Good day, everyone, and welcome to The Estée Lauder Companies' Fiscal 2017 Third 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; 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, the commentary on our financial results and expectations is before restructuring and other charges. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investor section of our website. During the Q&A session, we ask that you please limit yourself to one question so we can respond to all of you within the time scheduled for the call. And I'll turn it over to Fabrizio now.

Thank you, Dennis, and good morning, everyone. Our company delivered an excellent performance in the third quarter. Our business accelerated, driven by many brands, channels and markets that experienced strong momentum. In constant currency, our sales rose 9% and adjusted diluted earnings per share increased 28%, both of which exceeded our expectations. The outperformance was generated from stronger organic sales growth, largely in China in travel retail channel; a better-than-expected performance of our newest brands, Too Faced and BECCA, as well as disciplined expense management. When fiscal 2017 began, we said our sales were expected to accelerate every quarter, culminating in a robust second half. As we look to the fourth quarter, our sales growth should increase farther, enabling us to deliver our financial and sales target for the full year and position us for a strong start in fiscal year 2018. Our success this quarter came despite continued external macro headwinds in certain areas. In the U.S., foot traffic continued to decline in brick-and-mortar department stores, our largest domestic channel. And Macy's closed 68 stores, as expected. In certain other countries, we faced difficult economic or political climates, particularly in the Middle East, Turkey and Latin America. And the continued strength of the dollar impacted our reported results. Globally, we encountered stiff competition from both established and upstart brands. The fact that we have achieved a strong performance against this backdrop speaks to our successful strategy, which is anchored by our increasingly diversified business model and multiple engines of growth. We also are benefiting from our choice to stay focused on a dynamic prestige industry that has been growing steadily for many years and continues to grow faster than many other household and personal care centers. As global prestige beauty undergoes rapid change, we are embracing new opportunities, accelerating…

Thank you, Fabrizio, and good morning, everyone. First, I will review our fiscal 2017 third quarter results, and then cover our expectations for the remainder of the fiscal year. As a reminder, my commentary excludes the impact of restructuring and other charges, which are disclosed in our press release this morning. Net sales for the third quarter were $2.86 billion, up 9% in constant currency compared to the prior-year period. Incremental sales from our most recent acquisitions of Too Faced and BECCA contributed approximately 4 points of this growth. And the balance was driven by strong performance in several areas of our business, most notably travel retail, online, China, and our mid-sized and luxury brands. From a geographic perspective, every region grew sales, led by Europe, the Middle East, and Africa. Net sales rose 13% in constant currency in EMEA, led by a 30% increase in global travel retail. The substantial growth in travel retail was supported by an 8% increase in international passenger traffic, as well as further expansion of our makeup and fragrance brands in the best airports. Notably, our travel retail business in Hong Kong and Macau returned to strong growth in the quarter. We are closely monitoring the political tensions that have curtailed Chinese consumers traveling to South Korea but we do expect the slowdown in this travel quarter to be offset by Chinese consumers traveling to other Asian destinations. The EMEA region also benefited from strong sales in Italy and the U.K., which rose high-single-digits while most other Western European markets grew mid-single-digits. The region's major soft spot this quarter was the Middle East, where net sales fell again as distributors continue to align their inventory to much weaker retail traffic. This negative sales trend, however, did begin to ease this quarter and is expected…

The floor is now open for questions. Our first question today comes from Rupesh Parikh with Oppenheimer. Rupesh Parikh - Oppenheimer & Co., Inc.: Thanks for taking by question, and congrats on a great quarter. So my two questions are on BECCA and Too Faced. First, I wanted to get a sense of what type of growth rates you're currently seeing in those businesses? And then, it sounds like they're both trending above expectations, so just curious what's driving the above expectation performance so far? Thank you.

So the growth is very, very strong in these two brands. So, it's very strong double-digit growth in each one of the two brands and in every segment they're operating. And what is driving the success is actually same-door sales is a success, which is driven mainly by same-door sales and for the moment, a very small initial distribution deployment. These two brands are really strong and consumer demand is exceptional. And their recent launches are among the most successful launches in the entire marketplace. And on top of that, for us, the great news are that they attract really new consumers that in the past we were attracting less, particularly Too Faced attract more younger consumers in our portfolio which is great extra business for the company overall. And importantly, they have dramatically increased our penetration in Specialty Multi in the U.S. And this will continue internationally, which is a very important objective because as you all know, the Specialty Multi-Channel globally is one of the fastest growing channels in our sector.

Your next question comes from the line of Andrea Teixeira with JPMorgan.

Hi. Good morning, everyone. Thank you for taking my question. I just wanted to see if you can kind of elaborate more on basically the Clinique products into ULTA stores and how – I understand you've been there for five years, and how that learning can be applied to the M•A•C relationship? And along those lines, how you think about any cannibalization of the products within Specialty Multi against department stores. And second, if you could elaborate more on the fourth quarter guidance for margins, because it seems conservative against your beat of $0.21, and just $0.03 increase over the low-end of the guidance. So if you can give us what is your embedding in terms of investments? I understand from Tracey's comment that you had some R&D that might be pushed over to the fourth quarter. So if you can elaborate more on the investments? And again, congrats on the results.

Thank you. I'll start with answering the ULTA question. So Clinique is very successful in the ULTA channel. And what we have learned is that when Clinique is exposed with all the strengths of the core (32:42) portfolio and the strengths of services to a good growing traffic, the brand responds very, very well. And Clinique is growing both makeup and skin care aggressively in every ULTA door in which the brand is deployed. In terms of what we can learn for M•A•C – by the way, as I said in my prepared remarks, we plan to increase gradually the number of Clinique doors in ULTA in agreement with our retail partner. And, as far as the learning for M•A•C, absolutely we have learned a lot for perfecting our upcoming M•A•C execution; also from the Clinique experience. In particular, we have learned the importance of the service aspect, of making sure that the brand is deployed with all the necessarily SKU, assortment SKU, and decorations of the SKUs to the consumer, is the concept of a curated assortment that really fit the consumer, which has been a big learning that will be absolutely applied to every one of our brands. The good news, that is true for Clinique based on your question, but is true for every other – our three big brands. Also Lauder is the same. We really attract new consumers and a lot of millennial consumers. So the cannibalization is very, very limited. This consumer, our consumer that were not shopping in the brands before in a large majority, or they were lapsed brand users, because they were not anymore going in channels that – where the brands today are distributed. So the large majority of the business is net extra business. Tracey?

And in terms of the fourth quarter. As we mentioned in the prepared remarks, because we have some very strong launches coming up in the fourth quarter, we also have a fair amount of consumer reach expansion into Specialty Multi, as well as some of the opening of our free standing stores and other points of distribution in the fourth quarter. And that's where the investment is coming in, in the fourth quarter. When you look at the – our expense mix in the fourth quarter relative to last year, it's relatively comparable. And again, our motto certainly here has been to start strong and stay strong. So, a combination of very strong launch and distribution activity in the fourth quarter, and certainly supporting products to accelerate into fiscal 2018 is what the fourth quarter represents.

Your next question comes from the line of Joe Altobello with Raymond James. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Hey, guys. Good morning. First, curious if you guys have detected any change in overall market growth for global prestige beauty from the 4% to 5% it was growing at earlier. And then secondly, a little bit more detail on the U.S. growth, with and without Too Faced and BECCA, and maybe what M•A•C did in North America this quarter? Thanks.

So on the total M•A•C growth, no. We're not seeing a big change. Overall, it's still between 4% and 5%; probably closer to 4% in this moment than to 5%, but still in the range. And – but what we have seen a change – we see a change continuously is where the growth is coming from. And the growth is coming from – by category – is coming more from makeup than in the past, as you know. And by recently, in this quarter, the growth is again coming from Asia more than in the previous quarters. And then, certain emerging markets have been more challenged than in the past, like, I don't know, Brazil or Turkey, obviously, and a few others. And so, we see a variation where the growth come from. But what is interesting is actually the total growth is still between 4% and 5%.

And as far as the North America performance this quarter. As we indicated, the brick-and-mortar channels were pretty challenged, particularly in the U.S., in the third quarter. Excluding Too Faced and BECCA, the North America segment was down in sales, and M•A•C was certainly a contributor to that performance. The M•A•C team is working very strongly in the U.S. to accelerate performance, both in the department store channel and certainly in their freestanding stores, and has some great programs coming up over the next couple of quarters.

Your next question comes from the line of Erinn Murphy with Piper Jaffray. Erinn E. Murphy - Piper Jaffray & Co.: Great. Thanks for taking my question. I guess I wanted to focus on the comment, Fabrizio, you made on the earned media value for M•A•C picking up in the third quarter. When you look back, what was driving that? Was it new product launches? Was it product placement with influencers? And then I guess just a housekeeping question in terms of the cadence of openings at ULTA. You talked about 25 in June and over 100 by year-end. Should we just kind of model the balance of that in the next quarter? Or how do we think about kind of the next couple of quarters in the calendar year? Thanks.

So, let me start from this last question, is – no, is what I said. You should not model it differently; is 25 by June and then 100, and you can assume that the 100 will be equally split, because it's a matter of capability opening. And the opening will be more aggressive as of September, obviously, because of organization and capability things. But this is the total number that we're planning for at the moment. What was the?

Earned media for...

Ah, the earned media value of M•A•C. So what was driving the improvement of the earned media value of M•A•C is, first of all, the M•A•C activation of many more influencers. And the activation also of M•A•C makeup artist has influenced themselves, which is a unique model created by the M•A•C brand. Meaning M•A•C is, obviously, activity is external influencer, (39:17), but also, many of the very valuable makeup artists of M•A•C influence themselves. And being enabled by a lot of great quality asset to support to do this job around the world, and particularly in the U.S. The other thing is, activity in this, is M•A•C is back launching hero products. And as you know, a lot of these media value is driven by exciting new products. For example, Next to Nothing launch, which I mentioned in my prepared remark, is an activity which is creating a lot of conversation in the social media arena, which is helping support the brand. We believe this strength will continue. The M•A•C brand is very active among the various changes they're leading in the U.S. market and internationally in increasing the numbers of hero products that will be passed of their deployed portfolio of innovation.

Your next question comes from the line of Jason English with Goldman Sachs. Jason English - Goldman Sachs & Co.: Hey. Good morning, guys. Thank you for slotting me in. I just want to turn to margins. Your guidance implies that EBIT margins are going to be down for the full-year modestly. Another three year where you kind of fall short of your longer term targets of 40 basis points to 50 basis points. Can we go through some of the drivers? Like, obviously some deleverage in free standing stores, department stores, et cetera. Talk about the size of those, the path forward? And maybe put a little more teeth on this Leading Beauty Forward program to give us some context of the savings when they can flow? And what it means for margins on the forward? Is this sort of just the new reality that we should get acclimated to service stagnant (41:09) margins? Or is there a path to improve on the forward? Thank you.

Yeah. Thanks, Jason. With respect to our margins this year, and I think we had indicated this was the case last year as well. One of the things as you all know that we've been experiencing for the last three years is negative currency impact on our margins. So, in fact, if you look at the guidance that you're referring to, Jason, for this year, we have 80 basis points of improvement in margins. That is being offset by a combination of currency as well as our acquisitions. And so we've had a bit of that experience over the last couple of years as we have done a fair number of acquisitions. But most importantly the currency drag on our margin. So, yes, we've had deleverage in free standing stores and that's had an impact. We are offsetting much of that with some of the shifts that we are doing in terms of expansion into specialty-multi, and you'll certainly see more of that impact in fiscal 2018. As it relates to Leading Beauty Forward, when we announced the program about a year ago now, we indicated that the structure of the program is efficiency, effectiveness and redesigning certain organizations to allow us to achieve greater leverage in the future, and leverage implies margin expansion. So, we've delivered 80 basis points of savings from just our cost savings programs this year. Leading Beauty Forward will take another chunk out of our cost base, and also allow us to grow in a more leveraged fashion. And we've got lots of great activity around Leading Beauty Forward. When we announced the program, and certainly still maintain this, we said that we would not see benefit this year. We will start to see some benefit next year, but it will not impact our margin guidance for next year. And then you'll start to see Leading Beauty Forward lead into our margin results over the following few years until it achieves its full potential and that full potential is $200 million to $300 million. We will invest a portion of that back but a portion of that will also be dropped to the bottom line. So it is the reason that we have so much activity around Leading Beauty Forward and, as both Fabrizio and I mentioned, it is actually slightly ahead of plan in terms of some of the initiatives under the program as the organization really rallies behind this to not only create some of these leveraged structures from an organizational standpoint, but also build some of the capability for the future support of our strategic objectives.

Your next question comes from the line of Bonnie Herzog from Wells Fargo.

Good morning. I have a couple of quick follow-on questions on M•A•C. First I just wanted to clarify that it did improve sequentially in the U.S? And then in ULTA, I imagine this will be incremental in the top line. But will it be a drag on your margins given some expected cannibalization of your more profitable M•A•C retail stores? I guess how do you balance that? And then I was curious about a potential halo effect that you might be seeing, broadly speaking, with your new innovation on some of your hero franchises or maybe as you further penetrate new channels, such as specialty-multi with some of your big brands. I guess I'm curious if you're seeing any evidence that Estée Lauder customer baskets are increasing? Meaning that your customers are buying more of your portfolio brands and possibly spending more per transaction? Thanks.

So, let me start from this line. I think we said it in prepared remark and everywhere we comment on this new distribution. The new distribution is bringing new customers. And so we have absolute evidence. That's why we have tested our way first with 30 doors, then in certain areas internationally, the same. We have done this very gradually with a lot of attention. And there is – the large majority of consumers are new to the brands. This is true for new distribution, both online in specialty and this is true for a lot of our new innovation which is focused on segments where we have strategic opportunities or strategic gaps. And that's actually been the big strength. And the other information we – that I have already shared but I want to further clarify it is that the large majority of these new consumers are millennials. And that's true in all these things that we have. We have year-end data that comport all these learnings and then based on this data, we made decision on distribution evolutions around the world.

In terms of M•A•C in the U.S., no, we think some up and down performance as it relates to M•A•C in the U.S. So the expectation, obviously, is in the fourth quarter and beyond that the M•A•C performance given certainly the expansion into specialty-multi along with, as Fabrizio said, many of the programs that they're working on and the increase in some of the digital activity that they're doing will start to gradually improve sales in the U.S. And also, as we said, M•A•C is quite strong other than a couple of pockets in international, quite strong in international, particularly in Asia. And again, in addition to some of the expansion into specialty-multi that's being done here in the U.S. and the work that is going on to grow sales in the freestanding store and distribution – and department store channel, they're also launching in Asia on Tmall. So we expect next year to be a strong year for M•A•C going forward.

And then in term of profit dilution of the new distribution, M•A•C is very dependent from traffic. And so if we – where we are able to create good sales per door, M•A•C is a profitable brand. And so our priority is to stay focused on really making M•A•C a good brand with great sales per door in every single distribution channel and that will make M•A•C – will keep M•A•C as a very profitable brand. And in term of the overall dynamic, I want again to clarify the – M•A•C exposure to, in this moment, the declining brick-and-mortar department store traffic is the key issue we are trying to solve. M•A•C has enormous demand and attention from consumers. It's a very desirable brand. Wherever M•A•C is exposed to traffic, it's performing well. And that's the key issue we are trying to work on. As we said, we have many international pockets where M•A•C is booming. And we need to address the U.S. issue as we have discussed. And I hope you see many of the pivoting activity that we are doing to achieve this goal as fast as possible.

And the only thing I want to add to that is M•A•C is one of the strongest, if not the strongest, brand online in terms of growth.

Your next question comes from the line of Mark Astrachan with Stifel. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Yes. Thanks and good morning, everybody. Wanted to go back to the overall category growth question and answer. So obviously, good quarter sequential improvement but still pretty decently below your large peers in terms of absolute organic growth. So I guess I'm curious to what do you attribute this? How much is Americas? The M•A•C commentary that you've touched on, how much is Clinique as a brand that hasn't been touched on but seems like it declined in the quarter? And then how do you think about improving those trends relative to peers? Or do you think this sort of normalize over time as overall growth moves back towards what you're calling 4% to 5% prestige beauty category growth? Thanks.

Our growth algorithm is 6% to 8% and we are obviously on this trend. And the key point is this industry is not a zero-sum game. All the big companies are growing. And depending by quarter and by year, some are growing a bit less or a bit more, but we all are growing. So the key point is that there is a strong category growth and there is space to grow for a lot of big companies. And they believe that small brands are diluting the growth of big companies is clearly not demonstrated by the facts, because big companies are growing, are growing their brands and enriching their portfolios. If there are some smaller brands which are doing very well, some of them get acquired by the big companies when they have the right rate of return. And so I believe actually this is an environment where many big companies can grow and can grow at the same time in this amazing part of the industry which is prestige beauty. Now, what do I attribute in the short-term in the last six months, nine months? Our growth be below some of our competitor is frankly 80% U.S. department store traffic. We are the company which has the highest exposure in percentage of our business and in our big brands to U.S. department store traffic. And that's the big thing. And then there are other – many, many other areas of the world where frankly we are growing faster than many other companies. And the last point I want to make, we are building market share. So in a market we continue to grow 4% to 5%, we continue to grow market share. This was evident also in the recent Unimonitor (52:02) report for 2016 calendar and is obviously proven by these first quarter numbers where we are growing in constant currency 9% versus the market which is probably closer to 4%. So we keep growing market share. We keep growing well in all over the world and we do have an issue to solve – to address, which is that U.S. department store traffic and our high penetration of this channel. And we are pivoting to reinforce this channel and at the same time diversify our business in the needed way.

Your next question comes from the line of Olivia Tong with Bank of America.

Great. Thanks. First, we obviously talked a fair bit about M•A•C in the U.S. and the increase in ULTA and Sephora, but one of the things I want to know is how much of their issue for M•A•C in the U.S. do you think is a function of more competition in the makeup category versus just its retail positioning, particularly with younger consumers that M•A•C has captured for so long. And then perhaps can you give a little bit more detail in terms of what other opportunities are there for other brands in terms of the specialty-multi distribution, not just the smaller faster growing brands, but also the larger ones? And then following up on that, as more activity moves online into smaller format channels, what's the difference in terms of the purchasing patterns versus your traditional retailers? Obviously, the consumer is younger. They are clearly focused a little bit more on the smaller brands versus the larger brands, but what about like product category, price points and things like that? Thank you.

Okay. So let's start again. M•A•C is – there've been some recent research issued that M•A•C is the number one brand loved by teenagers in this market in the U.S., and just been published a research on this. All our consumer data showed that M•A•C is among the preferred brands among the millennials and, frankly, all generations. So M•A•C is a business built to be really very sensitive to traffic. And that's the key thing we need to do. The brand is in excellent shape, very desirable. And as I said, to demonstrate this, there are markets around the world where the brand this quarter has been growing 40% or 45%, despite the competition being the same. And so it's a very specific opportunity. Said that, there is definitely a lot of new competition, and every big brand has to face this new competition. On this, I would like to make an – to do an observation. What we see in the data is that this increasing competition, done by an ever-increasing number of brands, is an increasing competition in the momental (55:06) trial. That is, we don't see increasing competition in the area of loyalty and in the area of retention and repeat, which where the profit is. Let me explain this. We have, for example, in all our big brands, take Estée Lauder with Advanced Night Repair, take M•A•C with Studio Fix, the big hero products in this moment are getting more success and increased repeat, despite the increased competition. What is tougher is to get the attention at the trial moment, because of the many small brands , there's more activity out there (55:42). But I would like you to think that the trial moment is not the profitable moment. Trial is an investment. Repeat is a…

Your final question comes from the line of Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co. LLC: Hey, guys. So, I wanted to look at your two heritage brands, Estée Lauder and Clinique, and Estée Lauder looks like it's clearly stabilizing here. There's another quarter of sales growth in both skin care and makeup globally. What are you learning from that? Because on the flipside, it looks like Clinique is still struggling a little bit, both in skin care and in color, not just in the U.S., but it looks like globally as well. So if you could help kind of figure out what could happen to Clinique, and how you're learning from Estée? You mentioned some innovation. Is that really going to be the turning point in Clinique? And then second thing, Tracey, maybe more for you, on just more quantification on the drivers you'd mentioned regarding SG&A coming down in the quarter. How much of it was a shift in IT spend from this quarter to next quarter? Was there an ad spend shift perhaps, versus how much of it was kind of more permanent, in terms of actually the improved efficiencies from cost cutting or channel mix? Thanks, guys.

Okay. I'll start from the Lauder and Clinique question, and Tracey will take over. So, first of all, Lauder is growing, so it's not stabilized. Lauder has been growing in a very exciting way, in my opinion, this quarter. And this is the second quarter in a row where the Lauder brand is growing globally. What is driving that is successful innovation that is hitting new consumers, combined with an amazing work on relaunching hero products, and that's the key point. I mean, Double Wear is a fantastic foundation product that millions of consumers around the world love. But still, there are millions of consumer that never tried this product. And so, the ability of the brand to continue win with winning hero products is the key learning, and this is working very well. And, for example, we have learned that Double Wear in specialty-multi attracts Millennials, despite being a foundation that's been there for many years, and being a fantastic product for many years, attract new Millennials to the brand better than maybe specific Millennial launches targeted to Millennial. So we are now ready to leverage these new discoveries on Lauder and continue the acceleration. The third thing which is helping the Lauder brand is that the Lauder brand is more exposed, positively exposed, to the Chinese consumers and to the Asian dynamics than the Clinique brand, for example. The Clinique brand in the country is more exposed to U.S. department store than any other brand in our portfolio together with M•A•C U.S. But globally, Clinique is more exposed in total. So the key point is that Lauder benefited from the comeback of growth in Asia and it being part of one of the brands, driving the comeback of skin care in Asia. And so the research of Asia, Asia skin care is obviously helping the Lauder brand and in our opinion will continue to grow – to support the growth of the Lauder brand. The learning for Clinique are the same, is more hero products, more activity on innovation that on top of building specific new products, build existing hero products, the Pressed Fresh Vitamin C launch is an example of that. Vitamin C is a new product per se, but at the same time create regimen with existing moisturizer of Clinique and so sell and build hero products and we have tested these successfully in the last year. The art of learning for Clinique is that also Clinique need to accelerate the entrance in growing channels. So also Clinique is further accelerating the expansion in the successful specialty multi-channels where it's playing and online. And so we will continue to do that and, sorry, the last thing on Clinique is the makeup. Clinique is also working to further activate their makeup innovation and activities in fiscal year 2018 that should further boost the brand.

And in terms of the beat this quarter in the margin leverage that we had this quarter, I would say that about 65% of it is a combination of the sales beat as well as the mix of sales. So, favorable channel mix as well as category mix, as Fabrizio was just saying. We did see a pickup in our skin care category and as you all know, that is our most profitable growth category from a margin standpoint. And then the balance of it was some shifts in terms of projects, and as well as A&P spend. So, again, we mentioned there were some of the programs that are launching in Q4 that we are spending behind that were initially thought to launch in Q3. The Cushion Compact would be one of those for Estée Lauder in China, and so we are spending behind that in Q4. So that's some of the shifts.

That concludes today's question-and-answer session. If you were unable to join the entire call, a playback will be available at 1 PM Eastern Time today through May 17. To hear a recording of the call, please dial 855-859-2056, passcode number 9981045. That concludes today's Estée Lauder conference call. We would like to thank you for your participation, and wish you all a good day.