Good day, everyone, and welcome to the Estée Lauder Companies Fiscal 2017 Fourth Quarter and Full Year Conference Call. Today’s call is being recorded and webcast. For opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Dennis D’Andrea. Please go ahead, sir. Dennis D’Andrea: Good morning, everyone. On today’s call, we have Fabrizio Freda, President and Chief Executive Officer; Tracey Travis, Executive Vice President and Chief Financial Officer; and Dennis McEniry, President of ELC Online. Dennis will discuss our current online business as well as our future opportunities. 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 and other adjustments disclosed in our press release. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors 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 now I’ll turn it over to Fabrizio.

Thank you, Dennis, and good morning, everyone. Fiscal year 2017 was another successful year for our company. We build momentum in every quarter, pivoted our business through the channels and categories driving global prestige beauty, created exciting new products, reached new consumers, and strengthened our multiple engines of growth. When the year began, we said we expected our sales to accelerate as demands progressed and they did, building each quarter and culminating in an exceptional final quarter and full year. The fourth quarter results came largely from terrific strengths in China, travel retail and online, as well as from many of our brands including our latest acquisitions. In this new fiscal year, we expect our effective strategy to continue to drive our momentum leading to strong sales and profit growth. For the full year, we delivered sales growth of 7%, approximately 2 points ahead of global prestige beauty, enabling us to once again gain share. This is the eighth consecutive year we generated a strong performance and outperformed the industry, demonstrating the sustainability of our strategy despite inevitable external headwinds. This year was marked by greater economic and geopolitical volatility and terrorism, which curtailed demand in several countries. The trend of consumers shifting their shopping preferences by channel accelerated, which resulted in declining traffic in some U.S. brick-and-mortar department stores. At the same time, global competition intensified as new beauty brands and thousands of new products competed for a share of consumer wallets. Despite these challenges, we strengthened our growth engines and created formidable new ones, which was evident in higher sales across our major product categories. Through our seasonal and luxury brands, we have reinvigorated our fragrance category. We also solidified our leadership in the fast-growing makeup category with the acquisitions of Too Faced and BECCA. These exciting brands…

Thank you, Fabrizio, and good morning, everyone. We created our dedicated online division almost 20 years ago, and today encompasses a global team of nearly 700 people, working on hundreds of direct-to-consumer and retailer sites across 39 countries. We are responsible for building and operating our direct-to-consumer A&M commerce sites partnering with retailers to fuel their growing online businesses as well as spearheading digital technology, innovation and omni-channel initiatives. The online division has historically grown sales at an average annual rate of about 25% and is margin accretive to the company. In fiscal 2017, online sales accelerated, growing 33% to $1.3 billion globally. Many of our brands, in particular Estée Lauder, La Mer, MAC and Tom Ford, had an outstanding year online. Too Faced, a recently acquired brand, more than doubled its online sales when viewed on a 12-month comparable basis. And our top four online markets, e-commerce represents approximately 20% of our sales. Globally online represents 11% of total company sales, up from 4% just five years ago. We continue to outperform total online retail growth in the U.S. and in the UK, our two largest online markets. In China, our third largest market, we nearly doubled online sales and we’re again the top prestige beauty company on Tmall for Singles’ Day. We are also nearly doubled our online sales in other emerging markets such as Russia, Turkey, South Africa and we launched in the UAE, Saudi Arabia and India. Our fiscal 2017 online growth was fueled by both direct-to-consumer and retailer sites, which account for approximately 60% and 40% of our online business respectively. We launched over 45 direct-to-consumer sites on our own platform and third-party platforms such as Tmall. Our signature High-Touch services that are available online set us apart from our competitors. We combine real-life beauty…

Thank you, Dennis, and good morning, everyone. First, I will review our fiscal 2017 fourth quarter and full year financial results, and then cover our expectations for the fiscal 2018 first quarter and full year as well as our three year target. My commentary today excludes the impact of restructuring and other charges and adjustments including Leading Beauty Forward charges, impairment of intangible, adjustments to contingent considerations and the China tax adjustment, which are all disclosed in our press release this morning. Net sales for the fourth quarter were $2.89 billion, up 11% in constant currency compared to the prior year period. Incremental sales from our most recent acquisitions of Too Faced and BECCA contributed approximately 3.5 points of this growth. Our business in the Asia-Pacific region led our growth this quarter, with sales up 18% in constant currency, driven primarily by accelerated momentum in China. Sales in China rose more than 40%, as you heard Fabrizio mention, with broad-based growth across brands and channels. All of our brands grew double or triple digits in China this quarter, and our online business more than doubled. Hong Kong continued its rebound with high single-digit growth ending more than two years of declining sales. We also achieved solid sales growth in Japan, Korea and Indonesia. In Europe, the Middle East and Africa, net sales rose 12% in constant currency, led by a 20% increase in global travel retail. The outstanding growth in the travel retail channel reflects a 9% rise in international passenger traffic and buoyant retail in areas of historical strength for us; notably Hong Kong, Macau and the UK. The strong performance across most of our brand portfolio; in particular Tom Ford, Jo Malone, La Mer, MAC and Estée Lauder was driven by new launch activity and targeted expansion in…

The floor is now open for questions. [Operator Instructions] To ensure everyone has the opportunity to ask their questions, we will limit each person to one question. Time permitting, we will return to you for additional question [Operator Instructions] Our first question today comes from the line of from Faiza Alwy from Deutsche Bank.

Yes. Hi. Good morning. So Tracey, first I just wanted to follow up on the margins. You mentioned 50 basis points per annum for the next three years. But just putting in the guidance for fiscal 2018, it looks like margins are expected to be flat for 2018. So one, is that right? And could you just expand sort of the reasons for why that is the case?

So on a constant currency basis, we expect that margins will improve about 30 to 50 basis points in fiscal 2018. What I said, Faiza, was that on average we expect to deliver about 50 basis points over the next three years. So that could be 30 basis points one year and it could be 70 basis points another year. But the average we expect to achieve over a three-year time horizon is 50 basis points. And obviously that will depend on where our sales growth ranges.

Our next question comes from the line of Ali Dibadj from Bernstein Research.

Hey, guys. Actually, I have two, sorry. One is, can you talk a little bit more about just the cadence of growth between the first half and the second half of 2018, given BECCA and Too Faced acquisition timing? Are you including any acquisitions in the guidance? And especially kind of your – curious about your view on the Americas because ex BECCA and Too Faced at 3.5% for the company, for the quarter is down 2% or 3%. So just kind of cadence of how you roll off successfully those acquisitions. And second, I want to just take advantage, Dennis, of you being on the call. For a while, we’ve asked about Amazon, how that fits into your online strategy. And it sounds like we’re continuing to say that Amazon is not part of the strategy at this point. But my concern obviously is that – and I think many people’s concern is that you might be essentially advocating your brand and price management on Amazon to third parties who are selling your products – you might not be selling but Estée Lauder can be bought on Amazon. So what would you have to see from Amazon to decide to sell there? Thanks for taking the two.

So let me start with the acquisitions and Fabrizio might add on to this. But we called out obviously that they will contribute 4% in the first quarter and again, we’re speaking about Too Faced and BECCA. Different lines or different product lines of ours have somewhat different seasonal cadence in terms of their growth algorithm. So, and for the full year, they will contribute 2%. So we acquired Too Faced and BECCA in the November-December timeframe of last year. And so certainly in the second half, we would expect for total company our growth to moderate about a point or two from the first half due to the fact that we will have Too Faced and BECCA in our sales growth numbers from prior year.

Yes. And on the contour of the cadence, in fact, the activity also – the base of the second six months would be stronger than the base of the first six months. As you remember, we had the first quarter last year at plus 2%, 3%. And so that’s the other factor that we would need to expect. So in our estimate, we do expect a stronger top line in the first six months from the second six months. But we expect also very strong and solid second six months and as we said, a 7% to 8% for the year. On the second question, on your question on Amazon, I mean, we distribute into brand-building distribution, which exercise the key drivers of our prestige beauty including High-Touch services. And so we are ready to distribute in channels where those criterias are fully respected. We do distribute in some global e-commerce platforms like Tmall where those criterias are respected. At this point we do not distribute in Amazon, and in our fiscal year 2018 plan and estimates, there is no distribution in Amazon included.

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

Thank you. Good morning. I was actually hoping you guys could comment on any effects you might have seen from department stores such as Macy’s rolling out discounts on cosmetics. First, have you seen a lift in your sales from this? And then second, what is your view on this strategy? And how have you been working with some of your retail partners as they’re facing headwinds? Fabrizio, you touched on this a bit, but I was hoping you could drill down a little further on some of the strategies that are being implemented to offset the weak foot traffic. Thanks.

Yes, no, absolutely, no. We are really strongly collaborating with our partners in department store to increase traffic. And I mentioned that – but I mentioned merchandising. We are relooking at merchandising activity and we are relooking at our counters, at our system of engagements in store, and we are making some progress, in my opinion. But obviously most importantly is the way innovation gets executed, and the way social media gets executed on the innovation is also an important element to contribute to traffic building again. The third big factor, we are working very aggressively with our partners with online. And they’re making excellent progress online, and we are making on our business very good progress on e-commerce with them as well, and that’s also important. The other important thing that e-commerce is increasing the frequency of purchase of our consumers because their repurchase is readily available, and sometimes in the past, people would have waited to repurchase their regular preferred product to the next visit. Now they don’t need to wait. So basically all the gaps of people in usage or repeated usage of product are being filled by the user online. That’s also very true also in the department store channel, and we are leveraging this reality. We are seeing some initial progress in the strong doors, and as I said in my prepared remark, the problem remains in the smaller malls where traffic for the moment is not yet strong. But I’m optimistic that we may see – we may have in front of us a moment of improvement in this area in fiscal year 2018.

Your next question comes from the line of Mark Astrachan from Stifel.

Yes. Thanks, and morning, everybody. Maybe just a follow-up and then another question. So just back to the Amazon question, would it be fair to look at it sort of a different way and say you may be more willing to put select brands like Clinique, which has struggled a little bit in North America, on a platform like Amazon that potentially helps to get the brand to more consumers? I guess, what would be your thoughts on that? And then just more broadly, on Asia-Pacific, so obviously really strong growth. I’m curious if you could quantify if possible the benefit from geopolitical issues between China and Korea, for example that has contributed just to the overall category accelerating in terms of the results from yours and some of your large competitors, and thoughts on the sustainability of 40% type growth in China?

Yes. So on the first question, as I said, all of our brand – our company is 100% focused on prestige luxury beauty, meaning that all of our brands without exception are distributed in brand-building distribution proven to have all the driver of prestige. So there will not be exception for brands like – any brand. And Clinique, by the way, is very much a key prestige brand in our portfolio. On Asia, yes, 40% is a big number, so I’m not going to say 40% is sustainable. But a double-digit continuous growth in this moment looks very sustainable because there are several dynamics that are playing in the China situation. First of all, the growth in China is depending a lot from the lower import duty that’s been passed on to pricing into the local product. This has pushed the market. Then the second big dynamic is that the Chinese consumers are passionate about makeup and fragrances more and more. So China historically was really driven by skincare. Today, China is driven by three engines, two of which on a very dynamic growth. So this is proven by our retail growth in quarter four, where we had for example some brands like MAC that just doubled the business in one quarter now, obviously helped by the team who launched. But still, the growth in the same-door brick-and-mortar was outstanding, and the same for our Bobbi Brown and the same for our Estée Lauder makeup, where historically Estée Lauder was very successful on skincare only is now adding a very important leg in makeup. This phenomenon is going to continue, in our opinion, and that’s why it would be sustainable. Third point in China, we see growth from department store, from Sephora, from freestanding store, from online; it’s really across and it’s across all the cities. We are in 170 cities. When we look at our online sales, where the purchases come from, an enormous amount of these purchases come from cities we do not operate in brick-and-mortar, which makes the distribution in China efficient, but also the opportunity to grow new consumers come from cities where we do not operate today. And then finally, the portfolio fragrance is going to get traction for the industry and for us, particularly Jo Malone and Tom Ford at this point. So I believe there is a lot of traction and a lot of fundamentals in China in this moment which is very strong. Now, you asked about Korean brands. Yes, in this moment Korean brands in China are weaker than usual and this may not be the sustainable part of the story. But that’s why I wanted first to explain the sustainable part of the story because I believe that even when the Korea brands demand had to stabilize, I think we will continue to see good traction in China.

Your next question comes from the line of Erinn Murphy from Piper Jaffray.

Thanks. Good morning. I guess I just had a question on Asia, in particular, from an operating income perspective. Tracey, could you just speak to some of the drivers in the quarter that led to that slide in profitability? And then as you go into fiscal 2018, what’s assumed in profitability of this region? Thank you.

So in the fourth quarter, one of the things that we saw was great new product launch from some of our brands. So the Estée Lauder brand, as Fabrizio mentioned in his prepared remarks, launched their double-wear cushion compact. There were new launches against Nutritious. MAC had their – the launch of Tmall, so we had a fair amount of advertising investment in the fourth quarter to support new product launch activity in China and in some other markets in the Asia-Pacific region. The Asia-Pacific region is a strong and profitable region for us. And to the extent that we had new product launches, and certainly you’ve seen this from us in the past, one of the ways that we, given our new product launch cadence, one of the ways that we certainly start the year strong is by investing at the end of the year against momentum launches that we see. The other new product that we expect to support in Asia-Pacific this year is the Fresh Pressed launch from Clinique, which also has had tremendously strong momentum. And we expect that to continue.

Your next question comes from the line of Nik Modi from RBC Capital Markets.

Hey. Good morning. This is Russ Miller on for Nick.

Hi.

I just wanted to ask on the MAC U.S. business. Can you provide any more details of the state of business there? Is MAC U.S. meeting your expectations, and what are the plans to further improve the business moving forward? Thank you.

Yes. MAC U.S. is improving, that has still been declining in the last quarter. So our expectation is that the brand will improve by better innovation, stronger social media, improvement in store and obviously activities, which are about the assortment and the marketing plans of the brand, which are in evolution to better match the consumer expectation and the consumer evolution. And also the distribution, MAC is still very much exposed in the U.S. to the foot traffic of brick-and-mortar department stores. And so this will be for some time. And so we will – we are working to improve MAC trend in the U.S. as well. But for the moment, we are assuming that MAC in the U.S. will get the majority of the improvement from the marketing I said and from the ULTA distribution that I quoted in my prepared remarks. The rest of the benefit will come from the international business. Most importantly, I want to underline that MAC online in the U.S., as was explained in the prepared remark of Dennis, grew 29% last year and we are expecting this to continue. So in summary, better marketing, better in-store activities, more social media, ULTA distributions, strong online are the positives that should create the improvements of MAC And we are for the moment not assuming an enormous improvement in the brick-and-mortar department store part in our estimates but we are working on it actively.

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

Good morning. It’s [indiscernible] on for Andrea today. Just want to dive in a little bit more in the skin care business. Can you talk a little bit more about the accelerators, other drivers of acceleration there with skin care being less strong more recently than historically? Are you seeing a pickup in the underlying market that’s helping to grow the acceleration? And how are you thinking about that market going forward within your expectations for the 4% to 5% growth globally?

So, skin care has been picking up and certainly very strongly in the fourth quarter and we do have higher expectations. Some higher expectations for skin care growth this year than we’ve seen certainly in the last couple of years. And there are a few things driving it. The first I would say is strong innovation. So Clinique, La Mer, Estée Lauder, all have strong innovation programs that they’ve launched and products that they’ve launched in fiscal 2017 that we expect to carry into fiscal 2018 along with new innovation that they have planned. The other driver is obviously the momentum that we’re seeing with Chinese traveling consumers. Both in China as well as in the travel quarters and that is driving a lot of skin care growth and consumption as well in various channels of business. We’re also seeing a bit of a pickup in Russian travelers as well which helps our skin care business.

Your next question comes from the line of Dara Mohsenian from Morgan Stanley.

Hi. A few questions for Dennis. First, just detail-wise, can you give us a sense for e-commerce profitability relative to the rest of the Estée organization? And then within e-commerce the difference in margins between DTC versus your partner business? And then the broader question is, and this will build on from the earlier questions, but conceptually there are a number of online retailers, some fairly sizable that have this open architecture beauty assortments and not just premium brands but mass brands also. Can you give us more insight on how you decide which online retailers you’re willing to partner with or not given your prestige positioning? And if they’re large e-tailers you’re not exposed to, does that create risk longer term from a market share perspective? And then within the e-commerce sites you’re at, how do you protect the prestige positioning given obviously ordering off a website is very different than purchasing a product at a department store. So how do you kind of manage to keep the prestige positioning within e-commerce? Thanks.

Okay. Let me address a lot of that. First of all, the margin is accretive to the company in total. It’s accretive across our own sites and our direct-to-consumer businesses and it’s accretive in our retailer business as well. So all of the components of the business is accretive to the company. Obviously, it varies by business around the world. We operate over 700 sites around the world. So, depending on how long the site has been launched and what sort of scale we have in that particular business or that brand in that country. But we’re really, really happy with the profit accretion of the channel. That’s number one. In terms of the amount of retailers we work with, we work with over 200 retailers around the world. I personally spend a lot of time with department store CEOs, with the heads of e-commerce businesses in different markets around the world. And frankly the number one consideration in which ones that we focus our effort on are two things: where is the consumer going? And secondly, what is their ability to help build our brands and to build our brand equity? Okay. In terms of prestige, we focus a lot on building the beauty expertise of what consumers expect in historically in the real world or in the brick-and-mortar world and we bring that expertise online by marrying both real people with real expertise and technology to help them provide really, really outstanding makeup, skin care, fragrance advice online. So we do not believe that it is all about putting up a website and letting people order and then processing packages. The expertise and the people part of it is as important to our brands and to our prestige positioning as anything else that we do on the technology side.

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

Great. Thanks. First in terms of just back to the U.S. and promotions, I mean how do you – obviously, a lot of that is being funded by the retailer at this point but how do you protect against a potential that the end consumer starts to get used to accepting discounts or delays purchases waiting for a deal, which does ultimately impact the health of the category for you guys? And then on margins specifically for fiscal 2018, I guess I’d like to better understand what kind of benefits you expect from Leading Beauty Forward for this year because you had said that you expect the benefits to outweigh the reinvestment. But 30 to 50 basis points sounds a bit light though obviously to your 50 basis point annual expectation, especially given that FX is turning from a tailwind into – from a headwind into a tailwind and the hit from M&A should lap as the year progresses. Thank you.

Yes. I’ll start with – to say your question is if the consumer will get accustomed to promotion. I mean, they are – consumers are segmented, and there are certain consumers that do wait for promotional opportunities to buy and this is not new. This has always been the case. And there are other consumers that don’t. But on average, I just want to make you think that the growing part of the business is the non-promoted one. And the growing – the fastest-growing channels are the channels that promote the least. And so in total, I would say that prestige beauty is from a consumer standpoint is an industry that need a moderate amount of promotions. And then where there are excessive promotions is a short-term event that generally doesn’t generate a change in consumer behaviors. And then I think Tracey will address Leading Beauty Forward.

Yes. So Leading Beauty Forward, when we announced the program last year, one of the things that we said was fiscal 2018, we would start to see some of the benefits of the program. We expected that we would reinvest those benefits back in talent in some areas and capabilities. So we talked a lot in our prepared remarks about the digital technology and skill sets that we are enabling in the company that are important for us to drive our – the growth of our brands, certainly, in fiscal 2018 and beyond. So net-net, we are not seeing a flow-through of any of those benefits of Leading Beauty Forward because we are reinvesting them in fiscal 2018. You will start to see more of a flow-through in future years, in 2019 and 2020, and obviously the full benefits of the program in fiscal 2020, 2021.

Your next question comes from the line of Rupesh Parikh from Oppenheimer.

So, I also wanted to touch on the U.S. prestige category. So, clearly, we’re seeing more discounting from the department store channel. So, I was just curious from your perspective, has anything changed for the category fundamentals? And as you look at your results recently, have the growth rates – I guess maybe not your results, but within the industry at all changed in prestige beauty the past few months? Thank you.

So I’m not sure I understand completely the question. But no, we don’t see any change in the dynamic of the industry. Actually, let me take the opportunity to explain one important thing. Obviously, the industry is based on trial and repurchase. What the change of the last few years is that the trial activity has become more competitive. There are more brands that have been in some cases promotions, they’ve been more active. And so, the world of trial has become more competitive. But the world of trial tends to be an investment. The world of repurchase, loyalty, actually has not changed a lot. The loyalty level on our brands are improving in some cases, stable in others. The repurchase rate remains very high for our hero SKUs. So, what’s happening is that the repurchase is still driven by product quality and by product performance and by brand loyalty. And those things are not changing much less. Now, it happened that the majority of the profitability is in the repurchase gain. And so, the brands and the companies that own the repurchase gain are owning more of the profit and more of the cash. And the trial gain which is becoming more competitive is what we are all reacting to, improving our social media activation, our innovation, our activation in-store and all the rest. Promotion is only one element of how this is evolving and, frankly, not the biggest one in my opinion.

Your next question comes from the line of Lauren Lieberman with Barclays.

Thanks. Good morning. I guess, everyone else have done two things, I’m going to go with two things. First is just on Clinique. So, one was just performance in the quarter, but more specifically, I was curious if you could parse out Clinique performance in the channels where there’s traffic. So, whether it’s specialty-multi, also specifically online, things like that. And anything you – whether you feel like there are green shoots or examples of where Clinique is improving outside of the Fresh Pressed or if the brand still kind of needs a bit more love and attention. MAC freestanding stores, I don’t think we got an update there on the U.S. performance. I know you talked about brick-and-mortar challenges ongoing. And then the final thing was on SMI. Tracey, I think you said that the savings were over $200 million this year. I believe the guidance was $150 million. So, I just want to confirm that SMI came in above plan and if you’re willing to share anything on the outlook for 2018. Thanks.

So, on stats and then Tracey, you take SMI. So, on Clinique. Clinique is growing in Asia. Clinique is growing in Europe. Clinique is growing in Latin America. I’ll ask Dennis in a second to speak about Clinique online. Fresh Pressed has been a success. There are several aspect in the Clinique business which is growing. Clinique in brick-and-mortar U.S. department store is declining. And since this is still an important part of Clinique business, obviously, this is offsetting some of the positive moments. Sorry, then you asked about specialty, Clinique is growing in specialty in the U.S. Dennis, on online?

So, Clinique in – first of all online Clinique is our second biggest business. It’s been the first business and the first brand that we ever launched in the company and it is growing over 23% globally. So, it’s very strong for us.

Yes. And then on MAC again, as I said before, I already answered the question on what type of positive signs from MAC which is, MAC international and MAC online, ULTA, MAC in the U.S., the improvements in MAC marketing activity, et cetera. But yes, the two areas of MAC which are still taking the brand down are brick-and-mortar brand store and freestanding store U.S. But freestanding store outside of the U.S. keep growing profitably. So, those are the two areas where we are working to further turn around the MAC However, to be clear, the expectation in fiscal year 2018 is MAC to grow because between the positive and these two areas still to be fixed, the positive are much bigger than these two areas still to be fixed. And then on SMI?

So, you’re right, Lauren, on SMI. We did deliver over $200 million in terms of savings this year and we did expect $150 million. So, we were able to drive additional cost saving programs in certain areas. Next year, we’re expecting around the $150 million to $200 million savings as well. Some of the programs under SMI are dwindling a bit in terms of the opportunity. Some of the actions and programs under Leading Beauty Forward allows us to reignite some of those areas. Indirect procurement would be one of those areas where we managed to get a fair amount of lower hanging fruit in the last two years. We’ve expanded the number of categories now that we are focused on with standing up a new organization. And that should allow us to continue to drive savings in that particular area. So, the classification in total, both in terms of our ongoing cost saving programs and what Leading Beauty Forward is enabling, we expect to have continuous improvement in not just annual cost savings but certainly the leverage of the company as our sales grow.

Your next question comes from the line of Jason English from Goldman Sachs.

Hey. Good morning, folks.

Good morning.

Morning.

Thank you for squeezing me in. I wanted to come back to margins as well. Congratulations on the 100 bps of underlying margin growth you achieved last year. But it has gotten you to a point where you’re kind of roughly parity with where you were in calendar 2013, so, kind of hovering around at 15.9%. Now, I know there’s been a number of extraneous factors in the battered margins are proven to be headwinds last couple years you tried to overcome. But many of those issues sound like they’re dissipating, right? FX, no longer the same headwind. Skin care acceleration through the year, you’re talking about more acceleration next year. A number of times throughout the call, you touched on the channel shift and acknowledged that much of that channel shift is margin accretive. And you’ve got Leading Beauty Forward coming at the same time. So, why couldn’t there be a bit of a catch-up here after the stagnation for a number of years? And is there conservatism kind of embedded in maybe the average 50 bps of expansion over the next few years? Or are there other offsets that we need to be contemplating whether they’d be in the form of how the business is changing, shifting, cost to compete reinvestments, et cetera? Can you help me understand that?

Sure, Jason. So, in terms of over the next three years, you’re absolutely correct that we should – I mean, hopefully, and the macro environment is quite volatile. But as we see currency now becoming more favorable, if currency rates are better than what we have anticipated and reflected in our guidance, there will be upside related to margin. And we certainly would hope to recover some of the margin that we’ve lost from some of the currency hits that we’ve taken over the last few years. In terms of the acquisitions, yes, our acquisitions, if they actually outperform what we have anticipated then that too will allow us greater margin expansion. Right now as you heard, we’re expecting about $0.01 of impact from Too Faced and BECCA. If they perform better this year, that will improve our margins as well. And then Leading Beauty Forward, to the extent that some of those savings get realized earlier, and we have a tremendous amount of momentum against this program. There has been adoption across the company. To the extent that we can actually start realizing some of those savings earlier, then that that also will impact. So, I think we’re pretty confident that we have a lot of irons in the fire in terms of improving margin. What we’re not confident of and hence the reason why we are saying around 50 basis points of margin expansion annually, so that’s an average over the three-year time horizon. Again, it could be 30 bps one year and 70 bps or, like you indicated, 100 bps last year, excluding some of those items. What we’re not confident of is the macro environment. So, we have experienced a fair amount of geopolitical tension and volatility whether it’s in our travel retail channel or in many of our markets. And so, we don’t think it’s prudent for us to not consider that that could be a factor this year and over the next few years. So, whether you call that conservatism or whether you call that prudence, that is certainly contemplated in our guidance. The last thing I would say is we do have a number of new brands that we are building. We’ve done several acquisitions, as you indicated, over the last few years. And we are supporting them in terms of distribution growth and, in many cases, building their presence in markets that – new markets that they’re entering globally. And so, that is factored into our guidance as well.

Your next question comes from the line of Steph Wissink from Jefferies.

Thank you. Good morning, everyone. Just a real quick question on your channel mix. I think you indicated department stores are about 17%, online about 20%. I’m just wondering if you can help bridge the balance across specialty-multi, freestanding and some of the other venues where you’re distributing? Thank you.

So, just a reminder that that 17% was U.S. department stores. Our department store mix now is about 40% globally, a little over 40% globally. And so, this is one of the first years where actually our overseas department store business is larger than our U.S. department store business. On specialty-multi we talked about on the last call, and with Too Faced and BECCA and what they have added to the specialty-multi channel given their presence, we’re at about 11% in terms of specialty-multi is where we ended the year. And then Dennis talked about where we’re at online, which is in the 9% to 10%, and expecting 11% in this upcoming year. So, that generally is where we’re at.

Yes, I would like to take the opportunity of this question to make one thing noticeable, that we have double-digit growth in many of these channels. But if you just take the combination of travel retail, specialty-multi, online, you arrive, just with these three, at well about one-third of the company. And this is growing very strongly and very double-digit, more than 20% each one of these channels, et cetera. So, we are in a situation from a channel diversification that we have more than one-third of the company growing in the high-20s and that’s very, very strong. So, the channel mix is actually a great point of our strategy of multiple engines of growth and diversification and is one of the key element which is building momentum.

Your next question comes from the line of Steve Powers from UBS. Mr. Powers, your line’s open.

Hello. Can you hear me?

Yes.

Great. Sorry about that. Just a couple of quick follow-ups on the U.S. business, if I could. As you look forward to the second half when BECCA and Too Faced become part of the base business, do you expect U.S. growth to return to positive territory at that point? And can that continue? Question number one. And then just to clarify on your 2018 outlook, do you expect new door openings versus closings to be a net tailwind to the U.S. business in fiscal 2018 because there’s a lot of stuff that you’re putting in motion? Or are you still factoring in some net headwind from department store closings? Just some clarity there would be great. Thank you.

So, yes, in our plans, there is a stabilization of the U.S. business without BECCA and Too Faced and absolutely. That’s what we are aiming for and working for. And the second question, we believe that we can open more distribution points than what will be closed. And so, this will be – is in our numbers. There’s still a net improvement of consumer reach in our plans.

Your next question comes from the line of Dana Telsey from Telsey Advisory Group.

Good morning, everyone. As you think about the freestanding store footprint and how it’s growing relative to online, what do you think the potential is for freestanding stores and also specialty-multi channel? How does that penetration develop? And then new product launches, as you look going forward, what brands do you think will have the most impactful launches of in fiscal 2018, and is there any quarters we should look to for that? Thank you.

So, freestanding – go, go.

Yes. So, Dana, we expect that freestanding stores will continue to show strong growth. And one of the things that Dennis spoke about is how we are enabling more productivity in our freestanding stores through linking them to more omni-channel capabilities, whether it’s loyalty programs or other things that we are doing to try to keep the consumer in a branded experience leveraging technology and we will continue to do that. So, we certainly recognize that even though online represents 11% of our sales mix, that means 89% is in brick-and-mortar somewhere. And freestanding stores are still – play an important role. There is no question that we are making sure, as we look at opening new freestanding stores, that we are contemplating the online growth in the region and how many points of distribution we need in a particular market so that we can make sure we are not over-saturating any market with brick-and-mortar distribution with the fast growth of online. So, that is factored into our retail plans. As it relates to specialty-multi, specialty-multi has continued to grow quite strongly, both the online sites of specialty-multi which Dennis talked about how he works with all of our retail partners with their online business to make sure our brands are represented well online. But we’re also seeing strong growth in specialty-multi. In the U.S., certainly, ULTA and Sephora, but also in our international markets as well. So, we expect that that, too, will continue as a great alternative for consumers. One of the things that we see and, again, as both Fabrizio and Dennis mentioned, we are getting much better at tracking our consumer and utilizing our consumer information for decision-making. And we see that whether it’s millennials or Gen X or Gen Z or we, ageless, consumers like to shop multiple channels. And so, there’s more choice than ever out there in terms of shopping. Online is very convenient, but in-store offers a different experience. And certainly freestanding stores offer a different experience than specialty-multi, than department stores. But she likes to shop multiple experiences. And so, we are certainly focused on making sure all of our points of distribution, including online, are well-represented from a branding experience.

In terms of innovation, we have one of the strongest innovation pipelines. As I said in my prepared remarks, the innovation in fiscal 2018 will be also very focused on reinforcing the existing very strong franchises which are in all brands – Too Faced, Peach or Better Than Sex, Estée Lauder Advanced Night Repair, Double Wear, Clinique taking the Fresh Pressed concept to the next level, et cetera, et cetera. So, there is a lot of buildup. You are now going to see one blockbuster which is a high-return, high-risk. You’re going to see every brand to have three, five, big serious initiative well-focused by category. And the portfolio of innovation of the company to cover all the opportunity by sub-category and region in a much more sophisticated way than we did in the past, thanks to better analytic and better preplanning.

Your final question comes from the line of Ali Dibadj from Bernstein Research.

Hey, guys. Thanks very much for the follow-up. Just want to go to the impairment charges of $31 million on Parfums Frédéric Malle and Olio Lusso. What percentage of the purchase price of those brands did that represent? And clearly, that’s typically because the business didn’t perform quite as well as you’d thought. So, I’d love to understand why and if it’s helping you think about the future acquisitions in any way. Thank you.

No. Frankly, this is very small. I mean, only one small fragrance brand is really in these impairment. And then one very small brand that was part of the acquisition before. And most of the other brands are growing double-digit, triple-digit, out of our [indiscernible] where we’re including the small brands where we have an impairment on. They are all growing double-digit or triple-digit. And in the case of the impairment, it actually is a timing issue. So, frankly, no. We believe our acquisitions have been very successful and there is only one brand that has a small delay which in the context of the many acquisition that we have done is frankly not relevant. We are very satisfied with acquisition and we believe that BECCA and Too Faced and the other acquisition we have done particularly in the fragrances, or GLAMGLOW for example, are extremely successful and will continue to be a big part of our growth.

That concludes today’s question-and-answer session. If you are unable to join the entire call, a playback will be available at 1:00 PM Eastern Time today through September 1. To hear a recording of the call, please dial 855-859-2056. Pass code number 65289585. That concludes today’s Estée Lauder Call. I would like to thank you for your participation and wish you all a good day.