Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2017 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 our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. To facilitate the discussion of our underlying business, the commentary on our financial results and expectations is before restructuring and other charges. You can find reconciliations between GAAP and non-GAAP figures in our press release and on the Investors section of our website. During the Q&A section, 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 afternoon, everyone. In the first quarter of fiscal year 2017, sales grew in line with our forecast and earnings per share growth exceeded our expectations, due to more prudent expense management, as we navigated through some of the macro uncertainty in the quarter. Across our business, many brands, countries and channels achieved double-digit sales gains. Our strongest performance were our small and midsize brands, particularly those in the luxury tier, many European markets and the online, specialty multi and travel retail channels. Yet, as we had anticipated, our strong gains were partially offset by challenging market and economic condition in certain countries. In constant currency, our sales rose 2% and adjusted EPS increased 5%. We manage our business with a full year perspective. So even though the first quarter top-line growth is starting off at a slower than usual pace, we are confident in our ability to achieve the solid sales and earnings growth we forecasted for fiscal year 2017. Our first quarter growth was slower primarily due to ongoing challenge in U.S. mid-tier department store caused by lower traffic, the market slowdown in the Middle East and difficult comparison in France and Germany and a continued negative trend in Hong Kong. All these challenges were anticipated, and plans are in place to gradually accelerate our sales growth quarter by quarter and position us to deliver our full fiscal year plan. Despite headwinds, there are expected – we expect to continue in some areas – but, sorry – despite headwinds are expected to continue in some areas, we have plans to further leverage our stronger brands, channels and countries. We have robust holiday programs and a strong innovation pipeline, exciting opportunities to reach new target consumers and geographies, especially with our fast growing brands and…

Thank you, Fabrizio, and good morning, everyone. First, I will review our fiscal 2017 first quarter results, and then I will cover our expectations for the second quarter and the full year. As a reminder, my commentary excludes the impact of restructuring and other charges, primarily related to our Leading Beauty Forward program. Net sales for the first quarter were $2.87 billion, up 2% in constant currency compared to the prior year period. Incremental sales from By Kilian contributed approximately 20 basis points of this growth. From a geographic perspective, Europe, the Middle East and Africa saw the fastest growth again this quarter. Net sales rose 7% in constant currency, with double-digit growth from the travel retail channel, developed markets like Italy and Spain, as well as most of the region's emerging markets. Sales in Germany and the UK were also solid. Last quarter, we called out two issues that we predicted would put some pressure on our first quarter sales in EMEA. As we anticipated, sales in France declined due to a significant drop in tourism against a tough comparison with an exceptionally strong first quarter of last year. Net sales in the Middle East fell sharply as distributors in the area significantly rebalanced inventory levels to adjust to weaker retail traffic due primarily to the impact of lower oil prices on the overall macro environment. We do see some traveling luxury consumers from the Middle East taking advantage of the weaker pound and buying more in the UK. Excluding the Middle East, the EMEA region grew 10%. Sales in the Asia-Pacific region grew 5% in constant currency. Growth was led by Korea, which grew low double digits followed by strong growth in Australia, Taiwan, Thailand and Japan. China grew in line with the overall region. Sales in Hong…

Our first question today comes from Dara Mohsenian with Morgan Stanley. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Hi, guys. The first question is more short-term. In your release, you changed the expected full year top line outperformance versus the category to more than 1% from 2% previously, along with the 4% to 5% beauty category growth. So given that commentary in Q1 came in at the low end of the range, Q2's still expected to be below the full-year FX-neutral sales growth rate. Should we expect the sales growth to be more at the low end of your 6% to 7% range now? Is that reasonable? And then the second question more longer term is last quarter, you announced you were expanding more of your business into ULTA and Sephora. As we look out over the next few years, I was hoping you could discuss conceptually how much further distribution expansion you'd expect to see in non-traditional retailers versus your historical footprint and if bringing more brands into those retailers over time is part of your plans. Thanks.

So let me take the first half of that question in terms of the range. It's still pretty early in the year, which is the reason why we give a range for the full year. So at this point, we're not prepared to say that we're going to be at the low end of the range. And certainly, the second quarter is a big quarter for us. It's holiday. And obviously, the second half of the year is big for us for all the reasons that we spoke about in our prepared remarks. So at this time, it's still very much within the range.

Yeah. And the answer to the fact that we will continue increasing our penetration in win in China, the answer is yes. That's part of our program. There are several winning channels around the world in this moment in the area of luxury and prestige. One is definitely specialty multi, and we will continue increase not only distribution but success and continue to increase brands which are tailored to this channel in the future around the world. We will also continue to increase our penetration of the online channels. And we will continue to increase also our penetration of travel retail and distribution in these areas, among others.

Your next question is from Olivia Tong with Bank of America Merrill Lynch.

Great. Thank you. Just following up on Dara's question, if you're not taking the high end off the table, then what are you seeing to make you confident that the second half can accelerate to essentially a double-digit pace in the second half in order to get to the high end of your outlook? But really what I wanted to ask more about was M•A•C because – what are you doing to remedy some of the things that are going on in the U.S.? I guess part of this is an appeal to tourists and less travel and the impact of that. But how much of this is just how much more competitive the makeup category has become, particularly with the younger consumers that M•A•C has captured for so long?

All right. So, Olivia, thanks for your questions. Let me start off with the expectations again for the second half. We talked a bit about the innovation that we're expecting in the second half. We talked about pricing, and we also talked about an acceleration of consumer coverage for many of our smaller brands. As you're aware, we most recently acquired a number of smaller brands that are in expansion mode, brands like Jo Malone and Tom Ford and others have quite a bit of expansion opportunity as well ahead of them. And so they are certainly much of that distribution growth is planned for the second half of the year. If you were to think about the second half in terms of the building blocks that we typically talk to you about for the full year, 2% is roughly – a little over 2% is roughly the pricing expectation that we expect to get in the second half of the year. New distribution would be about 3% to 4%, so a bit of a step-up versus the first half of the year. And then our existing and new business including our newer acquisitions are another 3% to 4%. So that's how we get to the numbers for the full year that we guided to in terms of 6% to 7%.

Yeah. And as far as M•A•C is concerned, is first of all, I said in my prepared remarks, M•A•C is still growing double digit in many of the global markets where there is equally new – equally tough in new competition than there is in the U.S. And M•A•C internationally has been growing in line with the very fast growing market, continuing to well compete with mass and all the mass brands, despite some of them are now using prestige codes, they continue to grow on average less than the prestige brands. So M•A•C continued to be one of our most successful brands and a fast-growing brands and we will count on this for the future. In the U.S., there is the specific two issues in the short term that we have already commented on, which is obviously M•A•C is very concentrated and focused on high internal distribution presence in high touristic areas and in mid-tier department stores. And in the traffic in both of these areas has been lower, significantly lower than in the past. And so M•A•C will need to react to that. The second is the programs. And you're right, there is new competition. There are some very successful brands. We have acquired one of them, BECCA, and there are many other successful brands, particularly in specialty multi, which are a new competition among the millennial generation. And M•A•C is stepping up their activity, their innovation, their collection, their social media and their penetration of this new target group with new activity. That's why in our prepared remark we brought up the example of the Selena and what's happening there when M•A•C speaks to this target group more directly. And we plan to do those much more also in the second semester of the fiscal year. So net, we expect M•A•C to continue to be one of our strong growth brands in the long-term.

Your next question is from Steve Powers with UBS.

Great. Thanks. I actually want to take a step back and think about your long-term algorithm because within that algorithm, I know you've got objectives to grow the top line while also expanding operating margins and improving free cash flow. But it seems philosophically as though maintaining the top line at 6% plus really dominates the other two. And arguably, that's not wrong, assuming the 6% plus growth is there. But I guess as we hear questions today related to the top line, what would it take for you to see whether in your business or in your end markets where you'd say, you know what, we're going to throttle back just a bit on top line investment and seek to generate similar profits, maybe improve free cash flow by going more after margin. I guess is – my concern is that you've been growing 6%, 7%, 8% in a market growing 4% to 5% for a while. And clearly, that can't go on forever, at least not without significantly higher costs. And I think the market's concern is that's what we're starting to see this quarter. And to that point, if you do happen to trend short of 6% in fiscal 2017, I think the market's fear is that you'll continue to spend as if you were still growing at that level, leading ultimately to deleverage and EPS reductions. So can you just help frame for us how you're monitoring top line trends and give us confidence that if the revenue does start to fall short, that the flexibility you've been speaking of the past few quarters can be applied to cost management to better protect bottom line and in the fact – even in the face of top line disappointment? Thanks.

Yes. I would like also Tracey to add on this. But first of all, our – in a market which is growing 4% to 5%, as I said, our long-term opportunity of growth remain between 6% and 8%. And again it's between 6% and 8%. It could be 8% in some years. Of course, there could be 6% in others, depending upon the external situation and in – of our internal innovation program and priorities and spending, as you mentioned. So I still believe the range for the long-term is the right range. And we are moving into that and continue to use this range as an opportunity. The key areas' opportunities – we continue to have pricing power. So as we say, in our – for example, in our 6% to 7% this year, which is a representation of our long-term view, is two points are coming from pricing. And then 2.5% are coming from distribution and 2.5% from organic growth. So our portfolio of brands, as Tracey explained before, still offer a lot of opportunity of more distribution of at least half of our brands, which are high growth, high productivity and not at all available to the global consumers in many areas. And this will be true for many years to come. As an example, even our recent acquisition, BECCA, has enormous opportunities for going also international, online, in travel retail and all these areas which will build value and today are not leveraged by a brand which is doing very well among its target group. And we have plenty example of this in our portfolio. The 2.5% organic growth in a market, which is growing 4% to 5% in prestige that continues to grow much faster than mass is frankly achievable if we get our plans…

Yeah. Stephen, so the only thing I will add on to what Fabrizio has already said, some of the margin gains that we are achieving through our SMI program and other cost initiatives are in fact being offset by acquisition accounting and currency. So we are seeing almost an equal cost set in terms of some of the benefit that we're achieving from an organic growth standpoint with some of those factors. As I had mentioned, I think, on our year-end call last year, that purchase accounting will bleed off over the next year or so, and you'll actually start to see some more of the margin flow through. One of the things that we also look at here obviously is EBITDA, given the fact that we have done a number of acquisitions in the last few years. And certainly you see more progression in terms of our EBITDA margin.

Your next question is from Caroline Levy with CLSA.

Thank you. Good morning. Again, my question is around margins, and just – in your 2% or 2% to 2.5% organic long-term growth, are you factoring in the likelihood of a -- some years where two or three of your biggest brands are down in your biggest market, which is what we're seeing right now, and I think it would be helpful to understand why M•A•C in the U.S. should get back to growth, separate from innovation. But just given where travelers are going, you're benefiting in the UK. Is it realistic that M•A•C gets back to growth, based on everything you are seeing right now?

Yes, it is realistic that M•A•C gets back to growth. But also the point that I keep making is diversification. M•A•C is a big global brand. The U.S. is less than 30%, three zero, of M•A•C volume. The rest of M•A•C growth around the world can be double digit, has been high single digit in the quarter we just closed and is projected to be double digit. So a brand that has double-digit power really demonstrated an enormous amount of opportunity, including extra distribution opportunity internationally, is a brand that can definitely grow and go back to growth very fast. Now, in the U.S. specifically, the growth – to go back to growth, there will be certain actions that are required, including new successful innovation and some other activity in social media that I can understand you say they need to be proven successful before believing them. But we know what they are, and so we trust in them. But even in terms of mix, the power of the brands will allow a double-digit growth in the medium, long-term. And then on the – what was the first part?

It was really more – the big brands and then Estée Lauder and Clinique, and then stabilizing, which is what we spoke about happening. So that actually is progress.

That's right. Sorry, I didn't get the Lauder/Clinique part of the question. So then on Estée Lauder and Clinique, as we said, we have stabilized the brands. These brands have been declining in the past. We have stabilized them, and we have started growing consistently the makeup part. As we said, we have said that our program was to start growing from makeup, and now the quarter we just closed is one more quarter where this seems to be now sticking and we keep doing this well. By the way, makeup is one of our priorities, and a lot of the growth in the second semester of this fiscal year as we anticipated will come from makeup acceleration. And Estée Lauder and Clinique will be part of contributing to this makeup acceleration in the second part of the fiscal year. Next, we need to address the skin care trend on these two brands. This has been slower than what we wanted, but in the situation with Hong Kong not really been declining and the traffic softness in U.S. department store, which are two of the biggest skin care contributors to these brands, has been tough. But we have now plans to also add skin care acceleration to the already achieved makeup acceleration. In our – the last thing I want to say, in our plan we play the portfolio brands. And I said other times that we have one-third of our portfolio which is growing always double digit. One-third of our portfolio that could be just growing single – low single digit and one-third of our portfolio that is growing high single digit. And in this way, we delivered the total. And so, yes, we are not seeing the big brands have the role to drive the 6% to 8% on the high side. The big brands have the role to drive growth. But there are the other brands in the portfolio we are driving double digit and the portfolio mix is what driving our long-term algorithm. Think of it like one-third pricing, one-third distribution, one-third organic growth and one-third small brand, high growth brands, one-third the medium size brands and then the big brands. And that's why this flexibility of managing through the different levers of growth and the different brands in the portfolio in the different countries make us a more – a less volatile, more reliable, more sustainable company than any other company. Today, companies that just count on one or two brands, given the volatility of the world and only one or two markets I believe are less reliable in the long-term than the model that we build.

Your next question is from Bill Schmitz with Deutsche Bank.

Good morning.

Good morning, Bill.

Hey. Can you guys just bridge the gap for us between sort of the 7% to 8% makeup category growth and the 1% you reported? Because if I did the math – and I think Fabrizio just said that only 30% of M•A•C sales are in the U.S. So if you assume that international business grew 7%, in line with the makeup category, does that mean the U.S. was down 20%? So I was just sort of trying to figure out, like, what is the source of the volume or share losses? And how do you fix it?

Yeah, so I'll start. I think we talked about three markets that were softer than last year, some due to macro factors. The U.S. was obviously one of those. France, which had an exceptionally strong first quarter last year, is softer for obvious reasons this year and the Middle East. I mean those are – and those are big markets for M•A•C and – for makeup in general and certainly for M•A•C. And we expect throughout the balance of the year, A, we won't be anniversarying – we'll be anniversarying some of the events. But in addition to that, we do expect a pickup in the – all of those markets throughout the course of the year.

Yeah, I want to add that Hong Kong is also a decent makeup market. Brazil is a very big makeup market in general for us and has been declining. And so it's been a – but there are other markets like China where – give you an example, M•A•C has been growing 20% more. And there are other markets in the world where the – our makeup portfolio is growing 30%, 40%. So it's not as simple as just one market explain everything. But the average of our international market has been doing very well. But Middle East, Brazil, low base in France, I also said Germany in my prepared remarks and Hong Kong are other examples of market that are driving down, but down significantly the growth. Middle East had a very difficult moment. And so double-digit declines numbers that are impacting in quarter one, offset by other phenomenon. So it's not only the U.S. But in the U.S. was specifically M•A•C. The rest of our portfolio in the U.S. has been performing well, as we anticipated also in the prepared remark, Lauder and Clinique makeup in the U.S. has been growing on both brands, for example. So that's the decision (47:53). How we fix it, I think I just said – just answered this question. We will improve the trend in M•A•C in the U.S., continue to accelerate our distribution in that all of our makeup brands that have distribution opportunities internationally turn around our M•A•C organic growth in the U.S. and continue to accelerate our winning makeup brands around the world, also in the organic growth with more programs, particularly outstanding innovation and better social media plans. And we will activate the planned price increases in January that we plan to activate.

Your next question is from Wendy Nicholson with Citi Investment Research.

Hi. Just housekeeping, specifically, can you give us the like-door growth in China in the quarter and the actual number for M•A•C? How much was M•A•C down in the U.S. and what was M•A•C's growth globally just for the quarter? And then my bigger sort of conceptual question. I get and I understand the opportunity for distribution expansion for so many of the brands in so many new markets. And I see why that will drive a third of your growth, and that's great. But my concern is that you are gaining more market share, it seems, through distribution expansion as opposed to with your own innovation. And I look at your two really big new products over the last year: New Dimensions and Estée Edit, which we heard about for several quarters before they were launched. They were supposed to be game-changers. New Dimensions was supposed to set off a whole new category. Estée Edit was supposed to revitalize the brand with millennials. And both of those brands have fallen well short of your expectations. And I know it may take time, and Estée Edit may be a slow build, and all that kind of stuff. But my bigger question, Fabrizio, and you even mentioned it at Barclays, that the company is changing its focus less from blockbuster home runs, successful new product innovations, and more smaller things. But I'm just wondering how big a change that is culturally. Does that change the cost to compete? Those kinds of things because that strikes me as a very, very different philosophy or approach to building your brands and launching new products than we've seen historically at the company. Thank you.

Yeah, you raise a lot of questions. So China, China, this was again a quarter where China retail touched double digit. So we are very happy. China retail grew overall 10%. M•A•C in China grew outstandingly, and our same-door in China grew in 2%. And so that's the situation. So we have again good, interesting growth in China. By the way, this is also driven by our makeup brands in a big way and by the makeup part of our heritage brands as well. And M•A•C is a really strong driver of this growth in China among others. Same thing in Korea. We are competing very well with Korea brands. We have another quarter in which in Korea we have been a very strong retail and continue to grow market share in the country of Korean brands, which make us very competitive – and again this has been driven by a lot of our makeup brands as well including M•A•C. The second part of your question is the innovation plan. Yeah, definitely, New Dimension was below our expectation, and in fact by the way, the launch of New Dimension last year was in the first quarter. And part of what we see in skin care this year in terms of base is that we are anniversarying a base where there was the launch of New Dimension that although below our expectation was significant in terms of overall volumes of innovation. And the future of our innovation is changing, as I explained in the Barclays Conference and the rest, meaning there are some very exciting innovation and less blockbusters. We believe this is much more in line with current consumers' expectations where consumer wants to try new products and have a variety of them. And the model is not – the…

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

Yeah, thanks for the question. Fabrizio or Tracey, given the importance of the December quarter and the overall year, can you just maybe give us your overall macro undertones that you are kind of assuming in your forecast for the second quarter, just to kind of give us a feel on how much potential cushion or risk you are baking in, just given the environment right now?

So I'll start, Nik. It certainly is difficult to predict the environment, certainly most near term here in the U.S. But at least the election uncertainty will be over next week and we can move forward. I think that we are very pleased with the programs that we have to take advantage of the holiday season. And M•A•C has an incredibly strong giftable program this year. And so we're very excited about that. Certainly, we expect that that is going to drive a great amount of volume and sales for M•A•C. In terms of Jo Malone, many of our brands are fragrance brands. Obviously, we're well-positioned for holiday. We are still mindful of the fact that there are many parts of the globe that are weak and certainly Fabrizio talked about some of those, Hong Kong, the Middle East. We're not expecting a big pickup in those markets in the second quarter and the holiday season. We expect the UK to have a bit of a pickup certainly given the currency favorability there. We do expect that that will be the case. And we were actually in the UK last week and certainly saw quite a bit of traffic in the UK in the shops. So I would say it's a mixed bag. I think we're very in tune with what's happening around our globe and certainly our regional presidents are as we migrate into this holiday season. And I think we feel we have an incredibly strong lineup across all of our brands including Estée Lauder and Clinique for holiday.

Yeah. And the other thing I want to leave you with is about our assumptions. We do not assume Hong Kong to go back to growth this fiscal year. We do not assume Middle East to go back to growth this fiscal year. We do not assume U.S., depart – mid-tier department store big improvements in the course of the year. We assume they will not further deteriorate, but we do not assume big improvements. And the rest is we assume that we will be able to reallocate resources depending on the volatility we see in the other element of economical and political volatility around the world.

Your next question is from Lauren Lieberman with Barclays Capital.

Thanks. Good morning.

Good morning.

The first – good morning. I just wanted to clarify, Fabrizio, what you just said about Hong Kong, Middle East, and U.S. department stores, that was – you are not expecting them to be positive for the fiscal year or for the calendar – like for the second quarter?

We – both.

So Hong Kong...

Now, by positive, depending what you mean positive. I said I don't expect Hong Kong market to grow in the fiscal year and definitely not in the next three months. We don't expect Middle East will be positive in the fiscal year and definitely not in the next three months. And I said we don't expect U.S. department store to further deteriorate in the level of traffic for the remaining of the fiscal year.

Your next question is from Mark Astrachan with Stifel Nicolaus. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Yeah. Thanks and good morning, everybody. I'm wondering if you can comment on M•A•C growth, excluding new distribution outside of the U.S. and how sustainable current double-digit growth is. And sort of broadly, we've estimated M•A•C has driven somewhere around 20%, 25% of company sales growth in recent years. So if it's slowing, and I get the comment about international being called 70% of brand volume, but how much can the company make up with acquisitions or other, assuming that the rest of the portfolio doesn't accelerate? And why or why not is this a good way to think about that?

So, the way – as I said before, the way you need to think about that is one-third of our sales will be growing single digits and one-third of our sales or our brands will be growing double digit and then one-third will be in the middle, as I said before. And this – you can make the same assumption by channel, by country. We manage the portfolio different growth levers. So specifically to M•A•C, M•A•C is internationally, so outside of the United States, M•A•C is a relatively untouched brand in terms of price and distribution in many countries. Take countries like China where M•A•C is really, really untapped, enormous opportunities only in a limited number of cities and a lot to go. And there are many examples like that. And there are other places where M•A•C is well penetrated, well developed like the U.S. or the UK. So it depends by the mix. Each one of these brands have a very different mix in portfolio. That's why I don't think we are going to deploy every single brand and every single opportunity in price and distribution and organic growth brand per brand. And that's why I summarize with the one-third, one-third, one-third. And then your – so this will continue. And the second part of the question is the role of acquisitions. Yeah, we have – in the fragrance business, the role of acquisition has been to create the engines of growth of this new high-end artisanal fragrance category where we want to lead and to drive growth. And I think this quarter you see for the first time a very significant sign of that and the potential of it in the long-term. We are doing fragrances what we did in makeup – past history on makeup. And then we'll continue to drive that. In the other categories, acquisition will play a role like they always played and will continue to play a role to create the right portfolio brands and to create the right possibility of growing in areas where we have strategic opportunity or strategic gaps. And so you can expect us to continue leveraging acquisition and continuing analyzing the opportunities on your acquisition in the future to manage these strategic gaps or opportunities. And last, we have also some minority investments around the world that could be very interesting in the long-term. For example, Dr. Jart+ in Korea, which is one of the fastest growing Korean brands where we have a minority investment, there could be an acquisition in the future as an example of strategic opportunities that we continue to monitor – to enrich our different engines of growth. And to close, I mean, we are building engines of growth, differentiated, different in many to diversify our opportunity for growth in the long-term. That's the key strategy. And frankly, we're making great progress on it quarter by quarter.

And the only thing I want to add to that is internationally, outside of the markets that we've spoken about, M•A•C growth from a comp store standpoint is strong and is expected to be strong throughout the balance of the year. So the international M•A•C business is quite strong. The travel retail business is quite strong for M•A•C as well. So I just want to...

And the online is very, very strong.

And online as well.

One specific issue is U.S. distribution platform on M•A•C and the competition in the U.S. That's the specific M•A•C issue that we have addressed and we will address in the next months.

That concludes today's question-and-answer session. If you are unable to join for the entire call, a playback will be available at 1:00 p.m. Eastern Time today through December 2. To hear a recording of the call, please dial 855-859-2056. Pass code 4794540. 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.