The Estée Lauder Companies Inc. (EL) Q1 2015 Earnings Report, Transcript and Summary

Dennis D'Andrea - Vice President of Investor Relations Fabrizio Freda - Chief Executive Officer, President and Director Tracey Thomas Travis - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Nik Modi - RBC Capital Markets, LLC, Research Division Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division Wendy Nicholson - Citigroup Inc, Research Division Caroline S. Levy - CLSA Limited, Research Division Lauren R. Lieberman - Barclays Capital, Research Division John A. Faucher - JP Morgan Chase & Co, Research Division Olivia Tong - BofA Merrill Lynch, Research Division William Schmitz - Deutsche Bank AG, Research Division Michael Steib - Crédit Suisse AG, Research Division Megan Cody - UBS Investment Bank, Research Division Christopher Ferrara - Wells Fargo Securities, LLC, Research Division Alice Beebe Longley - The Buckingham Research Group Incorporated Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2015 First Quarter Conference Call. Today's call is being recorded and webcast. For opening remarks and introductions, I would like turn the call over to the Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir.

Good morning, everyone. On today's call are Fabrizio Freda, President and Chief Executive Officer; and Tracey Travis, Executive Vice President and Chief Financial Officer. Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. Our discussion of our financial results and our expectations are before the impact of accelerated retail orders that took place in the fourth quarter of fiscal 2014 due to the July implementation of our Strategic Modernization Initiative, which would have occurred in our fiscal 2015 first quarter. We will note the impact of the shift in orders on our fiscal 2015 first quarter results and full year expectations. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investor Relations section of our website. I'll turn the call over to Fabrizio.

Thank you, Dennis, and good morning, everyone. During the first quarter of fiscal 2015, we delivered a solid financial performance despite a difficult global backdrop, highlighting the benefit of our broadly diversified business. Like many companies, we operated against several macroeconomic and geopolitical issues, ranging from the foreign currency headwinds and slower growth in some of our markets to unrest in Hong Kong, the Middle East and Ukraine. We weren't immune to the challenges, but many of our brands, countries and channels were resilient and even vibrant. Our best-performing areas were our luxury and makeup brands, our online, travel retail and freestanding store channel as well as the European region where we gained share. Our sales rose 5% in local currency, meeting our expectations and continuing a pattern on profitable quarterly growth. Earning per share came in above our forecast. Prestige Beauty overall remains healthy, as consumers are constantly drawn to innovative products and the hottest trends. Our creativity and ability to react quickly has enabled us to capitalize on many areas that we are winning. Looking across prestige beauty. Makeup is in the spotlight, generating the stronger growth. Our 3 fantastic makeup-focused brands helped fuel this trend with great success. Each one grew double digits. M-A-C is our largest makeup brands and a true powerhouse and generated another terrific quarter, with strong momentum globally and standout results in the U.K. and Latin America. We continue to build awareness and strategically fill distribution voids by opening freestanding stores and M-A-C created product launches continue to attract consumers. Lipsticks were strong sellers as well our new innovative kits and assortment of pallets. M-A-C next VIVA GLAM spoke model, Miley Cyrus is certain to bring attention to the brand and to aid age-related philanthropic causes when the new lip products will launch…

Thank you, Fabrizio, and good morning, everyone. I will briefly review our fiscal 2015 first quarter results and then I will share with you our expectations for the second quarter and the full year. To better demonstrate our underlying business performance, my commentary excludes the first quarter and full year impact of the acceleration of retailer orders that shifted sales from the first quarter of fiscal 2015 and the fourth quarter of fiscal 2014 related to our July rollout of SMI. The impact of that shift was $178 million in sales and $127 million in operating income, equal to approximately $0.21 per share. Also excluded is the year-over-year impact of restructuring and other charges. Net sales for the first quarter rose 5% as reported and also in local currency, in line with our expectations. Every geographic region and every product category contributed to constant currency sales growth in the quarter, demonstrating the benefits of our diverse portfolio. Our gross profit margin of 79.6% was 10 basis points below the prior year period, primarily reflecting the net of unfavorable mix offset by favorable pricing. Operating expenses improved 10 basis points to 62.7% of sales. Advertising and marketing investment decreased 140 basis points as planned, as we anniversary heavy spending from last year's major skin care and fragrance launches in the quarter, with the smaller product launches in this year's quarter. This favorability was offset primarily by a combination of higher retail store operating costs and investment spending behind key initiatives. As a result, operating margin remained unchanged at 16.9%, earnings per share increased to $0.80, above the top end of our guidance range, reflecting more disciplined cost management. All elements of working capital improved in the quarter, with inventory days to sell improving by 2 days to 193 days. During the…

[Operator Instructions] Our first question today comes from the line of Nik Modi with RBC Capital Management.

A couple questions. The -- just thinking about your travel retail business, and you've been building that business by conversion partly. And I'm just curious if you can give us an update on that strategy. I think it was 10% of all shoppers going through duty-free were actually buying one of your products. And I'm just curious if you can give us an update on that. And then on the acquisitions, should we be thinking about a Smashbox type of growth curves here in terms of how it's going to contribute to your business? If you can just frame how we should think about these acquisitions and its impact on the P&L?

Okay, on travel retail, we are working very actively on conversion. Things like advertising in light boxes in the biggest airports for us, for example, working, marketing activities, airport online activities connected and obviously launches and merchandising on the launches of our new initiatives. We started from about 10% of people we are converting. We believe this is growing and now we are in the range of 12%, 15%. Over time, this may continue. Now obviously, there is no perfect number of this, but those are numbers that we collect airport-by-airport with our experience there, so it's difficult to do an average global number after this. But we are sure that the conversion ability of our activity is increasing and we will continue work on this strategy, which I believe in the medium, long term is a very important piece of the continuous increase of sales in travel retail. In term of our acquisitions, those are very small brands that we have acquired really to grow for the long term. Our acquisition strategy includes the idea of taking some brand that we believe are outstanding and particularly which are managed by outstanding entrepreneurs that we really love to get also in the company working with us on these brands and to grow these brands over the long term in their space. Now we have capabilities. We cover 140 countries. We have great R&D capability. We cover travel retail, we cover online. So we can give to these small brand access to opportunities they didn't have before. And this will drive, we believe, outstanding growth over the years. Is more think of La Mer, when we acquired La Mer, was a $1 million business and today, is the brand that it is. So that's the spirit, but it's not comparable to Smashbox. Smashbox was already a mid-sized brand and obviously has been growing, is doing fantastic, but is doing fantastic from an already bigger base.

So the impact on our P&L this year will be de minimis and in the next few years, relatively small as well, although the brands are expected to have strong accelerated top line growth.

And then just one question on skin care. I mean, you talked a lot about the initiatives that you have in place, but this is a business that's been soft for the last few quarters. And just curious, from a competitive standpoint, is there anything that we should be thinking about in a certain region or a certain competitor that might make your path back to growth a little bit more challenging?

So I think that we have been growing a bit less in skin care in the last quarters than we used to. And this is because we have a big business and because some of our initiatives delivered below our original expectation. But I still believe our skin care innovation pipeline is very solid. The opportunity to grow skin care in the long term remains big. The way we are thinking is we are increasing the amount of innovation in skin care. That's the concept. We have -- the growth of new categories in the skin care arena has been very interesting and very promising and we need to tap more into these new categories to grow more aggressively skin care, which we are going to do.

And your next question is from the line of Ali Dibadj with Sanford C. Bernstein & Co. Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division: A couple things I wanted to get some more clarity on. One is to go back to skin care. One of the drivers of innovation, I thought, as you mentioned last conference call, was R&D spend. We haven't seen that tick up, so want to get an update on that and if that's going to help your skin care numbers going forward. And how much of that skin care weakness was related to the Americas, which obviously, it was flat, the U.S. was down. We're starting to hear that some of the retailers are doing better in the mask area and want to know if you think that has an impact on your business. And then 2 other questions, more long term in nature. One is from the market rate, that you still believe in the kind of 3% to 4% range, albeit more towards the 3% range, but you're taking down your top line by about 1 point. Is that just kind of in the rounding, or do you think you're exposed more than the marketplace to some areas of weakness? And then the last part, I apologize, trying to squeeze it in, the last part is this year, you're saying 7% to 10% EPS growth x currencies, x SMI. As you look forward, can you give us a sense of what you think drives you back to double-digit EPS growth? And how much of that is macro versus how much of that is stuff that you're going to do yourself?

Well, Ali, so I'll start with the R&D investment. Our R&D investment is -- we are making incremental investments this year in R&D. Some of those investments certainly are geared towards skin care. So that certainly should -- is anticipated to help our innovation plans in the next few years and is critical to our strategic growth plans. But we actually have been increasing our R&D investment the last couple of years and certainly plan to do so again this year.

Yes, on the skin care is the -- yes, there is, in the U.S. obviously, we -- our skin care has not been growing as strongly as it used to and so that's part of the issue that we are going to address. We need to increase the amount of innovation in the U.S. market to compete in a market that in skin care is becoming much the competitive, and that's the plan. There is innovation in multiple different skin care categories, well beyond moisturizers, serums, which are the traditional ones, as an example, masks, oils. So the skin care has become more competitive because innovation is happening at the same time in multiple categories. We are adjusting and actually anticipating with some new, I believe, strong ideas, these kind of trends for the future. The other thing that has been addressed in skin care is also linked to R&D. And a big part of the skin care consumption of the world comes from Asia. The moment Asia/Asia travelers are a bit softer, automatically, this has a negative input on the percentage of skin care sold. Today, there is this dynamic that we have discussed in the remarks that the softness of Asian travelers versus other travelers, for example, of other emerging markets has an impact on skin care. The third effort, there are some new trends in skin care, which are mainly Asian trends that we can address. And this frankly doesn't require necessarily R&D capability, but require the conceptual ability to transfer these existing brilliant products among regions. And that's also something which is happening and we will continue to do more aggressive that will push up our innovation programs in skin care. Last question that you had was on the 7%, 10% EPS growth x currency. And we -- that's a range. We had before an 8%, 12% range. And in that range, obviously, what will influence this range is, first of all, the sales, how the sales will go and importantly, the mix of the sales, because some of our sales are more profitable than others by channel, by category, by brand. So the mix of the sales is what is in this range. The level of the sales and importantly, the level of some of our cost saving programs, how much of this will be, at the end, impacting current fiscal year. As Tracy explained, we are working very hard to ensure that maximization of the saving year after year in line with our SMI goals.

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

This question really follows up on that question about the long-term growth rate, but looking specifically at the margin dynamic in 2 of your businesses. We've heard reports that your margins in the travel retail business are coming down just because of the extra investment spending you're doing there, just building out the light boxes in the airports and all of that. Can you talk about that specifically, just the margin trends within travel retail and where you see them going? And then secondarily, I know your margins were up strongly in Asia this quarter. And you talked about lower investment spending, I'm sure that's just a timing issue. But given what you talked about in terms of increased competition, the heightened promotional activity and what sounds like maybe a mix shift towards more makeup as opposed to skin care in Asia, should we expect Asia margins to kind of be flat to down? Again, I don't care about the second quarter, but kind of over the next 18 months, 24 months, is Asia going to be an area for margin compression, do you think?

Okay. So let me start, Wendy, with the travel retail question. Our travel retail margins are not under pressure. We have been investing in light boxes over the last few years and our travel retail margins have been steadily improving. So that is not an issue for this year. We have invested in opening new points of distribution for some of our luxury brands, our makeup brands as well as Aveda. So a lot of the investment in travel retail this year is for new distribution, which certainly has proven to be productive and profitable for us. So we certainly are bullish on the travel retail business going forward and don't expect margin pressure.

Yes. And on the Asia margins, I think in Asia, the investments will continue and we will continue to invest in building the markets. Obviously, we will adjust the investments to the level of opportunities. The moment like it was this quarter where there was certain noise, certain softness, we felt that was not needed to push the investment beyond reasonable because the consumers were not reacting anyway. And also, we are trying not to make Asia over promotional. So we have tried, sometimes we accept lower volumes, like in this case, in China, to avoid it to become over promotional. And so those are choices for the long term. And they, yes, may have an impact quarter-by-quarter. But in the long term, we don't believe there will be margin pressures because of needed investments. Now the evolution of the mix by countries, this is obviously -- could be a big positive. There are countries which are more profitable, and countries which are less profitable, in China, so the mix is an element. The other element is the cost savings. Also in Asia, we have -- part of these cost savings that Tracey already referred to are also happening in Asia, where there is a lot of work going on in this moment on SMI value-creation activities. So the mix of all this, I believe, will allow us to continue over time to develop, in the proper way, our margin in Asia.

And the only thing I'll add to that, Wendy, is clearly this year, and you said you weren't focused on the short term, which is good, some of the shortfall that we're seeing relative to our prior expectations in -- because of some of the macro events, given the geography that they're impacting do impact the skin care business, so that is a high-margin business for us, as you know.

Yes. And I think we were very clear in the prepared remarks. Hong Kong skin care is among the most profitable businesses in Asia, and frankly, around the world. That's why it's difficult to offset it in a short term. Actually it would be the wrong decision, in our opinion, to try to offset it in the short term, cutting investment, which are, on the contrary, good investment, which will provide long-term solid growth.

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

My question is around the guidance for the full year relative to the second quarter. Your comparisons are much harder as you move to the back half of the year, be it sales or margins. And so if your second quarter comes in, in your guidance range, what are the factors that you think can drive sales growth and margin acceleration so much that you can get to the full year number? What's going to happen in the back half despite those tough comps?

Yes. So Caroline, actually the second half is a bit easier for us from a comp standpoint. So we -- as we said earlier in our prepared remarks, we had major launches in the first quarter of last year related to Estée Lauder and Clinique. And we had softer launches, certainly, this year relative to last year. In the second half of the year, we have lots of good programs planned for both Estée Lauder, Clinique, as well as our other brands. We have the benefit of new door openings that have happened during the course of the back half of last year and the beginning of this year that will help from a growth standpoint. And we are assuming that the Hong Kong situation is really a first half issue and that it will return to growth in the second half. So those are the things that are embedded within our second half earnings, both sales and profit, that lead us to provide the guidance that we did for the year.

There is also -- in the U.S., there is also, in the third quarter, there is a low base of retail because there was one less week in retail. So the indexes would be helped by that situation, by the low base last year.

And the polar vortex.

. Yes. And also, I mean, all of you will remember the toughest winter on earth that we had last year in the U.S. and we have expectation that this has created a low base in term of retail opportunities for this very big market for us. And finally, there are many markets that last year were under pressure like Korea where, as we just said, frankly this is very good news, that we are again growing in Korea, like Russia, like Australia, like -- then there was the Venezuela issue last year in the second semester. So our assessment is actually we have an easier base, as Tracey said, in the second 6 months.

And your next question is from the line of Lauren Lieberman with Barclays.

First, just talking again about U.S. retail. So in terms of the Chinese traveler impact, I know there are some stores where you have a dramatic, really significant data suggesting the prevalence of Chinese travelers in that store, in particular. So is there any data or even anecdotally you could provide to say how much traffic was in some of these very Chinese traveler heavy particular retail outlets? That's one. And then two, outside of that issue, just a little bit around the retail environment in general in the U.S., because I know that some of the data across retail mall traffic centers have been weak. So what are you anticipating as you look forward into the calendar fourth quarter for holiday, and just what you think the overall health of the U.S. luxury market is outside of the Chinese traveler issue?

Okay. Let me start from the overall. So the market, that grew about 5%, overall, in the quarter that we just closed, which was better than July-September last year. So the overall market in beauty, prestige beauty, in the U.S. is growing and is continue to grow faster than mass. So the fundamental phenomenon of -- that we had been driving over time and discussed with many of you that the ideal sourcing from mass and growing prestige faster than mass, this is still happening and is happening in a positive trend. The second reality is that, however, the way the growth is happening, the amount of growth which is happening online and in E&M commerce is increasing. We had strong growth online in the U.S. Our retail partners are having outstanding growth in their retail with us. And so the proportion of the growth that goes to retail is increasing. As a consequence, the pressure on brick-and-mortar productivity is also increasing, because there is less growth in the brick-and-mortar path and that's what you refer to the fact that traffic in some malls is not exciting and that's -- the 2 phenomenon are related. And so it's very important, over time, that we are doing this with many of our retail partners to continue to look at the productivity of the brick-and-mortar and to create traffic opportunities and to continue to build traffic also in brick-and-mortar in the right way. We believe holiday will be a great opportunity for that.

And then, Lauren, as it relates to your question on Chinese traveling consumers and their impact in the U.S., in the doors that are measured where we know there is a disproportionate amount of tourists, we have seen a disproportionate impact in the first quarter related to softness in volume, so you're correct.

And your next question is from the line of John Faucher with JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: Tracey, you talked about sort of the significant cash balance that you guys have. And the cash flow was very strong in the quarter and it looks as though working capital could be nicely favorable over the course of the year. Can you talk a little bit about sort of your attitude in terms of looking at the dividend increase, in terms of your ability to really ratchet up the cash return to shareholders as you get what could be, let's say, a 20%, 30% increase in free cash flow this year?

Yes. I think that's a great question. So we demonstrated that last year. As our cash flow, our free cash flow increased during the course of the year, we increased our share repurchase activity. So we have, over the last few years, had a good mix of both dividend increase as well as share repurchase increases. And certainly, to the extent that we expect to continue to improve working capital this year, we would increase our share repurchase activity. As I believe I stated on the last call, similar to prior years, we are looking at redeploying our free cash flow into dividends and share repurchase. We announced an increase of the dividend this morning, and certainly this year, our repurchase activity will increase as our free cash flow increases.

And your next question is from the line of Olivia Tong with Bank of America.

A lot of your competition is non-U.S. based, so they get the currency tailwind while you have to deal with the headwind. So I'm kind of curious how that potentially impacts your marketing and spending plans for the year.

So we plan to continue investing in marketing and activities for the year. That's the reason why we are adjusting our estimates in EPS, is exactly to make sure that short-term issues will not impact what we believe are long-term investments. And so we will -- this fiscal year, we expect our marketing investment to be ahead of the previous year in absolute terms and to remain more or less stable in term of percentages. And the reason why the percentages will remain stable is also because the amount -- the growth on our known advertised brands or on our brands with lower level of advertising like the La Mer, the M-A-C in our portfolio, is obviously stronger than the growth on our heavy advertised brands like Lauder and Clinique. And so there is a mixed reason why the percentage remains stable but the actual level of spending is expected to increase. And we believe this investment will drive growth for the medium and the long term.

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

Just a couple questions. For the second quarter, have you tried to sort of -- can you tell us what the difference is between shipments and consumption in your guidance? And then I have a follow-up.

Between shipments and retail?

Retail will be ahead of shipments.

Yes, yes. So and we had a little bit of the reverse in the first quarter. And I think I mentioned in our prepared remarks that we expect that, that will cure itself in the second quarter, which is part of the reason for the guidance that we provided in the second quarter.

Yes. And the 2 markets where the retail will definitely be ahead of shipments, in our assumptions, is travel retail in the U.S.

And your next question is from the line of Michael Steib with Credit Suisse. Michael Steib - Crédit Suisse AG, Research Division: I have a couple questions. Fabrizio, just a point of clarification on the U.S., you mentioned sort of pressures on your brick-and-mortar customers. Just to be clear, you mean by that, department stores? Or are you also saying that some of the special retailers, the growth in those channels has slowed somewhat? And then my second question really relates to, now that SMI is complete, really, are there perhaps opportunities for you to accelerates some other productivity initiatives that you've been working on to offset some of these weaker macro trends?

Okay. So yes, I was referring to our business in department stores. That's where we have been challenged and we are going to improve our plans and work to go back to stronger growth. But I was referring to our business in brick-and-mortar department stores, not in specialty, which continues to grow very well. Also, the business in free-standing stores continue to work strongly, the business online continue to work strongly, and that's the picture in the U.S.

And as it relates to SMI, you're correct. We finished the group 4 implementation in August, so we went live in July. The hyper care, this time, was the shortest that we've had. So again, flawless execution by the team, as Fabrizio mentioned. The team, along with many others in the organization, really throughout the globe, are now focused on SMI value realization. We've combined what had been our former cost savings efforts and initiatives which was a separate group from the SMI group into one group. They're focused on leveraging the capabilities that we have gained in SMI from process and system, the additional visibility to information that we have gained and really leveraging that to drive cost savings opportunities in the biggest areas of opportunity, which I outlined in our prepared remarks. The focus for us is on continuous cost improvement. So it's not a program, it's actually a habit going forward. And as we have spoken about in the last few calls, when we look over the next few years in terms of where margin expansion will occur, we expect less in terms of gross profit margin, more in terms of the expense areas. So this is a strategic enabler for us and it is terrific to be able to now leverage this tool over the next few years. We actually, for this year, given some of the softness that we've seen, have identified incremental cost savings over and above the cost savings that we had embedded into our plan and into the guidance for this year as an example.

And the reason why we've done is to defend the marketing investment. That's the key point.

Your next question is from the line of Steve Powers with UBS.

This is actually Megan Cody calling in on behalf of Steve. Just one question that we had was what -- how much macro non-currency deceleration was baked into your prior guidance versus now?

Macro non-currency?

Yes. So like you guys obviously upped your FX headwind, but kind of since you brought down on your constant currency sales growth guidance, what kind of non-currency-related headwinds do you have baked in there?

So in terms of our updated guidance, about half of it was related to currency and about half of it was related to the macro issues that we outlined for you in the prepared remarks. So it's about half and half.

Yes. That was the question, half currency, half Hong Kong, mainly. On the other half, that is not currency, a big, big percentage was the Hong Kong, Chinese part.

Yes, right.

Your next question is from the line of Chris Ferrara with Wells Fargo.

Can you guys just give a little more detail on, on an x-SAP shift basis, why were profits in the Americas down as much as they were, down 29%? And I guess, and I'm sorry if you said this already but, Fabrizio, where in the Americas exactly will shipments lag consumption into next quarter?

So the Americas sales, as you saw from our press release, were actually flat. So that is difficult to -- even though, certainly there were costs actions that were taken, it's hard to offset flat earnings. And Latin America was up, the U.S. was slightly down and that's how we netted out in terms of flat sales. So that's the reason why we have a deleverage in the Americas. We did, as Fabrizio mentioned, protect some of our marketing spend and some of the critical initiative investments like R&D that we're making in the organization. And in terms of the -- where you're going to see the shipments lag the retail, really in the U.S.

In travel retail.

In travel retail, yes.

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

I have follow-up questions about the second half of the year. If I use the upper end of your guidance and adjust out the SMI shifts, it looks like you're projecting second half earnings up 15%. So I'm trying to factor in what gets better? You already said that you expect Hong Kong to return to normal. Do you expect -- you said on travel retail that you're losing share now but expect to gain share ahead. Are you -- does your guidance bake in share gains returning in travel retail in the second half? And also, on the Estée Lauder and Clinique brands in the U.S., does your guidance assume that those brands resume growth in the second half in the U.S. or maybe just lesser declines?

So yes, let's start from the U.S. What is in our -- again, Alice, we will try to remake your calculations to see what you said. That's not exactly the way we see it, but we will see. But anyway, your point is right, anyway. We need to have a much better performance in the second 6 months versus the base. As I said, we have an easier base. The second point I want to make on the overall is that although the majority of the growth of profit will need to come in the second 6 months, the absolute level of profit is the large majority is in the first 6 months. So if you look at the numbers, you will see that 60%, 65% of the absolute profit will be delivered in July-December. And only about a bit less than 40% or the profit will be delivered in the January-/June. So we have much more investment and cost flexibility to deliver the profit in the second 6 months than what we had in the first 6 months. Just as a general statement that explain, I hope, clearly why we have the confidence that we have. The second point is what should go better. I think many things should go better. As Tracey already explained, we assume that we will not have in the second semester the same Hong Kong issues that we have in the first -- in the second quarter. Second, we are assuming that in the U.S., we will deliver a better trend. How this will be composed? Will be composed by continued outstanding business on our M-A-C and on our luxury brands, on our rest of the world portfolio and stabilization or slight improvement versus stabilization on Lauder and Clinique. So not a huge assumption, but a reasonable assumption of our 2 biggest U.S. brands, while the rest of the portfolio, which is doing outstanding, is assumed to continue to do outstanding. Then there is a continuous improvement in the traveling corridors because, again, the base is different in the second 6 months and because there are many activity in travel retail that we are doing that we expect to make, as I said in my prepared remark, to make travel retail to go again above traffic. And that's the key goal and what is in our assumption. Third and last -- or fourth and last, what is in our assumption is the delivery of the cost saving opportunities that Tracey has commented on that obviously we have started. Don't forget that July is when we went live. So we have started many of the savings as soon as we can, but more of them will impact the second 6 months of the year, of the one that could impact the first 6 months of the year.

We have time for one more question, and your last question comes from the line of Mark Astrachan with Stifel. Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division: Two questions. One, I wanted to revisit the China commentary about the slowdown and then the share gains in the masstige. I'm curious how you quantify the impact from some of those companies that are doing it, particularly given the long-term growth expectations from one of the larger Korean companies over the coming years. So do you know what you need to do to offer competing brands to retake share or to sort of stem what seems to be coming? And then secondly, just go back to Hong Kong. So some of your large prestige beauty competitors didn't call it out. I guess I'm curious like, is there something within your business that's a little bit different than theirs? Do you have more retail doors? Or is there some sort of more online presence, more department store presence for one versus the other, maybe some sort of quantification there would be helpful

Let me start from Hong Kong. Again, as we said in our prepared remarks, the real big impact in Hong Kong started end September, early October. So in the course that we saw the initial softening, in fact, we were in July-September, stable in Hong Kong. But is -- our estimate is the impact that it will have on our business in the entire quarter. Our estimate is based in what we have seen in the month of October during the protest. So this is an estimate, and I cannot comment on why a competitor didn't bring it up. It is an estimate based on an October observation, which, by the way, was not the first quarter. I think we made it very clear in our report. The second thing is yes, we have a very big business in Hong Kong. We have a very high market share of Hong Kong. And because our business is also so strong in Mainland China, half of the Hong Kong business is done by Chinese and so also the market share of the Chinese that come in is very high. So as a concept, we have a very high market share in Hong Kong. And if Hong Kong get a cold, we get a bigger cold than many of our competitors and there are other parts of the world that if that part of the world get a cold, our competitor get a bigger flu. So it's a matter of market share in certain areas. By the way, we are very happy to have a very high market share in Hong Kong because it's a super market for the long term and we actually protect our market share with the appropriate investment in the short term because again, we are there for the…

That concludes today's question-and-answer session. If you were unable to join for the entire call, a playback will be available at 1:00 p.m. Eastern Time today through November 18. To hear a recording of the call please dial (855) 859-2056, passcode 17160386. 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.