Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2013 Second Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir.

Good morning, everyone. On today's call are Fabrizio Freda, President and Chief Executive Officer; Tracey Travis, Executive Vice President and Chief Financial Officer; and Fabrice Weber, President, Asia/Pacific. Fabrice will give a strategic overview of this fast-growing region. 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. Except when noted, our discussion of our financial results and our expectations are before restructuring and other charges. You can find a reconciliation 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. During the second quarter of fiscal 2013, we continue to constantly steer our strategy on a successful course through varying market conditions. This resulted in solid sales growth at the high end of our -- of the range we provided. Sales grew 7% in local currency, while diluted earnings per share were better than we anticipated. Around the world, prestige beauty continues to grow but at a slower pace than a year ago. While this reflects the reality of the markets, our brands and high-quality products are winning with consumers, thanks to our diverse portfolio that gives us a presence in a full range of prestige channels. With effective advertising that promotes our outstanding innovations, we pull consumers to our counters, and then generate sales with High-Touch personal service. In the recent quarter, all 3 of our geographic regions contributed to our highest sales, despite some soft market and specific challenges. Sales in all of our major category also rose. Continuing a recent pattern, the fastest brand growth came from the high end of our prestige portfolio. The affluent consumer is spending freely for a product she desires. As a result, our luxury brands including Jo Malone, Tom Ford and La Mer are striving, each up more than 20%. We believe these brands have terrific growth potential, and we plan to continue to invest in them over the next several years, so they become more formidable players in the beauty landscape. Our emerging markets continued to deliver the most rapid growth. Sales rose 24% in the quarter, and they accounted for 40% of our total business. In China, our largest emerging market, our retail sales climbed 28%, enabling us to gain market share. We continue to push into new cities and add counters…

Thank you, Fabrizio, and good morning, everyone. I have worked in the beauty business for over 25 years and joined the Estée Lauder Companies 12 years ago. For the last 6 years, I have led the Asia/Pacific region and previously served as President of our Aramis and Designer Fragrances division and oversaw our travel retail business. Our company began selling products in Asia/Pacific in the early '60s. And soon thereafter, we opened our first affiliates in Australia, Japan and Hong Kong. Today, we sell in 13 countries and our brands have a presence in travel retail locations in 24 markets. The region is very wide geographically and extremely diverse in terms of cultures, ethnic groups, consumer expectation, skin types and beauty regimes and routines. Asia/Pacific closed fiscal '12 with net sales of $2 billion and achieved compound annual growth of more than 15% over the last 5 years. In Asia/Pacific, we estimated we are the leading prestige beauty company in our distribution, and the Estée Lauder brand is the #1 brand in each distribution after several years of significant growth. We currently sell 20 of our brands in the region, although not all are sold in every country, so we still have expansion opportunities. Our travel retail business in Asia/Pacific has also grown significantly in recent years, and today comprises over 50% of our global travel retail sales. Due to the high demand for skin care products in this part of the world, the category represents 62% of our region's total sales, twice that of makeup. Fragrance comprises 5% of sales and hair care, 2%. Distribution formats vary across markets, but 86% of our sales are to department stores. We have been rapidly expanding into beauty specialty stores and freestanding store formats in most countries over the last few years,…

Thank you, Fabrice, and good morning, everyone. As a quick reminder, my commentary on the quarter results and the outlook for the remainder of this fiscal year excludes restructuring and other charges. As Fabrizio mentioned, we delivered sales growth during the second quarter at the high end of our expectations. Reported net sales were $2.93 billion, a 7% increase over the prior year period. The effect of foreign currency on total net sales versus the prior year was de minimis in the quarter. Net earnings increased 14% to $457 million compared with $401.1 million in the prior year quarter and diluted EPS was $1.16. Our EPS was higher than our previous expectations, primarily due to favorable foreign exchange impact on EPS, a higher-than-anticipated SAP order shift into the quarter and a nonrecurring gain associated with the settlement of the remaining terms related to the 2007 sale of Rodan + Fields, one of our product brands at that time. As we anticipated, some retailers accelerated their orders into our second quarter that otherwise would have occurred in our third quarter, in advance of the January launch of our third wave of the rollout of SAP, which is part of our overall Strategic Modernization Initiative, as you're well aware. The impact of this shift in this year's second quarter was an additional $94 million in sales and $78 million in operating income, equal to approximately $0.13 per share. The prior year second quarter also included an SAP impact and reflected a pull forward of $30 million in sales and $23 million in operating income with the same quarterly timing effect on the third quarter. Excluding the SAP-related order shifts in both this year and last year, local currency sales would have grown 5% in the second quarter and the related EPS would…

[Operator Instructions] Our first question today comes from Jason English with Goldman Sachs.

Two questions. First, travel retail destocking. I'm encouraged by what you guys said about it abating throughout the quarter. Do you think that's at an end?

Yes. We see it abating in the quarter. I think that soon retail sales and net sales will get aligned again. That's our expectation.

Our next question comes from Lauren Lieberman with Barclays.

Just one housekeeping was I think Fabrice said that China was 30% of Asia. I was curious if that includes travel retailers, such as -- as reported China number. My real question was more about launch activity. And I know that the strongest growth was coming from the ultra premium brands of the super high luxury. But is innovating and spending more money on those brands versus on Estée and Clinique, is that less impactful overall? Because the halo effect of a hit product in Tom Ford is going to be smaller than the halo effect of having a big winner in Clinique or Estée brand.

I'll first answer the second question and let Fabrice answer then the first question. No, we will continue to focus on Estée Lauder brand and Clinique as much as we can. We have a fantastic innovation program for both brands in the future 3 years, which is leveraging our compass analysis, meaning the areas of fastest growth in the world and leveraging our best technologies. So there is no -- in no way our investment in building Tom Ford, Jo Malone, La Mer to the next level will dilute our focus on Estée Lauder and Clinique. Fabrice?

Yes. Lauren, the 30% was actually excluding travel retail. We were talking China domestic sales only.

Your next question comes from Dara Mohsenian with Morgan Stanley.

Fabrizio, I was hoping you could give us a review of your market share performance in the U.S. during the holiday season. It looks like some of the share gains from the last couple of years dissipated a bit based on some of the market data. So wanted to get your thoughts around holiday performance and also what you're expecting in the back half of the year from a market share standpoint in the U.S.

Sure. So first of all, our -- if you look at the calendar year '12, we continue to grow market share in skin care in a very solid way, and that's been our main focus. Obviously, you need to exclude devices from the way the market is reported by NPD because it's like putting electronic brushes in the toothpaste market. So looking at skin care, we are growing skin care, and that will remain our focus. Looking at makeup, we are also growing in makeup very solidly. Because, again, in the market number you see, they're not included all our online business and all our freestanding store that represents a big and fast-growing part of our M-A-C, particularly, business. So we are very satisfied with makeup. And we continue to grow skin care and makeup in the future and to grow market share. Yet a positive aspect is that the prestige in general is growing faster than mass, so we'll continue to grow market share versus mass, meaning market share to the total market. On our fragrance business, we had a tougher year in term of market share. This was in part designed because we had focused on improving the model and profitability of the sector and also reduced the promotional level in a very big way in order to improve profitability. This is particularly tough in the October-December quarter because as you probably know, the October-December quarter is the quarter of the year in the U.S. where fragrances are the biggest part of the market. While in the other 9 months of the year, skin care and makeup are much bigger proportion of total cosmetics. So yes, growing market share without a strong fragrance innovation program and eye promotion in October-December is tougher, and we have experienced that. But in next fiscal year, we have an outstanding fragrance program and we plan to come back with a more important ability to grow fragrance as well on the new better profitable way.

Your next question comes from Wendy Nicholson with Citi Research.

The first question for Fabrice. Can you give us a sense, the 6% like-door growth you saw in China, is that the right run rate for the business, do you think? Because I know it's been a little bit weaker than that over the last couple of quarters but maybe that's just China specific and macro-related. So was 6% a good run rate for us to forecast? And then, I guess a question for Tracey. The guidance for the third quarter, I think everybody assumes, is pretty conservative. But if we take you at your guidance, that implies, I think, like 10% or 11% organic growth or like-door growth or whatever, local currency growth in the fourth quarter, which seems high given the tough comp. So are there a particularly strong number of new products launching in the fourth quarter that's going to make that quarter so good?

Wendy, let me first remind you that the 6% like-for-like growth in Q2 comes after 2% in Q1. We certainly expect to see on average the like-for-like sales remains single-digit range. And the rule [ph] that the growth is clearly expected to come from new consumers in new cities across the country, that's simply the reflection of the fact that the mature cities in China, tier 1, if you want, actually are very close in terms of consumption per capita with what you see in neighboring countries, like Korea, which are very developed in terms of beauty industry. So consumers are also, in those markets, starting to shift towards e-commerce and the travel consumption as we have noted before.

Yes. On the total business, I just want to say that we believe the number is absolutely our goal in the last quarter, and is doable. First of all, in the last quarter, we have a easier base period last year because our 2 biggest problem, which are Korea and Russia, were already in the numbers at the point in time of the year. Second, because we have a very strong initiative program and great new launches on our main brands, Estée Lauder, Clinique in the period. And third, again, the increased advertising spending that would also continue in the third quarter, we believe, will impact strongly the last quarter of the year, where in the past, we were increasing advertising also in the last quarter. There would be also further impact in the first quarter of the year after. I don't know, Tracey, if you want to add.

No, that's it. Your assumption is correct, Wendy.

Your next question comes from Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: Guys, I had a question related to the pull forwards in a couple parts. First is just to get a sense on the level of confidence you have in kind of estimates for the pull forwards. Because it's often underestimated, it seems, and I'm trying to understand whether that's actually bad or could that actually be interpreted as good? And in fact, if your level of confidence is high -- but I do want to go back to this share question, the 5% underlying top line growth. Because actually they'd be at best maintaining share, but likely losing share globally versus your peers. And I'm trying to get a sense of whether that's a shift in luxury competition or a shift between mass and prestige growth rates. And then the second related part to this pull forwards is -- and Tracey, you mentioned this, there's the chart that is at the back. I think it's like the fifth from the back of the table that talks about the company's top line and EPS, excluding returns and charges and as well SAP adjustments. It was in -- it's in this quarter. It wasn't in the last quarter. It was in the quarter before. And this quarter it says, "Look, 5% EPS growth is what we believe the underlying growth is." A couple of quarters ago, it was 0. And absolutely get it that you're not a quarter-by-quarter company. I totally get that. But I'm trying to understand when that actually normalizes. So when should we expect that to be at a normalized run rate going forward? So lots of stuff in there, but if you could help on any of those that would be helpful.

Okay. I -- that was definitely more than one question. But let me take the pull forward questions and -- because we certainly can appreciate, as we said earlier, that it can get a bit confusing, especially since this is the second year in this quarter that we've had this phenomena. So as it relates to the pull forward and the pull forward actually being more than what we had originally anticipated, so it was indeed above the high end of our range. That actually is a good thing, I think, especially since, as Fabrizio said, the SAP go live thus far has gone quite smoothly. So the fact that our customers were willing to take advance orders from us and we were able to get those shipments out, I think is certainly a good thing. It speaks to the relationship that we have with our customers both -- and many of those orders actually were in Fabrice's region, in the Asia/Pacific region, some in Europe and then some here in the U.S. So I think that was a good thing. And the fact that the SAP go live went well, we are now bringing down the inventory levels related to some of the extra inventory that didn't get shipped out in the quarter that certainly will be shipped out over the next few months. We do have another go live next year, so -- unfortunately, it won't be as big as this year's go live in terms of advance shipments. But it is the last major wave for us of SAP, what we call release 4. So you will see this phenomena one more year. The normalized, as we mentioned, is really the full year. So looking at the second and third quarter is very difficult. And again, we can appreciate that. The full year, I think, gives you a better indication of the normal growth rate of the company, and the same will be true next year as we have this phenomena again this -- next year.

And I would just -- to add one point as Tracey said, normal is the full year, which is 6% to 7%. And we estimate the global market to be in this moment about 3% because there are many markets which are actually declining. To be very clear, France, Italy, Spain, Greece, Portugal and Germany have been on a declining trend and Korea as well as we explained. So yes, we believe the global market in this moment is at 3%. We are growing at 6% to 7%. So we are definitely continuing to grow share.

Your next question comes from Alice Longley with Buckingham Research.

My question is can you update us on the outlook for your ad ratio for the whole year and your selling ratio? Will those ratios be up, flat or I assume not down for the year?

We don't have that information handy and we typically don't speak to that information. So if there's another question that we can answer for you as it relates to advertising, we're more than happy to. I'm not sure if -- the base of your question is related to the shift in the advertising spend that we've had, which follows a different cadence of innovation and promotions this year. But we typically don't...

Well, I'm trying to smooth out that shift and see if your advertising ratio is actually going to be up for the year overall. And if your -- maybe you could talk longer term, if your idea is to generally increase your advertising ratio and more than offset that with your perhaps stability improvements?

Okay. So our advertising spend will be up this year, and I think we had communicated that that was the intent at the beginning of the year. What has changed this year slightly is just the timing, the double-digit increase in the second and third quarter that we're having in advertising spend which will not be -- which will be more normalized, again, when you see our full year results in terms of advertising spending. But it will be up this year for sure.

And I will -- just to add that as we said several times in the last years, we are doing a lot of work to eliminate cost, we do not add value in the company, and to reinvest custodies [ph] in improving our advertising and our ability to influence the consumer. And on top of what we're doing this year, we are focusing this advertising spending on the biggest growth opportunity in the world, namely some categories in the U.S., China, mainly growth in emerging markets. And building share in some of the important soft markets around the world like France, where the market is declining, we are growing 8%. And so that's what we're doing. And so the answer is yes, we are going to keep investing in absolute, more in advertising as we take other cost out of the company.

Your next question comes from John Faucher with JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: Just following up on that last question there. So the investment levels are going up. Can you talk a little bit about what you're seeing from a competitive standpoint? So on an absolute basis, spending is higher. Do you think that you're increasing your share of voice in the category at the same rate maybe as you were before? Or are we seeing a bigger increase from your competitors? And then one housekeeping adjustment. Tracey, I believe you mentioned something about an out-of-period adjustment in the SG&A for the quarter. Was that material? Or can you give us just a little bit of color on that.

So first of all, we believe we are increasing our global share of voice on average in [indiscernible] with the market. But there are some of our competitors which are also increasing their spending. And so the competition is pretty tough, particularly in the big, growing markets. So this increase of advertising spending is essential. However, I want to verify [ph] that independently from share of voice. The real important thing that we see in the business is just the ability to spend because this is bringing new consumers and transfer [ph] people from us to prestige, and in turn is what is behind the growth of the entire prestige sector in the main markets we operate in. So share of voice is not necessarily the key measure of the success of advertising that we're using in this field. Tracey?

And the out-of-period adjustment, we've had a few this quarter obviously, Rodan + Fields. But the one that you're referring to was related to an accounting adjustment, and it was about $0.02 in EPS.

Your next question comes from Bill Schmitz with Deutsche Bank.

I just want to try to squeeze in 2 questions here. I think you said you were going to spent $80 million of incremental advertising in the quarter originally. And then I think in the prepared comments, you said that advertising is up 100 basis points. So that's $30 million. I just want to make sure that's correct and maybe why you decided to push some of them forward, if my math is right. And then just on a housekeeping item, just the sales growth x SAP for Clinique and Esteé Lauder brands in the quarter?

I'll take the first one. So the -- no, we said we spent $75 million advertising extra in the second quarter. So not $80 million at the end but $75 million. So your math on the $30 million is wrong. I don't know where this came from, but happy to reconcile it later with Dennis.

And while we don't disclose specifically Clinique and Esteé Lauder, in the press release, we do show adjusted growth numbers by category i.e. skin care, makeup, et cetera, excluding the impact of SAP. We also show it by region. So I will refer you to that.

Your next question comes from Connie Maneaty with BMO Capital Markets.

If I heard you correctly, you said that the restructuring program closed on December 31. So could you give us what the total cost in savings of the program were and how much they exceeded the going in expectations? And also what the benefit of the savings you've gotten out of that program, how they will affect 2014?

So we will still incur some restructuring charges in the balance of the year. I called out in the guidance that -- what the third quarter impact would be and then the full year will be $25 million. So we only incurred a portion of what we had identified in the second quarter in the financial results for the second quarter. The total restructuring charges under the now closed program will end up somewhere between $325 million and $350 million. So that is consistent with what we have discussed previously. And our restructuring savings related to that program are still in the area of $7.60 million to $7.85 million.

Your next question comes from Chris Ferrara with Bank of America.

Just a clarification and then another question. So the clarification is can you talk about what China's growth was? I think the numbers you cited, maybe you said retail, maybe I got that wrong. But what was China's growth x the SAP adjustment? And I mean, selling not necessarily retail takeaway. And then can you just talk about some of the Western European markets? Obviously, there have been pockets of weakness there. Can you talk about the cadence there? Are those pockets of weakness getting weaker, getting stronger, have they stabilized? And then have the places that have been more resilient in Western Europe, have you seen any deterioration there at all? Or are they staying strong?

I'll just take the China net sales growth. You're right, that I was actually referring to retail sales. So taken as net, the actual growth is 23.6% and this is adjusted excluding the SMI impact.

In term of the -- sorry, what was -- the second question was about European markets?

Talk about how they've progressed. Like, the weak markets, have they stabilized? And then the markets that have been more resilient on an x SAP basis, have they remained resilient? Or are you starting to see some of those markets get a little bit weaker as you move through?

Okay. So in term of the markets that -- I need to divide into 3 blocks. So the Southern European market, the European market, the markets are definitely getting weaker. The markets in the October-December has been negative. Many markets, France, Italy, Germany, Greece, et cetera. And so the markets -- we have been growing in most of these markets with the exception of Spain and Greece. And so we are gaining market share. Now the best example is France, which has been a market on the negative in total, where we've been going 8% basically based on Estée Lauder and Clinique great successful trend and our smaller brands successful trend. So we are doing well. The key idea here is that we seems to be able to grow and progress also in soft market and not only in strong markets. Now the exception to the story is Russia, where the market is strong, and we are not doing well because of distribution issues. And we are -- we believe we have a plan to come back and restart positive trends in the next fiscal year.

Your next question comes from Caroline Levy with CLSA. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division: Would love to just think about the dynamics going on in China with online and the potential for that to be much, much bigger than it is in other parts of the world. I'm trying to understand the margin impact. Is it purely positive? Is there any expense in building that out that makes the margin anything less than stellar? And also, just to understand if same-door sales are negative in the first tier and some second-tier cities, what the impact of -- on returns and margins is from that? And finally do you have any sense of how many consumers you're reaching in China?

There's a lot of questions. I will give you, first of all, the -- start with online and let Fabrice answer the rest of the question. So our online sales in our own sites in China is growing and is an important asset to penetrate more than 300 cities, as Fabrice explained in his prepared remarks. And we believe this has a strong future. We'll continue to grow. But to be clear, we are strong, growing fast, but it's the beginning of the journey. It's still a relatively small part of our sales in China at this point. Fabrice?

Yes, I just like to add that we are already 6 brands that in China are active with our own e-commerce sites. This is e without m. We are actually working on launching m as well. But the point that Fabrizio made is correct. We have seen a very, very active expansion of the demand to the channel. Regarding your point about the tier 1 negative retail growth, we actually have a fair amount of brands with positive retail trends in tier-1 cities. So I don't think we should go that far in terms of cataloging tier 1 as a declining market. It's just not growing as fast as the rest of the country. Because basically, as I said before, it has reached levels of maturity, which are very close to neighboring countries. So that's expected. In terms of the audience we reach, I can maybe share with you the fact that through our CRM activities and our willingness to create loyalty and work harder at retaining consumers in a market where they're still educating themselves very, very rapidly but still educating themselves in the industry, we think that annually, we're looking at 7 million to 8 million women and a few men, we hope, buying our products across the country in the domestic context. Remember that we sell probably twice as much to Chinese people outside of China in terms of value, certainly.

We have time for one more question. Your last question comes from Mark Astrachan with Stifel Nicolaus. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: I'm still trying to reconcile the fourth quarter guidance. What gives you confidence that increased ad spend can drive that kind of acceleration on the top line? And then maybe sort of related to that, what are your expectations for category growth? Is there something underlying that in terms of an anticipated acceleration? Or do you anticipate still at the low end of that 3% to 4% for the year?

As I said is yes, as the increased advertising spend in the third quarter, it should happen in the fourth quarter. But it's also the fact that we have a very strong initiative program in the fourth quarter on our core brands and on all our brands. And because the fourth quarter, some of our softer markets started being soft actually in that quarter a year ago. So we have easier base on this one to beat. And finally, we know there are some markets which are started recovering, and we see an accelerated growth that we are also planning to exploit at best. Tracey, you want to add anything?

No, other than category, without giving specific information, I mean, the -- what is driving the bulk of that growth from a category standpoint and giving us confidence to Fabrizio's point is skin care and actually, fragrance. So we talked about some of the strength of our fragrance launch performance, as well as some of the newer products that are continuing to expand and grow with Jo Malone and Tom Ford. So those 2 from a growth standpoint are driving a good chunk of the growth in the fourth quarter.

That concludes today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1 p.m. Eastern Time today through February 19. To hear a recording of the call, please dial (855) 859-2056, and enter passcode: 86189449. That concludes today's Estée Lauder Conference Call. I would like to thank you, all, for your participation, and wish you all a good day.