for Clinique has been in the mid-tier department store market in the U.S., particularly in skincare, an area we are addressing with our next set of initiatives and activities, working with our partners to turn this around as well. I also want to emphasize that in the U.S., Clinique continues to grow well in specialty multi, Sephora, Ulta, and overall online. So, good progress is being made, and yes, we are determined to bring both of these brands, with their differing challenges and strengths, to single-digit growth as soon as possible, market conditions permitting.

Hi. Good morning. Could you guys talk about a few things? First, shipments versus consumption in the quarter – and I know it is not a great resource, but it looks like NPD continues to trail some of the numbers you're reporting. So I would love any commentary you have there? And then, the price harmonization impact in China – so I know it is fairly early, but I'm just trying to figure out, are the Chinese shoppers – is it price-driven, or is it experience-driven when they buy overseas? Are you seeing them buy only in travel retail; outlets because it is cheaper because of the duties; or are they buying it more exponentially, and I think probably the latter is better than the former? And then, just lastly, very quickly, have you ever thought about a more of an omni-channel approach to Clinique, including maybe going into masks? I know you have done very well in Boots in the UK. I think you have a decent business at Shoppers Drug. So I wonder if you ever explore like CVS or Walgreens with Clinique. I'm out of breath. Thanks.

Firstly, we have no intention to bring Clinique into any other distribution than prestige global distribution. This brand is a prestige luxury brand that needs a service element attached to the business model to be successful worldwide. This will remain the same.

And Bill, as it relates to NPD information and shipments versus sell-through, I assume you're referring to the U.S., the North America NPD numbers. A couple of things that I would point out; in our first quarter, September is a pretty heavy shipping month for holiday sales, which would affect shipments and you wouldn't see that in the retail sell-throughs and the market share information. Also, freestanding stores are not included in that information, nor are our online sales. Those are two elements that are missing that contribute to our numbers when we report, which you don't see in the NPD numbers.

Thanks. Good morning. I actually wanted to talk a little bit about holiday, just kind of in general, your outlook in terms of the broader retail environment. I know sometimes when there's heavy promotion around other areas of retail, it can impact category growth in beauty. So a little bit on that. Anything you are doing differently in terms of gift sets, or positioning around holiday would be great. And then, secondly, within the U.S., just curious on Estée. Because you've had New Dimension in the market for the better part of the quarter, how did skincare for Estée perform in the U.S., and just any kind of color on the outlook for New Dimension's momentum moving forward. Thank you.

On holiday, we feel confident that we have a good set of activities, particularly strong on our fragrance business and makeup, and we believe we're well prepared. There will be strong activity across our portfolio brands, and we have seen growth in brands like Jo Malone and Tom Ford, which reinforce the part of our portfolio that can gain traction during the holiday. So we're seeing improvements not only in our gift sets and holiday promotions but also in the range of portfolio choices we offer during the holiday season globally. Additionally, we are enhancing our online readiness to capitalize on the holiday season. Regarding New Dimension, its launch has performed in line with expectations globally, particularly successful in certain European markets. In the UK, it has also been very successful since July. In the U.S., I would say it's performing more or less in line with expectations. However, last year during the same period, we launched the Advanced Night Repair eye product, which was highly successful. Thus, in some markets, including the United States, we see that New Dimension's launch has not been able to completely offset the Advanced Night Repair launch in the previous year. That said, we will continue to grow and attract new consumers to the brand.

Hi. It's not entirely clear to me, because the first quarter was stronger than we expected, clearly on the top line and bottom line, and much stronger than your guidance – why you wouldn't be raising the full-year numbers. I'm just trying to understand if there was more pipeline fill? Was it that shift – I know, Tracey, you mentioned a shift in some marketing expenses. Or is it that you feel incrementally cautious about the macro environment? Or are you just being wildly conservative with the second quarter and the full-year numbers? Thanks.

So, Wendy, we're definitely not being overly conservative with the numbers. We actually did – when you consider the fact that we maintained our full-year guidance while sharing that we expect to experience another $0.06 of currency impact based on current spot rates, indeed we did raise our guidance for the full year. So, we did flow some of the beat in the first quarter through to the full year. It is a very uncertain macro environment, and as Fabrizio mentioned, there are many markets that are currently volatile, and currency is also still volatile. So, we were not comfortable flowing 100% of the beat through the first quarter into the full year, but we certainly did flow a portion of it through.

I have a couple of things. One is, on the SG&A beat based on lower spending. Given the commentary that we've heard for a while now about agility and nimbleness, is there any way to help us think about how much less volatile you may be today, given some of these organizational capabilities you've built, about reacting more quickly and stuff? Because – and if you could be specific about what you've actually done. Because it has always been a concern, I think, among investors – among us as well – that you are not really a staple company, right, you're much more discretionary, so macro has to be much more concerning for you guys. Can you give us a sense of how your organizational capabilities have changed? And if you can tell us how much less volatile you might be, so we can be less concerned about macro, that might be helpful. Tough question, but love some context there. And then, second thing is around the dividend increase of 25% – good; again, I think that was 20% last year, so now 25% this time. How should we think about where you're funding that from? I mean, clearly, the payout ratio seems to be going up because the EPS growth, ex-currency, is 10% to 12%. Should we expect some more debt load? Lower stock buybacks? Is it just kind of the payout ratio going up, working capital improvements? How should we think about that from a signaling perspective, given your dividend's going up so much? Thanks, guys.

In terms of volatility, the market has increased, and we've prepared ourselves to deal with this volatility better. The strategy we are executing has reached a point where we believe we are much less volatile than we used to be and more reliable. This comes from our improved channel, category, and brand diversification. For example, we have now 8% of our business online, with some key markets like U.S. and U.K. being at 12%. In China, we are also approaching double digits. We’ve improved our business in emerging markets which are performing well, and we’ve launched new brands and developed strategies that drive this accordingly. Moreover, we are doing well in specialty multi. All these factors allow us to offset external volatility. Our internal systems have also improved, allowing us to allocate resources quickly based on new trends, significantly enhancing our ability to react.

To continue Fabrizio’s thoughts, one of the benefits of executing our strategy, which includes agility and diversity, is that our free cash flow has increased dramatically over the last few years. We’ve seen a considerable acceleration in free cash flow allowing us to raise the dividend and repurchase more shares. Every year, we review and get board approval regarding the portion of our free cash flow allocated to shareholders. A lot of this cash is generated overseas, and as we have committed to this strategy, we have taken on small amounts of debt. We've also taken on debt as needed for acquisitions.