Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2018 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; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of the remarks today contain forward-looking statements, let me refer 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 I'll turn it over to Fabrizio now.

Thank you, Dennis, and good morning, everyone. Our new fiscal year is off to a terrific start. We delivered an outstanding financial performance in the first quarter, powered by multiple engines of growth across our business. Both sales and earnings per share rose double-digits, and all of our regions and major categories advanced. Our 13% constant currency sales increase exceeded our forecast, and we leveraged the incremental top line results into excellent earnings growth, aided by cost savings and efficiencies. We accelerated the momentum that we experienced at the end of fiscal year 2017 by continuing to focus on fast growing brands, channels, and countries, and fueled these areas with additional resources and investments. We targeted new consumers as we expanded our reach, especially with millennials, and they were drawn to our innovative, high-quality products. More influencers' attention, sophisticated social media programs and a digital-first mindset across our brands helped drive our success. With an encouraging start to the year and continued confidence in our outlook, we are increasing our full-year sales and EPS guidance. In constant currency, we now expect our sales to rise 8% to 9% and earnings per share growth of 12% to 14% in fiscal year 2018. At the same time, we are mindful of external geopolitical and economic issues that could pose challenges to our business. Looking out our categories, makeup has been strong for several years and continued to be robust across many of our brands. Too Faced and BECCA contributed significantly along with Tom Ford and Estée Lauder. What stood out in this quarter, however, was our skin care performance which rebounded strongly, a trend we are seeing in the industry. Our improvement stemmed from strength in existing products and successful recent launches from Estée Lauder, La Mer, and GLAMGLOW, as they captured…

Thank you, Fabrizio, and good morning, everyone. First, I will review our fiscal 2008 first quarter financial results and then cover our expectations for the second quarter and for the full year. As a reminder, my commentary excludes the impact of restructuring and other charges and adjustments primarily related to our Leading Beauty Forward initiative. Net sales for the first quarter were $3.27 billion, up 13% in constant currency compared to the prior-year period. Incremental sales from Too Faced and BECCA contributed approximately 4 percentage points of this growth, as expected, which means our organic growth accelerated this quarter to 9%, exceeding our expectations. Net sales in our Europe, the Middle East and Africa region rose 18% in constant currency, driven by a strong double-digit increase in our global travel retail business. Travel corridors in Asia led much of the growth and they were fueled by strong demand in local markets that drove solid passenger traffic, exceptional like-door growth, and some additional points of sale outside of travel retail. Business was more mixed in the region's other markets. Our sales in the Balkans, Turkey, and India grew strong double-digits and we had solid increases in Italy, the U.K., and Switzerland. These gains were partially offset by declines in Germany, the Middle East, and South Africa. In the Asia/Pacific region, sales rose 17% in constant currency, driven primarily by the accelerated momentum in China. Sales in China rose almost 50%, with broad-based growth across brands and channels. Hong Kong also accelerated, rising 14% off of a very soft performance prior year. We also achieved solid sales growth in Taiwan and Malaysia. Net sales in the Americas grew 7% in constant currency. Excluding the incremental sales from the acquisitions of Too Faced and BECCA, the region's sales declined 3%. The U.S. had…

Our first question today comes from the line of Jason English with Goldman Sachs. Jason English - Goldman Sachs & Co. LLC: Hey. Good morning folks. Congratulations on a strong start to the year.

Thank you. Jason English - Goldman Sachs & Co. LLC: You're welcome, and thank you for letting me ask a question. I guess I wanted to delve a little bit deeper in terms of the swirling tide of what's happening underneath the hood of beauty growth overall, prestige beauty growth. You mentioned skin care getting better, makeup slowing. We've also seen in some of the measured data out there a bit of a slowdown in some of the small brands that have encroached upon the territory in the last couple of years. It's raised some consternation of what it means for the sustainable growth of some of your recent acquisitions. I'd love to hear you weigh in on what you're seeing, and what you expect from Too Faced and BECCA as they roll into the base? But, maybe as importantly, if not more importantly, weigh in with what this shift may mean in terms of your stronghold in skin care, the implications for your market share overall, and the implications for margins on the Forward?

Wow, this is one question. But yes, basically, prestige market we believe will continue to grow 4% to 5%. In this moment, it's pretty solid. The drivers of the global prestige market, frankly, are not changing, and they are the higher consumption of prestige from the millennial consumers. The higher access to luxury and prestige businesses in emerging markets, particularly in China. And the continuous – the higher level of usage, particularly on makeup, of the millennial consumers versus previous generations. The recent improvements of the trend is in skin care where the millennials are also entering more than skin care business. Now what is the consequence of us of this is frankly a better balance of the growth between makeup and skin care is favorable to us because our skin care margins are better than the overall makeup margins, but I want still to remind that, within makeup, there are certain categories like face or foundation, which are also very profitably like many other skin care categories. So it's a very good positive. In term of the impact of this trend on Too Faced and BECCA, makeup is growing. Now the new news is the acceleration of skin care. Frankly, I don't see any big issue with deceleration of makeup, also because makeup continues to grow internationally in a very strong way, and we are, in fact, deploying Too Faced and BECCA more internationally. So what is our expectation for Too Faced and BECCA? Obviously, after we have finished to add them – when we will add them in the base, we plan to continue growing this brand double-digit and, as part of this, the internationalization of these two brands will be an important step.

Our next question comes from the line of Wendy Nicholson with Citi.

Hi. Thank you. My question had to do with the U.S. business. Tracey, I think you threw out a number of the U.S. business being down 3% ex the acquisitions. And I know that's just sort of a reflection of tough times in department stores, et cetera, et cetera. But what's your outlook there? I mean when does the specialty-multi distribution become big enough so that it really offsets your exposure to the department stores so that we can see positive growth in that core organic U.S. growth? Thanks.

Well, I'll start and then perhaps Fabrizio will pipe in. So we do expect, Wendy, to your point and spoke about the fact that we do expect to roll out more brands in specialty-multi this year. We've rolled out Bumble and bumble into specialty-multi. We continue to rollout M·A·C into specialty-multi. So we now have a good representation of brands in specialty-multi, and are doing quite well as we said in our prepared remarks. At the same time, Fabrizio reinforced the fact that we are also partnered with our department store customers to try to stabilize some of the declines that we've seen in their brick-and-mortar business – again, the retailer dot-com business is growing quite nicely, but in the brick-and-mortar business and a lot of good dialogue and discussion there, and we hope to see some improvement in that area. Those two things combined, we expect to come out of this year in a much better position as it relates to the U.S. market, both in terms of us having diversified our distribution more with our brand portfolio and hoping for some stabilization based on the activities of ourselves in combination with our retail partners in department stores and brick-and-mortar.

Yes. And I just want to underline the point that we are working very closely to our department store partners to look for accelerating and finding a better way to attract higher traffics also in the brick-and-mortar malls – stores, and we see some promising signs that some of the activity we are testing and learning about has a stronger effect on consumers than what we have done in the last couple of years. So we will keep focusing on that. But to Tracey's point is the balance (34:30) is being where the consumer is. And I want to underline where the consumer is, is more and more online. And so our strength online including our strength online with our department store partners is a big part of this mitigating impact of the change of traffic in the country.

Our next question comes from the line of Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co. LLC: Hey, guys. So I have an admittedly two-part question about your guidance. So first on top line, the back half of the year implies organic sales growth decelerating from, call it, 9% roughly now to below the 6% to 7% organic sales growth number. So can you talk through that organic top line deceleration a bit? And what's your expectation on comp store versus distribution growth? And then similarly in guidance, so your SG&A this quarter was down 380 basis points it looks like. Can you talk about the drivers of that specifically? How much was mix? So channel, product, geographic, so how much was mix? And how much is actual apples-to-apples cost reduction? And all that's really tied together, but trying to understand the run rate going forward for you guys, especially in the back half of the year. Thank you.

Sure, sure. So let me start with the cadence of the year in terms of organic growth. As you'll recall, Ali, we are anniversarying a fairly soft quarter last year. Our organic growth last year was 2% – a little over 2%, and so the 9% is on top of the 2% from last year from an organic standpoint and obviously not having Too Faced and BECCA in our numbers. We saw sequential improvement throughout the year, particularly in the second half in terms of our organic growth. So we started to see the pickup largely in our Asian markets, so certainly in China, in Hong Kong, as well as in our travel retail markets and that would be global. And so we are anniversarying that. And when you look at the second half of the year, both the combination of having Too Faced and BECCA embedded within the second half of the year still growing double-digits for both of those brands but also anniversarying that sequential improvement that we saw in our Asia and travel retail markets last year, that's where you see the organic growth starting to mitigate a bit in the second half of the year, still meaning that we have a terrific year that we expect to well outgrow the industry and gain share. As it relates to the SG&A in the quarter, I did talk about one timing issue that was embedded in that number, and that was a change in our stock comp plans that actually just caused a timing shift in the recognition of some of our stock comp expense. This is not the tax accounting change, but this is actually embedded in our expenses. So we had a little over 100 basis points of impact of that in terms of favorability in the first quarter that we'll see reverse out in the second and third quarter. The balance of the favorability was, to your point, a combination of mix as well as expense controls, and I would say it's about 50-50 in terms of the balance of between mix and expense controls. After that shift, that timing shift.

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

Great. Thank you. I was curious if you could talk a little bit about GLAMGLOW. It's been about two years since the acquisition and you just called it out as an outstanding double-digit growth in the release. So I was just kind of curious about, I guess, one would be how the product line has expanded, two, any international expansion that's going to happen that maybe kind of slipped beneath the radar screen for me? And just over kind of outlook for that business, particularly now that the skin care category's accelerating. Thanks.

Yeah. No, GLAMGLOW is doing extremely well. It's continued to grow in the U.S. and is expanding internationally, is, in this moment, very successful in the U.K., for example, and is expanding in other markets. The target that we are hitting is the younger consumer. So millennials really like GLAMGLOW. The strength of the GLAMGLOW, in this moment, skin care proposition, are several, but two standouts in my opinion. One is that the glow overall promise of the entire brand, the benefit of glowing skin is one of the most desirable benefits in the market in this moment and, importantly, is the most desirable benefit for younger skins, which is behind a lot of the growth we are seeing in skin care around the world, which is driven by that target group. The second strength is the fact that this brand is focused on masks, and masks is the fastest-growing product category in skin care in this moment in most of the global regions. And third is that this brand is, as you said in your question, expanding into other categories beyond masks. And every single very careful decision we have taken to expand the category is working and is giving great results. It is coherent from a consumer standpoint. And finally, as I already said, the internationalization of the opportunity. So again, a good acquisition, a good promising start of the acceleration of this brand, and a lot still do to in the next years to make this brand one of our mid-size and then one day very big brands in our portfolio.

Our next question comes from the line of Caroline Levy with Macquarie. Caroline Levy - Macquarie Capital (USA), Inc.: Good morning, and congratulations from me. I'd like to know a little bit more about your online growth. You did talk about how strong it was in China. Can you talk about other markets; what you're seeing in terms of growth rates online? Are they accelerating or declining in any of your big markets, specifically the U.S.? And is your market share, as far as you know, bigger or smaller online?

So our online business is still growing very strong. We were up 33% in quarter one. And our online by now represent about 11% of total sales now globally, but the penetration is much higher than 11% in some of the top markets where online is very strong. We are growing our online business this quarter in general in our estimate for the year. We have growth in our brand dot-com, in our retail dot-com, and in platforms. So all the three segments are growing very strongly. This quarter, particularly brand dot-com remain very strong, but we saw a tremendous acceleration of platforms, namely Tmall. And as we said in the prepared remarks, the beginning of our investment in Lazada in Southeast Asia. And we saw amazing progress in retail dot-com across the world. So growth in department store retail dot-com in the U.S., growth in the specialty-multi retail dot-com and growth in many retail dot-coms around the world. Actually, the exception is China where in China is now retail dot-com driven but is Tmall driving the growth. So very strong and, as we said also in the prepared remark, clearly scalable. We have opened 100 sites just this quarter in a very efficient way, scalable and agile, meaning where we see it works, we can invest more. Where it doesn't work, we can smoothly change and revise and review what we're doing.

Our next question comes from the line of Jonathan Feeney with Consumer Edge Research.

Good morning. Thanks very much. I guess bigger picture here, your operating margins were 17% in 2014 and your guidance has you about getting back there by 2020 and recognizing a lot of that in the Americas where you've had a big currency headwind. It's now a tailwind. E-commerce makes it seems to be a tailwind. Why shouldn't you be able to get back towards peak margin in that segment, which would mean peak margin across the company and beyond that? And what are the margin drivers that are still going on with the Americas right now that sort of limit that now that you have these mix factors and maybe a little better performance in department stores happening? Thanks very much.

Yeah. I think that in terms of the currency headwinds that we've had in the past, it's beyond the Americas, right? So, certainly, in the last couple of years, we've had negative currency that has offset quite a few of the initiatives that we've had in terms of cost-savings initiatives. When we guided the year, we said that we expect over the next few years to have on, average, 50 basis points of margin improvement. When you strip out all the noise from last year, we actually had 100 basis points of margin improvement. So – and we certainly have, in addition to continuing with some basic cost-saving programs, have the Leading Beauty Forward initiative, which is expected to deliver a fair amount of savings and allow us to leverage our organization in the next few years. So I believe that we will certainly get back to the historical margin and then some, given all the initiatives that we have over the last few years – over the next few years. But right now, our guidance is, on average, 50 basis points a year. And, as you know, we'll update that at the beginning of every fiscal year.

Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Hi, guys. First, just a quick detail question. Tracey, can you give us a sense of your A&P spending year-over-year as a percent of sales in Q1 and how that compares versus the balance of the year, just given the SG&A performance in Q1? And then, the real question, Fabrizio, is you had this tremendous sales momentum in China in travel retail the last two quarters. How sustainable do you think that momentum is as you look out longer term? Tracey mentioned those areas should slow a bit in the second half with more difficult comparisons. So just want to get some more detail on the key drivers behind the recent strength and how much they extend longer term from your perspective? Thanks.

So I'll start with your question on A&P. In the first quarter, we did see quite a healthy increase in A&P spend. It did not grow as fast as sales that we saw a slight amount of leverage in our A&P spend, but we actually expected to deleverage for the year. Again, we are making investments in several areas that generate momentum for the organization. And so we ultimately expect that it will – the A&P spend will grow faster than what we're projecting our sales growth to grow for the full year, which is a nice increase for us in terms of investment in markets that are growing quite fast.

Yeah. On the other two questions, so the short answer, and then I'll give you more detail, is that we believe that a double-digit growth is sustainable. Now, the 50%, 40% are – may happen again by quarter depending on volatility, but I could not define (47:17) them as sustainable model, obviously. The double-digit growth in China and double-digit growth in retail over the long run should be sustainable trends. Let me go one by one. In China, we are seeing, in this moment, an amazing results, but also in like-door we have 33%. And that's super strong, we are growing market share. And interesting, this quarter we saw these amazing results without increasing the number of cities, but just increasing the number of doors in the cities where we need to be more penetrated, where we need to put more brands. So it's about more establishing our strengths rather than further expanding the number of cities this quarter, which, again, shows the power of online in city – in China, where the cities where we're not expanding brick-and-mortar yet, because it's not yet efficient, we still can reach the city with online. So the model is pretty interesting, pretty sustainable, and has power. The second thing I would like to say on China, the market continued to grow. So we are growing above the market and building market share, but the market was about 30% growth, so very strong. It's about new consumer. It's about new access, as I said in my prepared remarks. The other important thing in China is we are growing in every single channel in China: department stores, Sephora, freestanding stores, online. They're all growing double-digits. So there is a really well spread. And then in every brand in our portfolio, we are growing. We…

Our next question comes from the line of Steph Wissink with Jefferies.

Thanks. Good morning, everyone. Our question relates to skin care margins. We saw a very, very strong increase year-over-year and just generally I think the strongest skin care margins we have in our models going back a couple of decades. I'm just curious if you can talk about sustainability within the margin profile of skin care. And then, Fabrizio, to your comments on the millennials, are you seeing anything trend-wise that would give you confidence in that margin structure in that category? Thank you.

Okay. Skin care – and now, Tracey, please add any perspectives. Skin care has strong margins structurally in our business. However, when there is a beat of skin care sales where the extra skin care sales versus our original forecast comes without a lot of expenses, this margin gets boosted in the short term. So I will not consider the quarter one margins as sustainable, but definitely we can count on stronger than average skin care margins in the future for the growth of skin care. And in terms of millennials, the millennials are obviously getting more and more in skin care in what I define in summary, instant benefits. Before I was speaking about GLAMGLOW and the glow benefit, there are other benefits which are instant, which is about preparing the skin for makeup, is about benefits for the day. So not only traditional anti-aging but instant benefit for the skin are very popular with millennials around the world, and this will continue also because we are driving it and, frankly, the industry is driving that. So I believe this can be an interesting medium-term trend. Tracey?

No. That's good.

Okay.

Our next question comes from the line of Mark Astrachan with Stifel, Nicolaus. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc.: Yes. Thanks, and good morning, everyone. I wanted to ask about how to think about your thoughts on the 4% to 5% category growth. It seems like some conservatism there. Just wanted to explore that a bit more and maybe, put differently, why is company share accelerating if the 4% to 5% category growth is correct? And if you couple your performance with peers like LVMH and L'Oreal, that trio collectively is growing something like three-times what you believe the category is actually growing at. So is it share gains amongst the big three? Is it sustainable as a result of that or what is just driving it? Or, as I said, part of it could be that you're just being a bit conservative with the category growth. So maybe any help there would be appreciated.

Yeah. No, frankly, this is the number that we see, we estimate for the year. Now, could be more 5% than 4%, absolutely, this first quarter was very solid. But you need to look at the – this is a global estimate. Now the retail in the U.S. is not super strong. The retail in Continental Europe is not super strong. U.K. is softening in term of market. The Latin America market is not super strong. So what you see today is actually an acceleration in Asia, absolutely. But you don't see in terms of total market every single region accelerated. So in total, with plus and minus, we still believe a 4% to 5%, probably more in the 5% area is what we see today. Which bring me to the second point that is, yes, we – I cannot speak for our competitors but from the number I see, I would agree with you, the big three are strong and are delivering market share growth overall, and we definitely are. We are growing market share in a significant way. And I think this is explainable in many ways but one way maybe I want to add as far Estée Lauder Company are concerned. The big amount of the small brands and new launches, innovation that's happening in the market has created a much more competitive trial environment, meaning consumer buying new products, try new products, being able to access many more new products. But repurchase is continued to be driven by high-quality products at brand they trust. So while the trial game is more competitive, the repurchase game is still in the hands of the hero franchises, the big brands, and these brands continue to deliver very strong repurchase. Remember, a lot of the profitability is in repurchase because trial, most of the time, is an investment. And so what you see is the power of product quality, the power of prestige experiences into play, and that in this very competitive market out there, still strong brands, great quality products, and fundamental superior experiences remain the reason for success.

Our next question comes from the line of Rupesh Parikh with Oppenheimer. Rupesh Parikh - Oppenheimer & Co., Inc.: Congrats on a great quarter, and thanks for taking my questions. I was curious to get additional thoughts on the U.S. beauty backdrop. Some of the specialty-multi players have called out softening trends in the cosmetics category within the U.S. market. So I was just curious, from your perspective, the dynamics currently playing out in the market, is it a shift more to skin care, less newness, or other factors at play? Thank you.

So I think that there has been a bit of softening in the U.S. market, again, mostly in, in brick-and-mortar. As we spoke about, certainly, we've seen a lot of strength in online. So we are certainly continuing to see that. The other thing that's happening in the U.S. – and Fabrizio was talking about online and how we play in various areas of online, but there are beauty brands that are direct-to-consumer that are online-only that bypass any retailer. And these are some of the indie brands as well. And we see more of this phenomena in the U.S. market than in some of our global markets as well. So I think that, too, is impacting some of the results of some of the retailers. They're not captured in the retailers' dot-com business because they're actually – it's a brand to direct sale, things that come to mind like Kylie Cosmetics for instance.

We have time for one more question. That question comes from the line of Bonnie Herzog with Wells Fargo.

Thank you. Good morning. I wanted to circle back on M·A·C, I just have a couple of questions. It's positive that M·A·C in total grew in the quarter, but I guess I was hoping you could drill down further on M·A·C's performance in North America specifically. Could you talk about your standalone M·A·C stores and how they're performing relative to your own online sales for M·A·C? And then when do you expect M·A·C's performance, particularly in your own M·A·C stores, to start to improve in North America? Thanks.

So M·A·C North America, specifically, as we said, is continuing to decline in the brick-and-mortar part of the business, meaning the department stores and our freestanding stores, and had a tremendous acceleration online and is performing very well in ULTA – in the store of ULTA as we had explained. So that's the mix. So in total, there is a sequential improvement of the trend of the brand. Also, the innovation of M·A·C is planned to improve gradually across the fiscal year to be more in tune for the key trends in the United States of what has been in the past. So our expectation is that the brands, in total, will stabilize over time thanks to the distribution balance, the drive of online, the improved innovation program, and having then in the base the periods that the brand had in the last year. So this gradually will put the brand in a condition to stabilize and then in the longer term grow again. As I said, in many other markets of the world, the brand is flying, and in China even doubling. So, in total, we continue to expect the brand to have the power to grow. But in North America, this will take a little bit of time to stabilize.

That concludes today's question-and-answer session. If you were unable to join the entire call, a playback will be available at 1:00 P.M. Eastern Time today through November 15. To hear a recording of the call, please dial 855-859-2056, pass code number 10665255. 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.