Good day, everyone, and welcome to the Estée Lauder Companies Fiscal 2014 First 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 Carl Haney, Executive Vice President, Global Research and Development, Corporate Product Innovation and Packaging Development. Carl will give a strategic overview of our innovation program. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. Our discussion of our financial results and our expectations are before restructuring and other charges. You can find the 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 now.

Thank you, Dennis, and good morning, everyone. I'm pleased to state that the fiscal 2014 is off to a strong start, as our strategy continues to fuel progress in many areas. During our first quarter, we had good global success from innovations, gained meaningful market share in Asia, China and the U.K. and continued to attract new consumers to our brands. Our sales rose 6% in local currency, in line with our guidance. Importantly, our growth came from every major category in every region, illustrating, once again, broad-based success, thanks to our diverse portfolio of brands and unparalleled High-Touch service. Diluted earnings per share were $0.76, which was better than we had anticipated. Continuing a trend we have seen in recent quarters, our biggest winners were our luxury brands, as well as M-A-C, which were all up double digits. China and other emerging markets advanced sharply, as did our online and travel retail channels. Our fragrance business was also an important contributor to sales growth, thanks to increased launch activity, excellent innovation and robust sales in the ultra-prestige tier . As we anticipated, U.S. prestige beauty was somewhat soft, driven by low traffic in stores in July and August, but it improved in September. Overall, prestige growth in the quarter was just about half the pace of a year ago and the environment was more promotional. Many consumers sought value at both prestige beauty products that were either advertised innovations or promotions. In this environment, our brand focused on driving innovation and did not increase their promotions. In the U.S., we started gaining share in fragrance for the first time in several years. Also, 5 of our brands, mainly in luxury, increased their share of prestige beauty. Our products held 9 of the top 10 SKUs in prestige skin care…

Thank you, Fabrizio, and good morning to everyone. I'm pleased join you today to share a few words on the research development, product and package innovation that is the backbone of the Estée Lauder Companies. I joined the company nearly 2 years ago, following more than 25 years with Procter & Gamble, with previous responsibilities including male grooming, cosmetics and beauty care. Our R&D and innovation organization is composed of hundreds of industry-leading scientists, engineers and managers, working in 5 major research centers around 3 continents. These talented innovators partner with our brand and product development leaders to fuel our innovation pipeline to deliver short and long-term results, directly linked to our companies strategy and 10-year compass. We have a diverse and talented team with deep expertise focused solely on prestige beauty. Over the past few years, we've been reinforcing our upstream capabilities globally and have recently doubled our investment in Asia. Our innovation centers have been designed to be close to the most demanding consumers we serve and are structured to drive local relevance for a diverse, multi-ethnic world. Our goal is to foster innovation in these centers to develop products for the largest and fastest growing categories and segments. We research, design and test where our consumers live and shop, giving us insight into their behaviors and desires. For instance, our R&D center in Shanghai taps into the personal customs and skin care requirements of the fast-growing Chinese market and provides valuable local insights. Local relevance is something you can expect to see even more of going forward. Creativity and innovation is part of our DNA and drives everything we do. We complement our internal capability with a long-standing and growing network of external innovation partners. These include world-class labs, universities, suppliers and cutting-edge technology research centers. We…

Thank you, Carl, and good morning, everyone. I will briefly review our fiscal 2014 first quarter results and then cover our expectations for the remainder of the year. My commentary on the financial results excludes the impact of restructuring and other charges. As Fabrizio mentioned earlier, our sales for the first quarter were in line with our expectations. Net sales rose 5% to $2.68 billion. Excluding the impact of currency translations, sales grew 6%. Net earnings and earnings per share each decreased 3% to $301.6 million and $0.76, respectively. EPS was above the top end of our expectations, reflecting more favorable exchange rates and more disciplined management of cost. Every region contributed to sales growth in the quarter. Sales in our Americas region increased 2%, in local currency, with low-single-digit growth in North America and strong double-digit growth in Latin America. The strongest performance in North America came from double-digit sales growth through online, as well as high-single digit increases at specialty multi-brand stores and our freestanding stores. Mid-tier department stores were challenged, but their online businesses grew strongly. In the Europe, Middle East & Africa region, sales increased 7%, in local currency. We achieved double-digit sales gains in the U.K., Turkey and Switzerland, and our sales in the Travel Retail channel rose 9%. Among the more established markets in Western Europe, Germany and France rose mid- to high-single digits, while Liberia and Italy were essentially flat. Our sales in the Asia Pacific region rose 11%, in local currency. Our business in virtually all markets grew, and we saw a particularly strong double-digit growth from Greater China. Distribution expansion continues in China, where we added 30 new doors in 5 new cities during the quarter. Retail sales growth remains strong at approximately 16% and like door growth was mid-single digit.…

[Operator Instructions] Our first question today comes from Bill Schmitz with Deutsche Bank.

Can you just talk about -- it's not just an Estée thing, it seems like, but if you look some of the NPD data, some of the mainstream brands, which obviously includes Estée and Clinique, seem like they have slowed recently. And so, why do you think that's happening? Is there anything you can do to sort of accelerate your relative growth in that respect?

Yes. In NPD, first of all, Bill, one clarification. NPD North America covers about 60% of our business. There is all the freestanding stores, the online, some specialty there, outside of this or this. Anyway, in NPD, there are some specific reason why that's happening. We say, we call it, heritage brands. And Lauder and Clinique where the initiatives that we supported have been very successful. But the base business, especially in July, August, was softer than we expected. And this was because the environment, first of all, there was low traffic in store, lower traffic in store than what we expected. As I said, improved dramatically in September. And second reason was that the environment was very promotional and our brands where, any moment, where their focus was on the innovation. So that was, clearly, not a competitive level of promotions during this period. Now we believe that our promotion, our competitiveness, during the holiday season will be dramatically improved. Our programs are much stronger, in this sense, however, we do not plan to increase promotions for the long term.

Your next question comes from Neely Tamminga with Piper Jaffray.

Fabrizio, can we talk a little bit more about fragrances? It sounds like that continues to be a major initiative for you guys. Could you just help us contextualize kind of the size and scope of the family fragrances that you have and maybe who you expect to kind of be some of the newer ones that could become the bigger ones? And just clarify, related to that, is that really kind of based on global point of distribution, is that how you're kind of thinking about it, because obviously, Jo Malone is going to be more prestige and premium than maybe even a Michael Kors. But just help us understand kind of how big some of these fragrance families could be.

Yes, sure. I think we will grow our fragrances substantially in this year and the next few years. Our fragrance portfolio is, first of all, very strong and they're very high-end, meaning Jo Malone, Tom Ford, these fragrances are, first of all, is profitable business and is growing very fast, more than double-digit or more and is growing globally. For the moment, very strong in Europe and North America and with a lot of future potential also in Asia. The second group of our fragrances are the fragrances which are part of our cosmetic brands, namely Clinique and Lauder fragrances. In this portfolio, this year our most important launch in this part of the portfolio, our more important launch is Modern Muse of Estée Lauder. We believe this is a very strong fragrance. Our test and our early acceptance in the market is outstanding, has been going #1 in Harrods and is already #10 in the U.S. after a few weeks of launch and continue progressing and climbing the ranking as I said. And we have also a pretty solid promotion level in fragrance, as I said, during the holiday season, including the Clinique brand. And then the third group of -- in our portfolio, the designer fragrance, like Michael Kors, Tory Burch, DKNY, et cetera. And this portfolio particularly includes 2 very strong and important new launches, 3 actually. One is Michael Kors, that I said has been very successful in the launch in the United States and this is why we will expand in Europe soon. Tory Burch, for the moment, is exclusive to Bloomingdale in the U.S. and is the #1 fragrance there. And Zegna, which is being a global brand, launched from the beginning where the super-high aesthetician are actually in Asia because of the high position of the Zegna brand, particularly in China. And we believe that these combinations of activity will drive our growth in fragrance. We will go back growing market share in fragrances. We will improve our retail -- travel retail business in fragrances, which was one of the key goals, which is very profitable. And each one of these new fragrances that will be launched will carry high profitability versus our historical fragrance profitable model.

Your next question comes from Alice Longley with Buckingham Research.

I've got one follow-up question and one bigger question. I think you indicated that you think that your U.S. performance in department stores will be better in the December quarter than the September quarter because you're doing more, I guess, planned promotional activity. Could you just comment on whether that's the case? And then the other question is, you are guiding to margin expansion, operating margin expansion for the year. In -- which are the business segments that are going to lead that? In other words, will skin care be up the most and fragrance margins be down? Or where are we going to see the margin expansion for the year by business segment?

Okay. I'll take the first one, which is, yes, you understood correctly. We believe that our trend in October, December in department stores in term of market share will improve, and will improve, first of all, because our innovation and the investment behind our innovation that we did in July, September will have an impact and our innovative product will continue growing. And second, because we will invest behind the fragrance launches, which will hit the holiday season. And third, because our promotional competitiveness will be stronger. I also want to remind that 60% of the fragrance sales in the United States happen during the holiday season. That's why we are focusing our fragrance investment and promotions in that period this year, and we have expectation to make. In term of the -- what will drive profit margin, I'll let Tracey comment on that.

So we typically obviously don't guide by product category. So we do expect from a total portfolio standpoint to have the margin expansion. I would comment, though, on fragrances and remind you that we have a number of new fragrance launches this year, so it is a heavy, heavy investment year for fragrance. In light of those launches, which will continue to build not only in terms of the doors that we've launched them in, but we're also phasing the rollout of some of these fragrances so they will continue to build distribution as well.

Your next question comes from Jason English with Goldman Sachs.

I want to focus in on the organic sales growth in a couple of areas that seemed a little bit light to me versus my expectations. One is in travel retail. 9% looks like a decent headline number but not really when you contemplate the easy comparison and the lapping of the destock that hit the 2-year deceleration is pretty stark. So I was hoping you could help me understand maybe the drivers of that. And similarly, this is a rare quarter when your Americas like-for-like growth actually lags what was reportedly measured in NPD. Was there something anomalous about that as well?

So speaking about travel retail. Our retail in travel retail was 13% growth, and our net sales were 9% and this was also driven by time of launch of many initiatives like Advanced Night Repair and DDML. So our travel retail business is actually growing double-digit. And in fact, we forecast, we guide to continue driving double-digit in the next quarters and is very strong in this moment, as I said in my initial comment, particularly in Asia. On North America, I didn't completely understand the question.

It was the difference between our net sales and then the NPD growth, which obviously NPD does not measure all of our sales channels. But on the other thing that I would remind you of is a small amount, but in order to support some of the skin care fragrance launches that we had at the beginning of the quarter, we did ship in product at the end of June in order to support the July launches.

Your next question comes from Caroline Levy with CLSA.

My question is why you're so confident in the margin expansion in the back half, because it's going to require a really major recovery across the board or maybe it's not in fragrance, it sounds like fragrance may stay down for the year to support the launches. But you're expecting tough comps in this coming quarter because of the lack, I understand that completely, but what gives you such confidence that you can continue to grow 6 to 8 top line if you cut back A&M [ph] in the back half to be flat as a percent of sales for the year, which I think you had guided to last quarter?

The first thing I would like all of you to notice that anyway, we are delivering 2/3 of our profit in the first 6 months. So in the second 6 months, we have an equal amount of sales and, historically, 1/3 of our profit. So clearly, as Tracey commented on, we have the flexibility in the second quarter to invest and support our business and to deliver the profit growth that we want to deliver. And the way the quarters have been historically built, been very, very heavy in the first 6 months and lighter in term of profit in the second 6 months. This is also dependent by calendarization and by many other aspects. So we are calendarizing our initiative and our investments, I believe, in a more appropriate way this fiscal year. But most importantly, we are calendarized based on the consumer needs and the kind of innovation we have rather than just working on last year or previous years' comparisons. So all in all, we are confident in the overall fiscal year. We are confident that we can accelerate margin in the second 6 months of the year.

And the only thing that I would add to that is even though certainly we have some soft environments that we are managing in, EMEA and certainly North America, the fact that many of our very strong large innovation launches happened at the beginning of the year, we expect that those products will continue to build momentum throughout the year, which certainly should help the second half of the year.

Your next question comes from David Wu with Telsey Advisory.

I just have a question for Carl. Can you perhaps talk about how you envision skin care innovation to evolve really over the next 5 years? Just given the demographic shifts with the aging baby boomers, as well as the new millennials as a new customer base. And also just given the changing consumer trends that you're seeing whether it's increasing use of beauty tools or sort of fusion products into other categories such as with CC creams?

Sure. Our innovation is balanced and competitive in product development across all our categories, including skin care. And as I said, we use a number of types of innovation against that. And our future pipeline is even more robust, it's bigger and broader. We leverage -- launch leverage. We are locally relevant. We're focused on the specific segments of growth and we're creatively driven and consumer inspired. So that's a long-winded way to say that we've developed capabilities to target consumer opportunities in fast-growing segments. The aging consumer is a large and fast-growing opportunity and we've developed innovation pipelines against those targets. And I won't get into specific details on them, but we a have very robust pipeline against those consumer targets.

Your next question comes from Christopher Ferrara with Wells Fargo.

Just I guess on fragrances. 2 things, Fabrizio, 1 is, how do you think about the incremental margin on the growth of the business going forward with a greater focus on fragrance as opposed to skin and makeup? And I get that the fragrances that you guys are launching are higher profitability fragrances, but I suspect still lower than the broader portfolio. And then secondly, obviously, mass is -- well, share the prestige in most categories more recently, probably less so in fragrance. Do you think going forward that prestige will source a big portion of its growth from mass over the next 6 to 12 months especially with your initiatives in fragrance?

So on profitability of fragrances. As I said, fragrances improved profitability in the last 5 years within the organization and within our company, and that was that one. Second, our new fragrance launches will have ongoing better profitability. Third, our portfolio is within fragrances as a mix, which is toward higher profitability fragrances like our high-end, like Jo Malone, which I already mentioned. And third, the growth on fragrances will allow us to leverage productivity and all the rest across the organization, across the entire Estée Lauder Companies, and this will be a positive factor. So that's why we believe that the growth of fragrance would be anyway creating value for us in the future. Said this, fragrance will remain a lower margin than skin care and makeup in our portfolio. You'll need to have one category which is less margin than the others anyway in any portfolio, and that's the reality of what we have. On your second question, which is the question on sourcing for mass, I would like to say, that's been our strategy now for 4 years, and this is probably the key idea behind our success in the last 4 years in term of accelerating growth is being that on top of competing for market share we deem prestige. We put ourselves as category builder, as the only company in cosmetic completely -- or big company in cosmetic completely focused on prestige and without any other mass business. And so, as great partners for our retailers, they want to build a category in prestige around the world. And with this strategy, we have been working in sourcing from mass in skin care and makeup. And as you have seen in the United States, we succeeded. And even in this last quarter, the prestige market in the United States, although softer than last year because as you've seen below 3.2% versus 7% last year, has been growing faster, decisively faster than mass. Now, we believe that this could happen also in fragrances in the future and this could be a trend that we will see also in the fragrance business. Although for the moment, in the fragrance business, this trend is being less remarkable that has been in skin care and in makeup.

Your next question comes from Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: I just had a quick housekeeping and then a little more fragrances actually. And the housekeeping was about, Tracey, if you can help us quantify the impact of currencies. It seems like it's better than you anticipated and how much of that was driving your increasing EPS over the course of the years? Can you help us quantify that? And then -- and I do want just a little bit more on fragrances because the pushback I'm getting from some investors is that is this the best ROI that Estée Lauder can find? So why don't we go into more tier 3, tier 4 cities in China for the same money, or more e-commerce or, in fact buying back more stock than investing in fragrances. So it feels like folks are thinking, well, maybe they're stretching a little bit into margin dilutive areas to grow, and what's your response to that. And also kind of in that context talk a little bit more if you could about the dividend raise, which seems a little bit lower than it's been in the past and how that should make us think about the priority we give to that versus M&A or other uses of cash?

So I'll take the fragrance part and Tracey will cover all the others and then comment also on the fragrance part the way she thinks. On fragrances, I want just to remind you that the role of having a strong fragrance business is not only about the value creation and margin creation. It's also in certain parts of the world, the fragrance are such a big part of the business that in order to create the critical mass of the company, that then will absorb all the reds, being able to serve retailers and cover the market appropriately. In absence of a strong fragrance business, this is going to be very costly and skin care and makeup can be much less profitable because of this. Example of this are many European markets, example of this is Latin America and there are many other example in Asia. Then second point is, fragrances are attracting new consumers to counters in many cases. So for example, on our Estée Lauder Clinique brands, a strong fragrance business is also a source of customers for the counters. And then these people buy also skin care and makeup, and so it's the driver. So fragrance can be profitable, can be value creating and can be an enhancer of critical mass of the company and finally, of building or bringing new consumers to our brands and sell our entire portfolio. So they're an integral part of our strategy even if skin care in China in the long-term may create more value, still there is space for a strong fragrance business in our portfolio, but never detracting priority level from skin care and makeup, however. Tracey?

Regarding currency, as we have taken up the midpoint of our range, a small portion of that certainly is related to the improved outlook in currency. As I had mentioned in my prepared remarks, we did initially expect that currency would impact us by about 2% from a top line standpoint. We now expect that it would impact us negatively 1% to 2%. The euro is doing slightly better. Others are doing slightly worse, and we certainly saw that in the first quarter from a netting standpoint. So from a full year standpoint, there could be a $0.07 differential in EPS. But our decision to take up our guidance is somewhat related to currency, but the other is to be in the first quarter related to performance as well. In terms of dividends, you asked about that and our increase in the dividend. We look at, along with the board every year, distribution to shareholders, and the mix of distribution to shareholders between dividends and share repurchases. And what we were comfortable with, given our plans this year, is very similar to prior years in that the free cash flow that we deliver this year is almost 100% delivered to shareholders and in the mix of share repurchases and dividends. So through discussions and analysis and prudent planning with the board, this is the mix of distribution that we've decided is appropriate for us as a company this year. But it is a heavy focus of us -- of ours in terms of distributing back to shareholders what excess cash. We still, obviously, have a pretty very strong balance sheet, both from a debt capacity standpoint and from a cash standpoint. So we believe that any acquisitions that we might be considering, we can certainly fund with our balance sheet.

Your next question comes from Wendy Nicholson with Citi.

Follow up on the travel retail question. Is it your sense that you are gaining share in travel retail, and maybe if you could specify if you think it's travel retail globally or are you gaining share in Asia travel retail or maybe not in Europe. So if you could clarify that? And then the second question, Tracey, just a follow-up on the inventory days, 195 seems really, really big to me. And I would've thought that I know you've got a big whatever holiday planned with fragrance, but at the same time, I would've thought you have already done a lot of that ship in. So had you anticipated 195, because it just seems like that number is getting higher and higher on -- and that maybe as you bring that down or work through that excess inventory, there's going to be a negative margin impact?

So in travel retail, we are definitely building market share and we are building strongly the market share. The market share build is very strong in Asia, a little bit in Europe and we are now building in this moment market share in the U.S. part of travel retail. That's the split. And we are actually accelerating the market share buildup in the Asia part of the business.

And in terms of the inventory days, you may recall that we did carry higher levels of inventory post the group 3 go live for SMI, as we had some stock issues that we were working through. So we ended the year higher. I would say that we were not expecting quite as high a level in the first quarter as we had. But the inventory is current, and so it is certainly salable throughout the second and the third quarters, as I mentioned. We never were relaunching new products or launching new products, in the case of our fragrances. We want to make sure, depending on what the sell-through is, that we have enough inventory. So that will provide some level of variability to our inventory levels when we have big launches like what we had in the quarter. But we have, to your point, shipped some holiday and are certainly shipping more as we speak.

Your next question comes from Mark Astrachan with Stifel Nicolaus. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: I'm curious about your thoughts of using gift repurchase for this holiday season, sort of just broadly how you're thinking about that and then more specifically, is that amount could be higher or lower this year versus, call it, a year ago level?

So we have -- as I said, we have a group promotional activity in the holiday season, which is not only gift repurchases, it's also relative to all the fragrance activity that happen there. And we believe we have a competitive gift repurchase program in the period of October, December. However, in the quarter where we just closed, the July, September, as I said, we were actually declining if we purchased versus the past. We were continuing our program, and that's one of the reason I was saying we were not competitively promotional in that quarter. In term of our program, we plan to improve our gift repurchase quality and activities in the future to make sure they work better and better with the consumers. And we are working with it. We have seen this and already in September, we have seen, for example, a very, very strong gift repurchase activity on the Estée Lauder brand, it was particularly successful.

Your next question comes from Olivia Tong with Bank of America Merrill Lynch.

Just first one point of clarification on advertising spend, you mentioned it would be up for the December quarter. Can you just say in terms of absolutely or as a percentage of sales that you expect it up because correct me if I'm wrong, but I think that there's quite a bit already in the base. And then on the inventory levels, obviously higher from your standpoint, but how does your inventory levels, how do your inventory level at retail look?

So our advertising is -- for the second quarter is deleveraging about 40 basis points as a percent of sales. So that's the increase in the spend in the second quarter, the advertising promotion and marketing. And in terms of our stock-in-trade, it really varies around the world. But in general, I don't think we have a situation where we have lots of -- an abnormal amount of stock in any area of trade.

Your final question comes from Lauren Lieberman with Barclays.

Quick, 2 things. One would just if you could comment on Russia, because there's no mention of that made last quarter, but perhaps it was starting to stabilize. I just curious on trends there. And then the second thing was just longer-term on hair care. No, I won't keep asking about fragrance in the strategic importance. I think within prestige beauty, it should actually be pretty clear. I think hair care, given both the margin structure and hair care size in global prestige beauty is actually been more interesting long-term strategic question. So could you talk a little bit about how do you think that evolves over time and sort of the near-term kind of returns in profitability goals for hair care, because I noticed a lot of advertising on TV this quarter for Aveda and you mentioned specifically in the release that Bumble had some new specialty distributions?

So on Russia -- Russia as, I said, is stabilizing and is stabilizing because we read some parts of the retail was going well. Anyway, we have stabilized the relationship with the retailers that was not going well and because we have started an aggressive distribution change in Russia with more freestanding stores of the brand that carry freestanding stores and good online business. So it's a mix of stabilization and diversification of our distribution that is giving to us more confidence about us being able to go back in the future years to grow our business in Russia. In term of hair care, we are having a very successful moment in hair care. Aveda has a huge momentum. Aveda is growing momentum with salons, which remains the critical and key channel for Aveda in the United States and in other countries of the globe. And Invati is driving the success in Aveda freestanding store, and importantly in Aveda salons. And we -- yes, you're right, you're seeing advertising on Aveda on Invati, which is basically our activity to drive and support the best innovation and build on strengths and drive initiative where we see that is an enormous consumer traction and consumer reaction. And also, we continue Aveda expansion around the world and most important in the travel retail channel where particularly in Asia, we are seeing great traction for the brands, which has a very positive impact also on profitability.

That concludes today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1:00 p.m. Eastern Time today, through November 30. To hear a recording of the call, please dial (855) 859-2056 and enter pass code 78520821. 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.