The Estée Lauder Companies Inc. (EL) Q3 2014 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Estée Lauder Companies Fiscal 2014 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 Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir.

Good morning, everyone. On today's call are Fabrizio Freda, President and Chief Executive Officer; Tracey Travis, Executive Vice President and Chief Financial Officer; and Cedric Prouvé, Group President of International for The Esteé Lauder Companies. Cedric will discuss strategy and current results for key markets outside of North America. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. Our discussion of our financial results and our expectations are before restructuring and other charges, including a remeasurement charge related to Venezuela. In addition, we will discuss results before the impact of accelerated retail orders that took place in the prior year quarter due to the implementation of our Strategic Modernization Initiative and the impact on our full year expectations of accelerated retail orders expected in the quarter ending June 30, 2014. You can find reconciliation between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website. And with that, I'll turn it over to Fabrizio.

Thank you, Dennis. Good morning, everyone. I'm pleased to report that our successful track record continued in the third quarter of fiscal 2014 as our strategy helped us deliver excellent results. We have generated sustainable, profitable and uninterrupted year-over-year sales growth quarter after quarter for nearly 5 years. This achievement has been driven by our superb creativity and innovation, broad portfolio of prestige beauty brands, a business that's well diversified across categories, countries and channels and the flexibility to direct our investments to the best opportunities. In the third quarter, our sales rose 12% in local currency, slightly higher than our estimate. Diluted earnings per share before charges were $0.64, ahead of our forecast and up 42% from a year ago. Our strong performance came from leveraging our sales and rebalancing our marketing activities. We continue to be financially disciplined, with the flexibility to support strong growth areas while managing more prudently in others. As a reminder, last year third quarter sales reflected a shift of $94 million of accelerated orders into the second quarter in advance of our SAP rollout. Adjusting for the shift, our underlying local currency sales gain this quarter would have been 8%. That increase is approximately double the annual growth of prestige beauty, which we estimate will be 3% to 4% this year. Global prestige beauty continues to benefit from favorable demographics and attracting new consumers from mass. With our single focus on prestige beauty on a worldwide view into consumer trends identified by our 10-year compass, we have positioned our company in many of the fastest-growing and largest areas, making us confident we can continue outpacing the industry overall. With 30 brands and more than 10 distribution channels around the globe, virtually every part of our business can fuel our growth. Depending on local…

Thank you, Cedric, and good morning, everyone. I will first review our third quarter financial performance and then share our outlook for the remainder of fiscal '14. As a reminder, my commentary excludes the year-over-year impact of restructuring and other charges, primarily the Venezuela remeasurement charges on this morning's press release. Reported net sales for the third quarter rose 11% to $2.55 billion, above the top end of our expectations. Excluding the impact of currency translation, sales grew 12%. Net earnings and diluted earnings per share each rose 42% to $251.7 million and $0.64, respectively. EPS was also above the top end of our expectations due to both the sales performance and greater efficiency from our marketing investments. Our third quarter sales growth was affected by the prior year acceleration of retailer orders into our second quarter that otherwise would have occurred in our third quarter related to the January 2013 rollout of SMI. The impact of that shift in the prior year quarter was $94 million in sales and $78 million in operating income, equal to approximately $0.13 per share. Excluding the impact of the SMI-related order shift and restructuring and other charges, local currency sales would have grown 8% for the quarter and EPS would have grown 10%. As I walk you through the highlights of our third quarter results, my commentary will exclude the impact of the SMI shift in the prior year's quarter, as well as other charges to facilitate easier comparison of our business performance. Looking at our sales growth by region. Net sales in our Americas region increased 7% in local currency, with 6% growth in North America and 13% growth in Latin America. Regarding softer retail sales, as Fabrizio indicated, a combination of challenging weather, a shift in gift timing for Clinique to…

[Operator Instructions] Our first question today comes from Mark Astrachan with Stifel. Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division: I guess one sort of housekeeping question and one other question. So China, could you maybe just give us a bit of your thoughts on what the category growth looks like and sort of try to put the slowdown in retail sales and in your same-store sales in terms of the context around category? And then, Cedric, sort of broadly speaking longer term, how do you think about the percentage of sales that you see coming from this company from developing markets over the next few years? And what do you think the number is, as we sit here today, inclusive of the percentage of sales that you got from travel retail that comes from developing markets?

Okay. That's not one question. So I'll answer first the category, while Cedric will answer the rest. So we -- overall, the prestige industry, we see it growing 3% to 4%. And in the previous year, it's been growing at 4% to 5%, so this is a softer year of growth for global prestige beauty. This is driven by -- continue to be driven by demographic, middle class, aging population. But the softness versus previous year in big markets, particularly in China and U.S., is what, at this point in time, is keeping the category around 3% to 4%. Between categories within prestige beauty, we continue to see skin care as a strong, growing category. But this year, we see a special acceleration globally of the makeup category that become more and more important over time as a promising category within prestige beauty. Now Cedric, do you want to address the international part? Cedric Prouvé: Yes, so if I understood the question, you're asking how we think the emerging market mix is going to evolve in the future. We have a pretty robust process where we have established a framework for all of our '13, '14 emerging markets, looking at them through 2022. I don't have the exact number in mind, but what I would tell you is that with the CAGR that we are experiencing with these emerging markets, we expect that we would probably double their size in the next 4, 5 years. And I think you asked a question about travel retail. Travel retail fundamentals remain very strong. And as we see these emerging populations accessing to travel and we are really growing in key populations that are going to travel increasingly, whether it's the Chinese or the Russians or Middle East or Turkey or Brazilians, so we are seeing an impact not only in the market but, of course, the destination. We think we also have a project on travel retail that would take us to doubling the sales.

Your next question comes from Chris Ferrara with Wells Fargo.

I guess, Tracey, I know you've talked before about the ability to access working capital opportunities, particularly inventory days that you'd need, the final wave of SAP to be up and going. So I guess the question is, with it likely to be 90%-plus done following this next wave, can you access working capital opportunities for this coming holiday season, or do you think it's more of a '15, '16 holiday season opportunity? And if so, just any preliminary thoughts on what you'd do with that cash as it starts to come through would be great.

Great question. So yes, I mean, clearly, the buildup that we saw in this quarter was to support that last major wave of SMI. And certainly, the higher levels that we've carried over the last couple of years have somewhat been driven by the rollout of SMI. So we expect inventory levels to start to steadily come down in fiscal '15, which will certainly free up more cash for us. As I said in my prepared remarks, as we look at our free cash flow, we'd look at the mix of distribution to shareholders that is excess -- outside of any acquisitions that we might be planning to do to redistribute. And that certainly will be what we do in the coming months when we believe we will have even more free cash flow available.

And your next question will come from the line of John Faucher with JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: I want to talk a little bit about the marketing efficiency in the quarter. What drove that? How is it -- is it sustainable as you look at it? Is that one of the reasons why you feel like you've got more confidence in the margin targets? And then there has been some chatter about sort of gift-with-purchase being maybe a little less efficient right now. Are you seeing any of that in the market? So that issue specifically as well.

Yes. On marketing, I'll -- so yes, there is more efficiency that we are making, and there are several things driving the efficiency. First of all, we have an internal project, which is adjusting our investment measured with greater return on these investments. So for example, we are adjusting down some of our television advertising activities and up other areas like digital and in-store and print as a result of some of these learnings that we had across initiatives. So this is about increasing rate of return on every single penny we spend. Second, the overall percent that you save on marketing can be impacted by the kind of innovation we have. For example, if we launch a big innovation in skin care on our big brands like Lauder or Clinique, this tends to be carrying more advertising investment than some of our makeup artist brands. So the mix between innovation across brands has an impact. Second, the mix by country has an impact. There are some countries which are more advertising-driven such as U.S. and other countries which are less advertising-driven such as some of the emerging markets. So overall, given the mix evolution of our business, given our rate of return improvements, we are confident that we can leverage our marketing expenses, still continue to spend more against our key opportunity and initiatives. In terms of gift-with-purchase, yes, we see the gift-with-purchase being less efficient than what it used to be in the past. That's why we are evolving and learning how to adjust our promotional strategy and how also, frankly, to improve the existing gift-with-purchase activity to make them more efficient for the future and more effective. Tracey, I don't know if you want to add something.

Yes, the only thing I'll add to that is that for the full year, we expect our marketing expense as a percent of sales to be slightly leveraged, so you won't see 170 basis points every quarter. But to Fabrizio's point, it does depend on the brand launch activity and the brand support activity, obviously, but we do expect to see a slight leverage this year, full year.

And your next question will come from the line of Olivia Tong with Bank of America Merrill Lynch.

Just following up on the advertising and the spending support, it sounds like over time, natural progression, more emerging markets, more makeup artist brands and more of the luxury brands, that there's a natural pull for the advertising to come down. So can you help us understand what -- help quantify what that kind of change is relative to what you can leverage in terms of just being more efficient?

No. Frankly, I think it's very difficult to quantify because this will depend -- that's exactly what we are doing. As I said in my prepared remarks, we are trying to adjust our business, reflecting the opportunity around the world to being flexible to respond to the various opportunity as they evolve. So it's very difficult to give you details at such level of complex mix element that we have around the world. But internal overall trend, you're right. That's exactly the point we are making. There is a leverage opportunity over time. And the way we are programming our strategy, basically, we call it compass, the way we are working our 5-, 10-year vision and compass of our mix of countries, channels, brands is designed to leverage, to leverage our gross margin, to leverage our marketing expenses to become, over time -- and to go in the right direction. However, you need to also assume that this change of model also bring new costs in some other aspect and areas of the P&L. For example, freestanding stores bring some other area of cost. And importantly, the mix -- the more we grow skin care globally, the more we can leverage all these aspects in our P&L.

And your next question comes from the line of Steve Powers with UBS.

Fabrizio, looking ahead, and I think you alluded to this in your prepared remarks and maybe in response to Chris's question, Tracey, earlier, but just given where the business is heading this fiscal year based on your guidance, should we expect you to revisit some of your longer-term goals alongside fiscal '15 guidance in a few months, whether with respect to the longer-term margin targets, working capital, the capital structure, cash deployment priorities in general. Because I think beyond your ability to continue to grow and expand share amidst all of the competitive and macro challenges, just getting more clarity and confidence in what Estée Lauder thinks it can do longer term in terms of profitability and free cash flow generation is probably one of the highest-order questions for investors. So just curious on how you're thinking about those items or at least a communication of them going forward.

So actually, yes, I have talked about that in my prepared remarks. And so we are progressing faster than what we expected toward our 16.5% margin for 16% previous goal. And so we expect to revise this goal in the August call, as we do every year. And so you will get, at that point, a new plan for the future. We continue to believe that we have the ability to grow 0.5 margin point per year in the several future years, and that's what we are working on. To do that, we will need to continue growing our business, to continue leveraging our business and importantly, as Tracey has explained in her remarks, to start using the SAP and the SMI project to creating value and to -- because we will have visibility on new value-added cost elimination opportunities. Tracey, you want to add something?

Yes. And the only thing I will add to that is one of the things that has worked incredibly well for us over the last few years is the opportunity to both identify and deliver cost savings, as well as invest for the future. So much of what we are experiencing this year is related to investments that we have made in previous years to set up some of our midterm brands for more success, as an example. And we would expect to continue to do that over the next few years. Certainly, SMI gives us a new tool to leverage cost savings, where -- versus some of the prior programs that we have. So we are, as I said in my prepared remarks, quite excited about moving forward in this next journey. We will update all of our goals in the August call. That will be margin, sales, as well as working capital. And as the board authorizes capital structure, we'll update those goals as well.

And your next question comes from the line of Neely Tamminga with Piper Jaffray.

Quick housekeeping question for Tracey. Could you just remind us the size and scope of your e-commerce business and kind of maybe whatever the high-level path of expansion you see for that channel? And then for Cedric, specifically, strategically, mobile commerce seems to be at a much faster adoption rate for your international consumers versus your U.S. consumers based on the work that we do. So as you look at your growth in digital for international, is it really, for you, more about sites, SKUs and brands available on those sites, or is it about key functionalities tied to payment that's going to drive conversion even further?

So on your first question, our e-commerce business is approximately 6% of our total business. There are some markets that are more highly concentrated than others, so the U.S. and the U.K. have more developed e-commerce businesses, e-, m-commerce businesses. And in those markets, the percent of sales are about 10%. And again, that includes both our sites, as well as our customer retailer sites. We are and have seen terrific growth in various markets of the e-commerce business. And certainly, Cedric talked about China, and I'll let him expand on the second part of your question in a moment. And we invest where we see high adoption in terms of e- and m-commerce and where we see -- where we have a brand presence as well so that we can leverage both in-store visibility and consumer availability, as well as e- and m-commerce visibility. Cedric Prouvé: Yes, so this is a big topic for international, but of course, we are very focused on the rollout of our sites around the world. You know the prospective now, it's 6% for total company. In some of our international markets, we are passing 10%, like the U.K. And in some of the emerging markets, we are, of course, in the very early stages of development. In terms of the sites, it's important for us to develop the sites. We have our own sites, and we have retailer sites. In general, what we see is that retailer sites tend to grow a little bit faster, so we have a program to actually help our retail partners developing their online business as well, because initially, there's always a little bit of reluctance and protection of their brick-and-mortar business. What we see that's very important is the future of omni-channel, where actually, we need to integrate online and offline and we get much better consumer efficiency.

And the last part of your question was m-commerce. So our m-commerce in the quarter was just doubling versus last year. So you're right. The growth of m is really, really strong. Cedric Prouvé: Much faster.

And your next question will come from the line of Alice Longley with Buckingham Research.

The organic sales growth in the quarter at 8%, how much do the early buying in Japan contribute to that? And a related question is that early buying clearly helped the quarter, but you were hurt by the promotional activity in China and in the U.S. by Easter, the weather and the Clinique shift. So if we put all those things together, were you may be up 8% adjusted for those gives and takes?

Yes, I would say with those gives and takes, we were up -- we were still up around 8%. So Japan, again, is a large market for us but in the whole scheme of things, from a total company standpoint, would not significantly impact our results -- our segment results, yes, not our total company results for the quarter.

Your 3 observations are correct. There has been some element of stocking these 3 things, but they are not significant numbers.

And your next question will come from the line of Jason English with Goldman Sachs.

This is Sean King in for Jason English. I guess the question that I have is if you could speak a little bit more about what you're seeing in U.S. department stores and what your expectation is for, I guess, the rest of the year given the weakness that we saw in the first quarter.

Yes, we saw a weak first quarter, as we explained, for several reasons, like weather, Easter and the 53rd week, et cetera. So what we see, we believe that we would see some recovery of the trend in the U.S. overall in the market. We are confident that the U.S. market has the potential to continue growing in the mid-single digits for the long term and to continue growing faster than mass. Within that, the mid-tier department stores are going to be the critical issue in terms of acceleration because, as you know, the rest of online, specialty, freestanding stores are, today, having strongest trend than mid-tier department stores. But mid-tier department store acceleration is going to be supported by our innovation in the next 12 months, which is going to be strengthened, to be innovation, which is less cannibalizing. We call it white space innovation. It should bring new consumer and accelerate the trend again, particularly in the skin care area.

And your next question will come from the line of Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: First, I just want a clarification on the 6% to 7% top line growth because until last quarter, that used to be excluding the SMI shift. And I'm trying to understand why now, it includes it, if I heard it correctly, particularly given the better number that you have from the top line for this quarter. And then the non-clarification question, although I would like some clarification about it, is the skin care rebound looks pretty good at about 7%. And a lot of it sounds like it was from innovations, which didn't really materialize last quarter. And I'm trying to understand -- I mean, cannibalization was a big theme last quarter for some of these innovations. I'm trying to understand why it's a little bit different this time, what went wrong last time, perhaps, what's getting better here. And if you can rope in as well the context of the fact you're only spending 1% of your sales on R&D versus some of your competitors spending much, much more, as well as the fact that the margins in skin care look like they were down, that's why the operating income only grew 2%.

Okay, let me [indiscernible] for that question, Ali. In terms of the 6% to 7%, and again, we quoted a lot of numbers on the call with all of the moving parts, so I can understand some of the confusion. And I think the press release does a good job of laying it out when you can refer to it. The 6% to 7% for the full year still does exclude the SMI shift. And obviously, we introduced the new SMI shift for the fourth quarter, but it also excludes that, so that is an SMI-adjusted number of 6% to 7%. What we spoke about was the $125 million to $150 million of advanced shipments we'll see in our fourth quarter are worth about $0.14 to $0.17 of EPS growth for the year, but that is including the next SMI shift. But the 6% to 7% is clean of SMI.

So no change versus our previous 6% to 7%, so basically, we are not changing our full year 6% to 7% x SMI. And in terms of the skin care, so you're right, the skin care had a softer quarter in October, December, and now there is an acceleration. The difference is the kind of innovation that we have in this part of the fiscal year is less cannibalizing. It's more white space. That's why in my prepared remarks, I spoke a lot about that exactly to make this point because I understood there was some confusion. Our innovation going forward will be a good balance between revitalizing our historical SKUs, like Advanced Night Repair on Lauder, and then adding on top non-cannibalizing innovation that enter white space and creates more net extra and then bringing in some of our brands into areas they are not, which is again, non-cannibalizing. So what you see in skin care is not necessarily more innovation in total, but you see that kind of innovation is driving faster growth. And I believe this will continue in the next 12 months, for example, with the innovation I have explained on Clinique in the course of my prepared remarks. Then in terms of the -- what was the third question?

R&D, 1%.

Yes, R&D 1% is -- we actually invest the majority of our R&D activity in skin care. So if you calculate the percent of your investment on the skin care sales, this is actually a higher number. That's one point. And then it's not necessarily apples-with-apples because we have other activities that support our innovation. And last, we -- our innovation program is based a lot in connect and develop with other groups, meaning with the suppliers, with university, with other experts. So we leverage capabilities which are outside of the company with our R&D program in a very profound way.

And your next question comes from the line of Wendy Nicholson with Citi Research.

I just have really quick questions. Number one, can you give us the like-door growth for China, whatever would be consistent with the minus 4% you gave us last quarter? And then, Tracey, on SMI, I know you've talked about how the first sort of aspect of the cost savings is just going to be turning off some of the legacy systems that you've been running sort of in duplicate as you've been in the process of rolling out SAP. So can you quantify for us -- forget about above and beyond, process changes and real benefits from SMI and SAP, but just the turning off of that old system, when is that going to start, and how much is that going to equate to in terms of the benefit to margins?

Okay. So for China, Wendy, the comp or the same-store sales growth in the quarter was minus 7%. And I mentioned in my prepared remarks that the total growth was low single digits, but the comp door sales growth was minus 7%. In terms of SMI and thinking about next year, so we go live in January. We have our normal hyper care period for 3 months, so the team remains in place in order to support that activity. And then we can begin the process of decommissioning legacy systems. From a cost standpoint, I think we'll be able to update more holistically in August some of that activity. There is some savings, though, related to your point of the decommissioning of those systems.

And your next question comes from the line of Caroline Levy with CLSA.

This is Brian Doyle in for Caroline. Just on the U.S. business, we were wondering if there was some shipping of new products maybe ahead of sell-through. The mid-single-digit growth in revenue was ahead of retail data that we've seen, which looked quite a lot weaker. I know you had e-commerce, and owned stores did better, but if you could just help us out on that. And then secondly, I don't know if you actually commented on what you saw in terms of market share trend both in China and the U.S. in the quarter.

So on the shipments, you're correct. We did ship product in the U.S., particularly in the March time frame, to support some April activity. We talked about the Clinique gift that shifted into the fourth quarter from the third quarter, as well as some other activity as well. So that's why you see the disconnect in the third quarter. And that's why we spoke about retail softness, although the numbers from a net standpoint didn't necessarily reflect that.

So what's the second question?

Market share in U.S -- market share in U.S and China.

So the question on the U.S. market share is -- the answer, sorry, on the U.S. market share, we are, by far, the leader in the U.S. We're more than double the second competitor and around 39% overall share. When you look at our quarter and our year, we are doing a very solid results in makeup. Also, please keep in mind that the retail numbers you see is only 60% of our business. The rest is not covered like freestanding store, online, et cetera. So the makeup, very solid. We are growing market share in fragrance and in hair care. We are growing faster than the market online in specialty, our luxury brands. So the specific issue in the U.S. market share is skin care in mid-tier department stores, and we need to address this issue with the non-cannibalizing skin care innovation that we have been describing the course of this call, in our prepared remarks. That's exactly our plan. That's exactly the area of focus that -- the area of softness that we will address with skin care innovation in the next 12 months to go back growing also skin care market share within prestige in the U.S. Cedric Prouvé: And for China, we are the #1 group and we're the #1 brand. But we have stable market share for the year-to-date, and we lost a little bit of market share in the quarter.

And your next question comes from the line of Javier Escalante with Consumer Edge Research.

First, a clarification on what you mentioned in Japan. Could you remind us what percentage of sales the company has in Japan and what was the actual growth of Japan in the third quarter vis-à-vis the second quarter? That will be the clarification because I didn't understand what you said with the prior question. And then more -- the real question has to do with China. The slowdown continued. What do you attribute this slowdown? Because we had seen a pickup of herbal and South Korean brands in our survey work. And how that dovetails into your strategy of opening stores in China at a time that there seems to be a slowdown, what does it mean for margins to the extent that those points of distribution may not be having the kind of throughput that you may want to have?

So I want first to address the China thing, and then we -- the Japan numbers. China, actually, it continued to be a very strong market. I want to clarify that slowdown means that it's gone from double-digit growth in the market to single-digit growth in the market but still remains one of the fastest-growing markets in the world. Second point is China, the decline -- or the stabilization or market growth in Tier 1 city of China is what is seen in the number. Tier 2, Tier 3, Tier 4 cities continued to grow. China online business continued to grow, and China freestanding store and specialty channels continued to grow nicely. So the last point is on your issue of productivity. China is still, today, the, by far, most productive market per door. Just a number -- our doors in China are 5x more productive on average than our doors in the U.S. So a certain decrease on sales per door is to be expected with a strong increase in distribution that is happening and the fact that internal travelers, which are 350 million, now find the product in their city of origins, thanks to online and increased distribution in Tier 2 and Tier 3. So the decline of same-door sales in China is expected and, by the way, will not impact profitability for many years to go because, as I said, it's the most productive market per door of the world as we speak. And the other...

So on Japan, Javier, both Cedric and I spoke about Japan. It's about 4% of our total sales. The market has been performing strongly this year up until, certainly, the third quarter, where obviously, the sales growth accelerated. So even prior to the VAT increase, Japan had been up mid-single digits. In the third quarter, Japan was up high double digits, and that is in advance of, obviously, the April VAT increase, where the VAT went from 5% to 8%. So Cedric spoke about a little bit of softness post VAT in the April time frame, but we would expect that Japan would recover to that mid-single-digit level based on some of the strong programs that we have in the market right now with Clinique and others.

And your next question comes from the line of Bill Schmitz with Deutsche Bank.

Sort of long, convoluted question, but part of the issue in the U.S., could it be -- I know a huge source of growth has been taking brands -- taking share away from some of the mass market brands. And one of your competitors said there's no such thing as affordable luxury, meaning that we're going to focus our business almost exclusively on luxury products because there's sort of no mid-tier. And I think maybe part of the risk -- you can tell me if you think I'm dead wrong. But the middle-class consumer is massively stretched right now, and you see it in some of the IRI-type data. And so is there a risk with the strategy of pulling people out of mass because that consumer, at least for the time being, is very at risk? Or maybe you think I'm being short-term on this, and over time, obviously, that market comes back. Just love some clarification, if you don't mind.

Frankly, I think it's a great question because it's actually true that in this moment, meaning the last 6, 9 months, has been tougher to move people from mass into prestige than it used to be. In fact, you see also in our portfolio the growth of luxury brands is much stronger than the entry price of prestige brands. And in fact, that's why, again, in our prepared remarks, we are explaining that we are turning our focus more balanced into gaining market share within prestige with the kind of innovation we are launching also and a non-cannibalizing one. That, however, is, as you say, a short-term point, meaning that's what is the right to do in this moment. I believe, frankly, that in the long term, the sourcing from mass strategy will continue to be the way to grow the category in prestige, that the middle-class growth will fuel the prestige market. Now in the U.S., this may be slower than in this moment than in other markets, but globally, this is still the clear trend, even today in total. So you're right, but I don't think this is a long-term trend. I think this is just a short-term U.S.-specific adjustment that, in fact, we are doing.

Your final question will come from the line of Nik Modi with RBC Capital Markets.

Fabrizio, I was wondering maybe if you can just touch on the -- one of the earlier questions on emerging markets. And as you think about the 10-year compass and doubling the business over the next 5 years, how should we think about the margin profile? Because many consumer companies see margin degradation as they expand more aggressively in emerging markets. So if you can provide any clarity there, that would be really helpful.

No. Actually, as we explained in the last years, in the majority of our emerging markets, we start to build a business in a way which is accretive and not dilutive to the other -- to the company after a certain amount of year of investment, obviously. So the growing level of the profitability in the emerging markets tends to be in line or accretive to the margin, so we don't see an issue of this kind. Also, the expansion of international contains an important share of travel retail and online. And as you know, those will continue to be among the fastest segments in the international growth, and they are very profit-accretive. And finally, within the emerging market, we tend to choose and prioritize the ones which are more accretive and the brands that we use to build emerging markets. Take this is mind in a very important way. So net, I don't believe the expansion of new channel and new emerging market will be a dilutive risk. If anything, it's one of the mix element that, over time, will play in favor of building our profitability.

Holly, can we wrap up?

Yes. If you were unable to join for the entire call, a playback will be available at 1 p.m. Eastern Time today through May 16. To hear a recording of the call, please dial (855) 859-2056, passcode 30824577. That concludes today's Estée Lauder conference call. I'd like to thank you all for your participation and wish you all a good day.