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EDITED TRANSCRIPTEL - Q4 2014 The Estée Lauder Companies Inc. Earnings ConferenceCall

EVENT DATE/TIME: AUGUST 15, 2014 / 1:30PM GMT

OVERVIEW:

EL reported FY14 net sales of $10.8b, net earnings of $1.16b and diluted EPS of$2.95. 4Q14 net sales were $2.55b, net earnings were $175.2m and diluted EPSwas $0.45. Expects FY15 reported constant currency sales growth to be 3-4%,reported EPS to be $2.89-2.99 and EPS adjusting for SMI shift to be $3.10-3.20.Expects 1Q15 reported constant currency sales decline to be approx. 1-2%, reportedEPS to be $0.51-0.55 and EPS adjusting for SMI shift to be $0.72-0.76.

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C O R P O R A T E P A R T I C I P A N T S

Dennis D'Andrea The Estee Lauder Companies Inc. - VP IR

Fabrizio Freda The Estee Lauder Companies Inc. - President, CEO

John Demsey The Estee Lauder Companies Inc. - Group President

Tracey Travis The Estee Lauder Companies Inc. - EVP, CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Lauren Lieberman Barclays Capital - Analyst

Bill Schmitz Deutsche Bank - Analyst

Alice Longley Buckingham Research Group - Analyst

Chris Ferrara Wells Fargo Securities - Analyst

Olivia Tong BofA Merrill Lynch - Analyst

Steve Powers UBS - Analyst

Connie Maneaty BMO Capital Markets - Analyst

Ali Dibadj Sanford C. Bernstein & Company - Analyst

Caroline Levy CLSA Limited - Analyst

Javier Escalante Consumer Edge Research - Analyst

Neely Tamminga Piper Jaffray - Analyst

P R E S E N T A T I O N

Operator

Good day, everyone, and welcome to The Estee Lauder Companies' fiscal 2014 fourth-quarter and full-year conference call. Today's call is beingrecorded 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. Pleasego ahead, sir.

Dennis D'Andrea - The Estee Lauder Companies Inc. - VP IR

Good morning, everybody. On today's call are Fabrizio Freda, President, Chief Executive Officer; Tracey Travis, Executive Vice President and ChiefFinancial Officer; and John Demsey, Group President. John will discuss the makeup and luxury categories in the context of his global brand portfolio.

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 whereyou will find factors that could cause actual results to differ materially from these forward-looking statements. Our discussion of our financial resultsand our expectations are before restructuring and other charges, including the remeasurement charge related to Venezuela. In addition, we willgenerally discuss results before the impact of accelerated retailer orders that took place in the fourth quarter due to the July implementation ofour Strategic Modernization Initiative. We will also explain the impact of the shift in sales on our fiscal 2015 first-quarter 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 will turn the call over to Fabrizio now.

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AUGUST 15, 2014 / 1:30PM, EL - Q4 2014 The Estée Lauder Companies Inc. Earnings Conference Call



Fabrizio Freda - The Estee Lauder Companies Inc. - President, CEO

Thank you, Dennis, and good morning, everyone. Fiscal-year 2014 capped 5 years of our strategy by delivering an excellent financial performance,setting new records and transforming our Company in many positive ways. I am pleased to be able to celebrate and share these importantaccomplishments with you.

Through our winning strategy, we have aligned our organization, created multiple engines of growth, improved our profitability, and solidifiedour leadership in global prestige beauty. The Estee Lauder Companies have many unique attributes that contributed to our achievements, including:a diverse portfolio of powerful prestige brands; huge global reach; a business that is balanced across categories, geographies, and channels; andsuperior talent in creativity, product quality, and innovation.

By strengthening our assets, pursuing the best opportunities, and sharpening our execution, we have delivered outstanding results year after year.We believe the foundation we have worked so hard to develop over the last 5 years set us up for continued success, creating desirable productsconsumer covet and creating value for our stockholders.

We are fortunate to be in an exciting and growing industry that thrives on newness and attracts millions of new consumers every year. We areconfident we can build on our success and continue to deliver sustainable, profitable growth that outpaces global prestige beauty, even whencertain geographies or categories may be challenged.

Fiscal-year 2014 was highlighted by strong top-line growth. Sales increased 7% in local currency to a record $10.8 billion, excluding acceleratedorders relating to our recent SMI implementation. These results were in line with our estimates and approximately 3 points ahead of global prestigebeauty growth.

All regions and categories contributed to our performance. We successfully leveraged our higher sales and created greater efficiencies to boostthe bottom line.

We grew our sales and profit in the face of several challenging markets, including slower prestige beauty growth in the US and China and softnessin certain other countries, including Southern European and Korea. Additionally, the competitive environment in global beauty intensified.

Our ability to successfully manage through these headwinds enabled us to deliver an impressive performance. By targeting our investments tothe most promising opportunities around the world, we achieved record financial results including sales, gross margin, operating margin, EPS, andcash flow from operations.

We accomplished many of our strategic goals and gained global share in prestige skincare and makeup, due in part to strong innovations. Our twobiggest brands, Estee Lauder and Clinique, each reformulated one of their iconic skincare products with new technologies to deliver greater valueto the consumer.

We had several strong skincare launches in Asia, with watery lotions, a large subcategory where we were not previously represented, and enter itwith new innovations. In the US, Estee Lauder, Clinique, and La Mer products were the top 10 SKUs in prestige skincare for the fiscal year.

Our makeup category was a vibrant. Lipstick sold especially well across several of our brands, as did hybrid products that incorporate makeup andskincare, like CC creams.

We maintained our strong leading position in prestige makeup in the US. The six best-selling makeup SKUs for the year were from M.A.C, Clinique,and Estee Lauder. M.A.C had one of its best years ever, and the popularity of this global makeup powerhouse keeps soaring. The brand's highlycreative collections, its stunning visuals, are steeped in the latest fashion and pop culture trends . M.A.C expanded its global distribution andawareness through dozens more brick-and-mortar stores and grew its digital audiences significantly.

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Our fragrance business accelerated its sales growth as planned, and we gained share in US prestige, led by recent launches such as Estee LauderModern Muse, the Michael Kors Collection, and Tory Burch, and also, importantly, our luxury brands. Due to first-year investments in some biglaunches, our profit for the year declined. But we expect our profitability in the category to improve going forward, thanks to leveraging successfullaunches and our more profitable luxury brands' growth.

Our small and midsize brands were among the fastest-growing, especially our luxury brands, which primarily focus on one category of prestigebeauty. La Mer, for instance, which specializes in luxury skincare, had global success by building its selective eye-hand distribution reach, creatingincremental usage with new products and attracting new consumers.

Turning to our geographies, in China our sales climbed double digits, and we remained the largest prestige beauty company. We delivered terrificresults despite lower beauty industry growth rates. During the year, we entered 12 additional cities, increased our presence in Tier 3 and 4 cities,and launched our Jo Malone brand. In the online space, Estee Lauder opened a shop on Tmall, which contributed to our e-commerce business inChina more than doubling.

We generated strong sales growth in other emerging markets, which represents an important part of our expansion plan. Taken together thesemarkets, which include, for example, Middle East, Turkey, Russia, are climbing double digits.

In our established markets, our UK business was exceptionally strong, led by M.A.C. and Jo Malone. We gained share by seeking opportunity insmaller cities and underserved areas, and catering to multicultural consumers.

We grew our business in the US, reflecting new product introduction while selectively increasing distribution for some of our strongest and fastestgrowing brands.

In terms of channels, we have continued our strong performance in the high-growth ones, where we are focused. Our online business rose doubledigits, and travel retail once again posted strong growth, far ahead of passenger traffic. Our three largest markets in the travel retail channel are inAsia, and each generated double-digit gains.

In fiscal 2014, we prepared the last major wave of our Strategic Modernization Initiative, which included North America, Japan, and travel retail,amounting to the largest volume of sales going live at once. We worked closely with our retail partners and suppliers, and I am pleased to say ourdetailed planning and training paid off, as last month's implementation has gone smoothly thus far. Today, approximately 93% of our sales areSAP enabled, and we expect to see greater efficiencies from the new processes in the months and years to come.

Our fiscal 2014 performance built upon the dramatic progress we have made in the past 5 years. Over that period our sales grew by $3.5 billion,excluding the accelerated orders in fiscal-year 2014. This was a compound annual growth rate of 8.1% and twice as fast as global prestige beautyon average.

We oriented the Company distribution to high-growth channels. As a result, our online sales have tripled; our travel retail business more thandoubled; and we have added nearly 220 freestanding stores, bringing our count to almost 950 directly owned stores today across the globe.

We eliminated more than $800 million of costs, which enabled us to reinvest in business-driving activities including substantially increasingadvertising. We increased our operating margin by 910 basis points, faster than we expected, allowing us to raise our long-term operating margintargets.

We posted double-digit EPS growth every year. We increased our dividend rate sharply. And all told, our stockholders saw a total return on investmentof 383%.

As I noted, this 5 years' period is a solid foundation for our future growth and underscores the confidence in our strategy. Thus, we are updatingour long-term operating margin goal to 17.5% in fiscal-year 2017, with at least a 50 basis point improvement on average each year.

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We continue to be guided by our 10-year compass, a high-level roadmap of expected economic and consumer trends. It helps us position ourbrands in the largest, fastest-growing, and most profitable categories, regions, and channels, which should enable us to deliver consistent, solidgrowth for years to come.

As for the coming year, we estimate that global prestige beauty will continue to grow at about 3% to 4%. Our strongest growth is anticipated toagain come from our online business and emerging markets across the world where, in the aggregate, we expect to post double-digit sales gains.

Our results confirm we have strong strategy, and we will focus even more on excellent execution and building capabilities while maintaining theflexibility to anticipate and respond to new opportunities and dynamic market conditions.

Our outlook for Asia/Pacific is bright. We anticipate China will deliver solid growth; Japan mid-single-digit improvement will continue; and ourbusiness in Korea will show sales gains.

Our sales in Europe, the Middle East, and Africa are expected to further increase. Certain European countries are expected to improve; and othersthat have been soft are forecasted to stabilize, due to our portfolio strategies as well as strengthening economies.

The US retail landscape continues to show stronger growth at the high end, which bodes well for our Company and, in particularly, our luxurybrands.

Over the past 5 years, our emerging markets sales have more than doubled. To spur the next wave of growth, we will use our diverse brand portfolioto address varied consumer preferences in different geographies.

We will also expand the development of freestanding stores, which are essential in some countries because of limited distribution opportunities.It is also important we will be culturally attuned to our consumer through our product offering, advertising, and services.

We have prioritized our emerging markets, and there are several that we believe have the best prospects for growth. China, our largest emergingmarket, remains the most promising; and our brands are positioned to win by taking advantage of the best opportunities there.

Our goal is to grow at double-digit compound rate over the next 3 years by strengthening our largest brands and making them more locallyrelevant. We also expect to increase the pace of innovation in key subcategories and deepen our penetration in smaller cities.

All our other emerging markets, taken together, are growing double digits and generate sales growth greater than our China business. Our largeheritage markets are essential also to our continued growth.

We are number one in prestige beauty in the US and in the UK and intend to grow our share profitably by further optimizing our brand portfolio,sourcing consumers from mass, and expanding our digital presence. Multiethnic consumers are a growing opportunity, and we will enhance ourefforts to appeal to them.

In terms of distribution, global department stores remains a core channel, and we will concentrate on building traffic on the beauty floor by makingour merchandising and high-touch services more engaging. Our Bobbi Brown brand, for example, is building traffic by amplifying its free makeuplessons at its counters; and that service has significantly increased the average unit sales per customer.

We continue to demonstrate success in higher-growth distribution channels as well, as we expand in specialty multi across the globe and we matchthe right brands with the right retailers. Our plans also include continued global expansion of our freestanding stores to reach consumers whereprestige distribution is limited and in busy locations. M.A.C. is piloting several new store formats featuring different designs and sizes.

As I mentioned earlier, our e-commerce business has grown tremendously, and we plan to keep up with exceptional pace. In fiscal 2015 we planto bring more brands online in several new markets. We are building on the success of Clinique and Estee Lauder on Tmall in China by openingOrigins there later this year and looking at more brands to follow.

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We also plan to expand our mobile capabilities, believing mobile commerce holds great potential in many countries. Our online business grewmore than 3 times the rate of the total Company, and mobile is the fastest-growing component of e-commerce, with its sales having doubled lastyear. M.A.C. is our leader in m-commerce.

We have enjoyed sharp growth in travel retail, have many initiatives underway to drive further momentum. We are the leader in skincare andmakeup categories as well in Asia and plan to strengthen our position in these key areas to capture opportunities in prime travel corridors.

As for our product offering, skincare sales will be integral to our growth strategy, and we have a number of key innovations from our biggest brands.Clinique recently launched two major products that reinforce its authority in customization and cleansing. One is its mass Smart Custom-RepairSerum that treats different concerns depending on individual skins. And the other is Clinique's Sonic System Purifying Cleansing Brush, whichworks in concert with its three-step cleansing system. Both products started on Clinique.com with very positive results and are rolling out globallythis quarter.

In haircare, our brands play in the relatively small but growing prestige niche. Aveda, our largest haircare brand, expects its recent trends in Asiato continue. It opened its first freestanding store in Korea and Thailand last year and will accelerate its travel retail expansion in Europe and Asia.

We intend to increase our R&D investment this year. Our innovation pipeline is robust across our brands, and this year is more focused on �whitespace�products that will fill untapped areas for us. These kinds of product generate incremental net sales because they encourage trial by both new andexisting consumers.

We also will continue innovating existing products in core franchises to keep them fresh, which drives loyalty from existing consumers. Many ofthe new innovations will be locally relevant and targeted to the specific consumer segment before possibly rolling out more broadly.

To help fuel our Company investment across all our businesses, we will leverage our SMI-enabled capabilities to achieve greater efficiencies andcost savings. We now have better visibility into vast amounts of data and information from our brands and countries that we can analyze and useto improve our operations. During the next phase of growth we will focus on superior execution in all facets of our strategy.

I am proud of what we have accomplished over the past 5 years and excited about our journey still to come. Our brands will be using their amazingcreativity to set trends, create the most desirable, high-quality beauty products, and seize opportunities evident in our compass as well as otherswe can't even imagine now.

It is a winning formula that we believe will enable us to deliver sustainable, consistent growth throughout our strategy. In fiscal 2015, we expectgrowth to come from many different engines, together producing healthy constant-currency sales gains of 6% to 7% and double-digit increasesin EPS. Tracey will provide more details on our financial outlook.

Our Company has made terrific progress, and I thank all of our employees for these fantastic achievements. Their passion and excellence hasresulted in another year of outstanding growth and creativity and helped build a strong, winning foundation for our future.

Now I will turn the call over to John.

John Demsey - The Estee Lauder Companies Inc. - Group President

Thank you, Fabrizio. I'm glad to be here today to share some details about our portfolio and our forward-looking strategies. I'm going to focusprimarily on the growing makeup category and our luxury business.

I joined the Company 23 years ago with the Estee Lauder brand and helped build the M.A.C. brand. Now, as Group President, I oversee nine brands,some of which include Estee Lauder, M.A.C., Bobbi Brown, La Mer, Tom Ford Beauty, and Smashbox.

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One of the core strengths of The Estee Lauder Companies is our large and diverse portfolio. We have more than 25 prestige brands in four majorbeauty categories, across a range of price points and positioned to appeal to a multitude of consumers. Our channel, geography, and categorydiversity lets us �dial up� and �dial down� where we are investing and seeking opportunities. Our broad range allows us to react quickly and tooptimize our brands to focus where the industry is going and navigate where there may be weaknesses.

Makeup is a key growth driver for us. The Estee Lauder Companies is the global leader in prestige makeup, and the category is the second-largestand fast-growing one for the Company.

In the United States, The Estee Lauder Companies' share in prestige makeup is over 45%. We have the top two brands, M.A.C. and Clinique; andthe last 10 of the top 20 prestige makeup launches in the United States were from our brands.

We are outpacing industry growth in global prestige makeup, which is expected to be the fastest-growing category in many markets. We are wellpositioned in this category since it plays to our competitive advantage, creativity, and innovation.

Within face, we leverage much of our skincare technology to create high-performance foundations. In color, we are able to leverage our extensivecolor library within the unique formulas of each of our brands. This is the area where we use our creativity the best, tapping into makeup artists tocreate collections and products that surprise and delight the consumer.

We also have great reach, from entry to luxury price points. Our makeup brands span the spectrum in terms of pricing and target consumers.

Let me tell you about some of the brands that are driving our makeup success. Our makeup-focused brands are expected to grow by double digitsthis year through a combination of strong organic growth and increased selective distribution.

M.A.C., one of our powerhouse brands, is our best-known and largest makeup brand. Its democratic pricing and all ages, all races, all sexes credoappeal literally to everyone.

To give a quick fact, on average in fiscal 2014 M.A.C. sold four products every second. M.A.C. has thousands of makeup artists globally and supportedmore than 425 shows during Fashion Weeks in New York, London, Milan, and Paris.

M.A.C. has grown from its strong North American roots and has diversified geographically. In fiscal 2014 M.A.C.'s international sales again surpassedthose from its North American business.

We opened M.A.C. doors in six new countries for a distribution total of total of 94 countries. And even as we are expanding M.A.C., we are generatingstrong comp door growth at the same time.

Department stores continue to account for the majority of M.A.C.'s business, drawing multigenerational consumers. M.A.C. has had great successat Nordstrom, where it has been the best-selling beauty brand for many years; and also at Macy's, where it recently became the number-threebeauty brand behind Clinique and Estee Lauder, which is an amazing accomplishment given the fact that it is only sold in less than half of theMacy's doors.

M.A.C.'s freestanding stores are also a key distribution strategy and act as a great venue for learning and experimentation, which lets us apply theirsuccess to other channels. M.A.C. is our top brand in terms of the number of retail stores, and we added almost 60 of them last year. These storesfully represent the philosophy and positioning of the plan globally and showcase our amazing creativity.

M.A.C. also expanded its digital audience through successful social media channels. It became the largest beauty brand on Instagram and increasedits Facebook fans by 25% in fiscal 2014.

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In addition, every week M.A.C. launches successful fashion and pop culture collaborations that bring consumers to its counters and stores andonline. This year will be no different, with collections as varied as pop-culture favorite Marge Simpson, from The Simpsons, to beauty icon BrookeShields.

Another of our purebeauty makeup brands is Smashbox, which has doubled in sales and profitability since we acquired it four years ago. Smashboxoccupies a unique space in the industry with its photo studio positioning.

Smashbox resonates well online and with Millennials. The brand won a Clio for Best Digital Social Campaign and was an honoree for the top twoonline awards.

Smashbox is a perfect fit for the specialty multichannel and remains a clear leader in makeup. It is one of the top three brands in primers and BBand CC creams in North America prestige beauty. This year we plan to continue this trend with exciting launches in contouring, primer, andeyeshadow. Smashbox also has been opening up new international markets during the past 2 years, and there is significant expansion potentialto come, including strong growth in the European region.

We also have had great strength in makeup within our multicategory brands. Estee Lauder is a global-three category powerhouse, with wide,multitiered distribution and a strong focus on Asia and skincare. This year, Estee Lauder is leveraging its leading authority in serums by launchingPerfectionist Foundation, rooted in the Perfectionist Serum.

We plan to leverage Estee Lauder's heritage and iconic franchises, which are some of the best known in the business. Last year we modernized thePure Color franchise with Pure Color Envy Sculpting Lipstick, which hydrates with a time-release moisture complex, and shapes and sculpts lips.This year we will build upon success with Pure Color Envy Eyeshadows.

Clinique is one of our Company's largest brands and the second-largest prestige makeup brand in the United States. While it is not part of myportfolio, I could not talk about makeup without talking about Clinique.

Allergy0tested and fragrance-free, Clinique occupies a unique position in prestige, with its embrace of healthy beauty. Clinique is a leader infoundation in the United States because its formulas offer flawless skin instantly and dermatological benefits over time.

A philosophy that says pretty can be easy adds to the broad appeal and helps Clinique draw consumers of all ages and retain them through productinnovations like Chubby Stick. Chubby Sticks make color easy to apply and expand the Chubby franchise of eye, lip, and cheek to help anchorClinique's leadership role in the category in North America and around the world.

Our other makeup artist brand, Bobbi Brown, has a luxury and classical positioning that helps women look like themselves, only better, prettier,and more confident. The brand has been making great strides in the specialty multichannel and plans to expand its distribution there over thenext several years.

Bobbi's makeup lessons in department stores and freestanding stores differentiate it as a teaching brand, and are a strategic service that drivessignificant traffic and loyalty. Next year, Bobbi will build upon this service with locally relevant menus by market and makeup lesson videos featuringmultiethnic models.

Bobbi has also rapidly and successfully embraced the digital world. Its e-commerce site in the United States is its number-one door worldwide,and it has created an outstanding social media results, with 72 global digital platforms that are followed by a subscriber base of 4.5 million consumers.The brand has the number one-ranked branded beauty channel on YouTube, with videos that have been viewed globally 10 million times.

We are confident about our continued strength in makeup this year. Based on our innovation pipeline, planned distribution expansion, we expectto capitalize on strong, established markets like North America and the UK as well as increasing demand from emerging markets.

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We expect another key growth driver to be our luxury brands. As the luxury market continues to grow, driven by affluent consumers around theworld, sales of our luxury brands -- La Mer, Jo Malone, and Tom Ford -- have been rising double digits globally for several years.

These three luxury brands cut across different product categories, but are largely in skincare and fragrance. Additionally, Bobbi Brown, as I mentioned,is our main luxury entry in makeup and has generated double-digit growth over the past 5 years.

Tom Ford also offers a curated super-luxe makeup collection in limited distribution that is also enjoying rapid growth worldwide.

La Mer, our luxury skincare brand, has doubled its net sales in just 4 years, making it now one of the top-five brands within the Company's portfolioand on its way to becoming a billion-dollar brand. What is even more impressive is that La Mer has grown this fast while still in limited distribution,maintaining a strategic balance between accessibility and exclusivity. To put its global presence in perspective, La Mer is in about 6% of the doorsthe Estee Lauder brand is in, and is sold in less than half of the countries where we do business, offering ample expansion opportunities.

La Mer has had brilliant success with The Moisturizing Soft Cream, which continues the brand's strong track record in moisturization. More recentlaunches include The Treatment Lotion and a Lifting and Firming Mask which have expanded its success beyond moisturizing products. La Mercontinues to focus on the luxury consumer, creating compelling product innovations, leveraging the heart of the sea, and the unsurpassed experiencein-store.

Jo Malone has also seen double-digit growth across every channel that it is in, doubling its business in the last 3 years. Its success is balancedbetween �heritage� scents as well as recent launches such as Peony & Blush Suede in the UK, its home market, where it is the number-two women'sfragrance brand. And Jo Malone owns the number-one fragrance position in some high-end retailers across the globe.

We see excellent growth opportunities, believing Jo Malone has the potential to become one of the largest, most successful high-end fragrancebrands in the world. We expect the brand to flourish by strengthening categories beyond straight fragrance, capitalizing on its lifestyle positioning,and leveraging its freestanding stores and their unique fragrance-combining experience.

Our Tom Ford brand sets the standard of luxury for beauty. In fiscal 2014, our sales grew double digits in all regions and profits doubled versus theprior year.

Tom Ford continues to tap into the growing demand for luxury, and we expect to continue this amazing track record through increased distributionin key luxury venues, strengthening pillar fragrance franchises and expanding its Neroli Portofino collection. We also see a major opportunity todevelop Tom Ford's makeup line in high-end luxury retailers around the world.

And there are large luxury segments within our brands as well. For example, Mrs. Estee Lauder was a pioneer in luxury skincare and created Re-Nutrivas part of her namesake brand. It is one of the top-selling luxury skincare brands by itself in the world, and we continue its tradition of harnessingnature's rarest and most powerful ingredients. Re-Nutriv plans to launch a new antiaging serum in the fall to build upon the luxury consumers'desire for highly effective and technologically advanced products.

We have been nurturing our makeup and luxury brands for several years, and now they are poised for even further growth. One of our Company'sgreatest strengths is building brands, and we have strengthened the equity of these small and midsized brands and now even M.A.C., one of ourlargest, to improve their productivity, profitability, and desirability so they are ready to embark on the next exciting stage of their growth.

These brands share several important characteristics. They have been highly successful in travel retail and still have great expansion potential. Theyare digitally savvy and less dependent on traditional advertising. They express their authentic equity through editorial, social media, freestandingstores, and luxurious counter services.

We will continue to partner with department stores to elevate the experience with our brands, to keep them fresh, while selectively broadeningtheir geographical and category reach and potential. We will continue to ensure that our makeup and luxury brands stay relevant to consumersin every region.

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It is thanks to our affiliates, with their deep insights of local tastes and effective go-to-market capabilities, that have made our brands and productsas successful and desirable in small European towns as they are in midtown Manhattan.

With our strong innovation pipeline, emphasis on exceptional product quality, innate creativity, and local and global capabilities, we are confidentabout the growth plans I have outlined today, because they build upon our existing strengths. At the heart of our makeup and luxury are ourbrands, and our brands have always been the strength of our Company.

The brands I discussed today are at different stages of their development, and we will nurture them profitably. I want to thank our employees inour regions and affiliates for contributing to the success of these brands and our Company. We expect our larger brands will continue to grow, andsome of our midsized brands have the potential to become billion-dollar brands over time.

Thank you. I would now like to turn the call over to Tracey.

Tracey Travis - The Estee Lauder Companies Inc. - EVP, CFO

Thank you, John, and good morning, everyone. I will briefly review our fiscal 2014 fourth-quarter and full-year financial performance and then sharewith you our expectations for fiscal 2015.

Please note that my commentary excludes the year-over-year impact of restructuring and other charges, primarily the Venezuelan re-measurementcharge we took in the third quarter of this year. Also excluded is the fourth-quarter and full-year impact of the acceleration of retailer orders thatotherwise would have occurred in the first quarter of fiscal 2015, related to our July rollout of SMI.

The final impact of that shift was $178 million in sales and $127 million in operating income, equal to approximately $0.21 per share. This amountwas larger than the estimate we provided in May, primarily due to higher advanced orders from our travel retail customers.

A full reconciliation between GAAP and non-GAAP financial statements can be found in today's press release and on our website.

I am pleased to report that for the fourth quarter net sales rose 6% to $2.55 billion. Excluding the impact of currency translation, sales grew 5%.

Net earnings grew sharply and were 81% higher at $175.2 million, compared with $96.8 million in the prior year quarter. And diluted EPS was $0.45,above the top end of our expectations, primarily due to the timing and discipline of expense management.

Regarding our regional performance, sales in the Americas increased 4% in local currency, with 4% growth in the US and double-digit growth inCanada and Latin America. We continued to realize double-digit growth in the US through specialty multi-stores, online, our freestanding storesand salons and spas, and low single-digit growth in department stores.

Latin America's double-digit growth was driven largely by Brazil. In the Europe, Middle East and Africa region, sales increased 6% in local currency.We achieved double-digit sales gains in most emerging markets including Turkey, the Middle East, and South Africa.

In the more established markets, continued strong growth in the UK and Northern Europe was partially offset by softer results in Spain, Italy, andGreece. Our sales in the travel retail channel rose 8%, primarily reflecting continued growth in global passenger traffic and the expansion of ourbrands.

Sales in the Asia/Pacific region rose 7% in local currency, led by double-digit gains in China. Like-door growth in China was flat, which was animprovement from recent quarters. Hong Kong and Singapore contributed solid growth, while Korea declined slightly.

Our gross profit margin increased 10 basis points to 80.4%, primarily related to pricing and mix. Operating expenses as a percent of sales improved350 basis points to 70.5%. The primary drivers were lower advertising, merchandising, and sampling of 280 basis points, reflecting the plannedcadence of marketing increases to earlier in the year, as well as impairment charges in the prior year of 70 basis points.

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Operating income rose 68% to $252.2 million. And operating margin increased 360 basis points to 9.9%.

Let me now turn to the full fiscal year. We managed to deliver strong full-year results while again navigating several macro challenges, as Fabrizioindicated. We achieved these results because of the breadth of our product portfolio, our agility in managing resources to fund the best opportunities,and the continued focus on the elements of our multiyear strategy.

Net sales rose 6% to $10.8 billion. Excluding the effects of currency translation, sales grew 7%.

Net earnings grew 11% to $1.16 billion, and diluted EPS increased 12% to $2.95. Every region and product category contributed to our sales resultsagain this year, with international growth continuing to outpace domestic growth.

Gross profit margin increased 10 basis points to 80.3%. The increase came primarily from positive mix and pricing.

Operating expenses as a percent of sales improved 80 basis points to 64.2%. The decrease was primarily due to leverage in our marketing andadvertising costs, reflecting shifts in our mix of brand sales, as John indicated, as well as a planned shift of media spending to the first half of theyear to support major launch activity. We also continue to benefit from our cost-savings initiatives and reinvested a portion of their savings in thebusiness-building activities we have indicated before.

Operating income rose 12% to $1.74 billion, and operating margin increased 90 basis points to 16.1%.

Net interest expense declined 7% to $50.8 million, primarily due to the debt refinancing charge in the prior year and a higher interest income thisyear. Our effective tax rate for the year was 30.9%.

On a reported basis, inventory days to sell rose to 198, compared with 183 days last year, primarily to support planned growth, the SMI transition,and the expansion of our retail stores.

Net cash flows generated by operating activities increased 25% to a record $1.54 billion, compared to $1.23 billion last year, primarily reflectinghigher earnings and certain working capital improvements. We invested $510 million in capital projects, mainly for counters, retail stores, andinformation systems.

We returned approximately 100% of our free cash flow to stockholders, consistent with our stockholder actions since fiscal 2012. This included$667 million to repurchase approximately 9.6 million shares of our stock, which was a 72% acceleration in dollars from last year's share repurchaseactivity, and $302 million in dividends, which reflected an 11% increase in the quarterly dividend rate and a dividend payout ratio of approximately26%.

We continue to review our capital structure annually, and at this time we are comfortable maintaining our current credit ratings, which gives usflexibility by way of borrowing capacity, at favorable rates, for acquisitions or to manage through an economic downturn. As I mentioned before,over the last 3 years we have distributed 100% of each year's accelerating free cash flow to our stockholders through a combination of dividendsand share repurchases.

We will continue to be opportunistic with regard to future share repurchases, while expecting to steadily increase the dividend, which, combinedwith our focus on operating performance and growth, we believe will create the best framework for us to deliver total stockholder return. Clearlywe have demonstrated that opportunities we have to reinvest back into our business yields the highest stockholder return, given our growthprofile.

We have increased our dividend rate by 191% over the past 5 years. Our payout ratio, which has also risen from a base of 20% in fiscal 2010, currentlystands at approximately 26% of earnings, in line with many other growth companies. We will continue to review our dividend on an annual basis,keeping it within the larger framework of a sustainable payout ratio, while being mindful of our continued growth opportunities.

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Looking ahead, over the next 3 years we plan to build on our strategy by continuing to focus on superior execution. We expect global prestigebeauty to continue growing approximately 3% to 4% in fiscal 2015 and to potentially return to 4% to 5% annually thereafter.

Our goal remains to exceed this growth by at least 1 percentage point annually, by focusing on the areas that represent the greatest opportunitiesfor momentum and sustainable growth. Our fastest growth is expected to come from emerging markets, reflecting the continued expansion ofthe middle class and our medium-sized brands, as they build awareness and loyalty and expand into more countries and doors.

Skincare and makeup will remain our largest categories, and we believe we have an exciting innovation pipeline for the next few years acrossbrands, categories, and geographies. From a channel perspective, the fastest growth is expected to come from our direct-to-consumer businesses,freestanding stores and online, as well as from specialty multi and travel retail.

These top-line growth drivers plus cost leverage and savings should allow us to deliver at least 50 basis points of average annual operating marginexpansion each year to reach a target of 17.5% in fiscal 2017, as Fabrizio indicated. That takes into account our reinvestment in growth drivers andcapabilities necessary to enable the growth, and translates into our ability to deliver double-digit annual EPS growth in each of the next 3 years.

Last month's SMI implementation was the last major wave of a long-term project that has enabled us to standardize our key business processesaround the world. This was an enormous undertaking, and our teams executed it superbly.

SMI gives us greater consistency in execution, enhanced visibility of information for improved management of inventory and expenses, and processscalability to support growth. As the major deployment phase has ended, we are focusing our attention on realizing the full value that SMI candeliver through better process adoption and proficiency with using the new technology to drive many efficiencies across the organization.

Some of the key areas of opportunity we are addressing include: improvement in forecasting capabilities, which should result in reduced inventories,fewer sales returns, and less obsolescence; improved management of the total cost of global and local launches and better enabling our A&Peffectiveness; additional indirect procurement savings; and improved customer service, to name a few.

In addition to these planned for benefits we certainly expect to uncover additional areas of opportunity as our global understanding and visibilityof SMI processes and SAP technology increases. Importantly, we have a governance structure in place to support our initiatives and ensure wehave continuous cost improvement every year through leveraging the SMI capabilities.

These savings and efficiencies, combined with some price and mix benefits, should allow us to deliver the net margin improvement I mentionedas well as reinvest a portion of the savings generated back into critical areas fundamental to our success in sustainably delivering our strategicobjectives -- areas such as product innovation, digital and e-commerce, and retail capabilities, as well as supply chain agility, to name a few.

Now let me discuss our outlook for fiscal 2015. The SMI shift discussed earlier adversely affects the first quarter and full fiscal 2015 year, and willalso create a difficult comparison in the fourth quarter of fiscal 2015. This is something to keep in mind when modeling the quarters and the fullyear.

So to put this in perspective, I will provide our financial expectations for fiscal 2015 both including and excluding the impact of the shift. First, ourexpectations for reported results.

For the full year, sales are forecasted to grow 3% to 4% in constant currency, with growth in our international regions continuing to outpace NorthAmerica. Currency translation is estimated to negatively impact our full-year sales growth by approximately 2%. Our estimate assumes weightedaverage exchange rates for the full year of 1.3 for the euro, 1.63 for the pound, and 1.04 for the yen. Reported EPS is expected to range between$2.89 and $2.99.

As mentioned previously, the $178 million of accelerated retail orders, equal to $0.21 per share, which benefited our reported numbers in fiscal2014, would have normally occurred in the first quarter of fiscal 2015. So let me share with you our comparable non-GAAP expected results excludingthe impact of this SMI shift.

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Constant-currency sales growth is forecasted to grow approximately 6% to 7%, in line with our long-range goal. We plan to achieve expenseleverage through a combination of cost savings, net of investment, which combined with improved gross profit margin are expected to driveoperating margin improvement of approximately 40 basis points.

Our cost-savings initiatives are primarily focused on productivity, indirect procurement, A&P effectiveness, and returns on obsolescence. Investmentareas include innovation, R&D, supply chain planning and travel retail expansion, as well as retail and HR systems.

SMI savings, post Hyper-Care, are somewhat offset by the ongoing support, maintenance and additional depreciation related to SMI. Throughoutthe fiscal year we will continue to be flexible in our investment spending behind activities that demonstrates the best momentum, which couldimpact the quarterly cadence of our spending.

As you know, our guidance excludes the one-time charge related to the devaluation of the Venezuela bolivar last year. As a reminder, in fiscal 2014we derived less than 1% of our net sales from Venezuela.

Earlier in this calendar year, the Venezuelan government enacted a margin cap law along with controls on foreign currency exchange that affectour comparability in fiscal 2015 to the prior year by approximately 1 percentage point of earnings growth, or $0.03 of EPS. The guidance we areproviding this year absorbs the impact of this lower margin.

Our fiscal 2015 rate is planned at 30% to 32%. Adjusting for the SMI shift, we are forecasting full-year EPS in a range of $3.10 to $3.20. This wouldbe comparable to our fiscal 2014 EPS of $2.95, before charges and the accelerated orders.

Depending on the magnitude of exchange rate movements, the approximately 2% negative currency impact on our top line this fiscal year equatesto about $0.09 of EPS. Excluding this foreign currency exchange impact, our EPS is expected to rise by 8% to 12%.

In fiscal 2015, we expect to increase cash flow from operations to approximately $1.7 billion. Our capital plan is $560 million, and it will continueto support consumer-facing investments in counters, retail stores, and retail and HR systems.

We expect modest improvement in inventory days in fiscal 2015, with more aggressive improvement in future years as we fully leverage the benefitsfrom SMI. So that is our guidance for the full fiscal year.

In our first quarter, on a reported basis we expect sales to decline approximately 1% to 2% in constant currency. Translation could hinder growthby approximately 1 percentage point. We anticipate that EPS will be between $0.51 and $0.55.

Adjusted for the SMI shift, first-quarter sales are forecasted to increase between 5% and 6% in constant currency. And EPS is expected to be between$0.72 and $0.76.

Our first-quarter profitability is expected to be impacted by the timing of expenses related to new launches and promotional activity comparedto the prior year. This is in addition to the increased spending for capabilities I just mentioned.

So that concludes our prepared remarks. We will be happy to take your questions at this time.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Lauren Lieberman, Barclays.

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Lauren Lieberman - Barclays Capital - Analyst

Thanks. My first question was just around capital structure. I think many of us, just even based on what you have shared in the recent past atconferences and so on, expected a little bit more of an update or really a change in terms of capital structure, particularly as you may have somegreater visibility into the potential for improvements in cash flow and inventory after SMI is implemented.

So could you just maybe elaborate a little bit more there, if you have plans for where inventory levels could go over the next couple of years andwhat your priorities would be for any changes in cap structure once that comes to pass? Thanks.


Sure, Lauren. Again, now that we are in the Hyper-Care stage as it relates to SMI and certainly starting to deploy some of the insight that we aregetting from SMI to aggressively reduce the inventory levels that we have, there are quite a few initiatives going on this year that should meaningfullyimpact our inventory levels towards the back half of the year and certainly in the next few years. I think we have spoken about at least a 20- to30-day improvement in inventories over the next few years that we see clear visibility to.

That, as it relates to at least our structure currently, most of the free cash flow that we generate is returned to shareholders via dividends and sharerepurchase activities. So certainly as we free up cash from working capital, as we demonstrated this year with some of the areas of working capitalimprovement that we had, we fully expect to redistribute that back to shareholders -- assuming that we don't have other uses for that cash, which-- in the acquisition area.

So I think certainly we expect over the next few years that our free cash flow generation will increase as our working capital improves.


Okay, thank you. Then I did have one question for John. The Estee Lauder, with Pure Color Envy, that and Modern Muse, I feel like there has beena pretty significant shift in the -- maybe call it the tone of the Estee Lauder brand advertising.

Have you done any consumer testing at this point, or a sense of if the consumer profile has shifted at all with those two launches over the last, Iguess it would be 6-plus months now?

Younger? More upwardly mobile? Any kind of change there to know that this is maybe having a bit of the impact you were hoping for.


Sure. From all of us at Estee Lauder, welcome back.


Thank you.


Lauren, welcome back; this is Fabrizio.

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Thank you so much.


In truth, yes, the new imagery around Pure Color Envy and Modern Muse has brought a younger, more contemporary customer to the Estee Lauderbrand. We have seen fantastic performance for both Modern Muse and for Pure Color Envy, which is the most successful lip color launch that thebrand has had in over a decade.

So we are bringing younger consumers. And the good thing about fragrance and makeup, it is bringing transactions.


Great. Okay. I will pass it on. Thank you.

Operator

Bill Schmitz, Deutsche Bank.

Bill Schmitz - Deutsche Bank - Analyst

A couple questions. The first is, how do you really know what sales are from SAP pull-forward and what are normal? Meaning, like, does a retailertell you, like: We are buying this because you need to get your SAP stuff in order?

And then my real question is on US skincare. Is there a plan to take back market share? Because obviously, some of the sell-in data has been great,but some of the market-share data, which has improved recently, has been a little bit soft.

So is there an urgency there? And should we expect market-share gains in 2015? Thanks.


Okay. On the SMI orders, what we do is work with our retailers to look at the first few weeks after go-live, of what the expected sales that they havewill be, the expected shipments that we would normally have to support their sales. And those are the sales that we pull forward. So it's SKU bySKU, it is week by week in terms of how we look, how we plan it with our retailers.

Obviously, this pull-forward was greater than all of the others that we have had, A, because the markets that were involved were larger, and thetime frame of the year is larger. July is a big time period for us as well as certainly for our retailers in terms of receiving shipments.

It is also the time frame that we have big launches, as you heard from Fabrizio, as it relates to Clinique and some of our other brands. But it is thefirst few weeks of the July time period that we worked with our retailers to plan.


To answer the question on skincare, definitely there are very strong plans to grow market share on skincare. I just want to clarify that in the fiscalyear 2014, we did grow market share of skincare globally, and we plan to continue to do that.

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If you are referring to the North America market, US market-share trend in skincare: yes, we didn't grow market share in the US specifically. And wehave plans to get back to growth via, first of all, innovation -- innovation, which is much more white space and new areas and less cannibalizingthan what we experienced in the beginning of fiscal-year 2014; and strongly improved merchandising in-store in this area; and new servicesconnected to the skincare area.

Also, globally, the skincare local relevant approach of our innovation is actually giving us some great returns. So we plan to continue growingmarket share globally in skincare also across fiscal-year 2015.

Bill Schmitz - Deutsche Bank - Analyst

Right. Thank you very much.

Operator

Alice Longley, Buckingham Research.

Alice Longley - Buckingham Research Group - Analyst

Hi, good morning. One housekeeping question. Can you tell us what the organic sales growth was for the year overall for Clinique and Estee Lauder,so we can see the difference between those and the other brands for your growth overall?

And your organic sales growth in the fourth quarter was 5%. You are saying it is 5% to 6% in the first quarter, both of which are lower than whatyou think your sustainable organic sales growth will be, including for fiscal 2015 overall. Why should we expect that acceleration next year?


Yes, first of all, our fiscal-year 2014 overall, our constant sales growth was 7%. And we are forecasting 6% to 7% for 2015. So it is not an accelerationfor the year; it is consistent.

In term of the sales by quarter, again, they are heavily dependent on the amount of new innovation that happens in a quarter or in another; alsoin the geography where this innovation is launched; and finally, in the category in which this innovation is launched. So as I say every time, don'tattribute too much into reading a single quarter. Read our fiscal-year overall trends, which I think is a much more solid element for predicting thedirection and the solidity of our business trends.

So we have 7% in 2014. We predicted 6% to 7%. And this will be driven, as I said, by a market overall at 3% to 4%, in our estimate -- so consistentoverall global market growth -- but a strong innovation in our brands. And the profile of our growth will continue to be the double-digit emergingmarkets, double-digit online, very strong results in travel retail.

And some markets, like the UK, are doing fantastically well and we expect to continue. And growth in China is expected to continue.

So there is a full consistent approach to growth, which is the strength, frankly, of our strategy.


And we don't comment on individual brand growth.

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But I want to clarify, on the individual brand growth, that Lauder and Clinique are growing. They are growing globally; for the fiscal year they willcontinue to grow globally.

If in some markets the growth has been below the market growth, meaning losing some share points, little share points in some markets, but thiswill not distract by the fact that both of these brands are growing and growing globally.


Are they growing globally in line with the prestige market globally?


They are growing globally in line with the prestige market or slightly below, depending by quarter and by brand. That is the one that we want notto comment on, to give too many details, public details on our growth rate.

But they are growing in a way where, as I said, we plan to grow market share also in these brands globally over the next 3 years.


Okay, thank you.

Operator

Chris Ferrara, Wells Fargo.

Chris Ferrara - Wells Fargo Securities - Analyst

Fabrizio, against your advice -- I apologize -- I have to ask a question about a quarter. But I was hoping in the context of the picked-up investmentyou are going to see, that you are talking about in Q1, can you just talk about how extensive that is going to be, to the point that it would knockearnings lower year-on-year?

And I guess if you can marry that with the fact that the top line for the quarter is expected to be below what the full-year range is, I am just curiouswhat the dynamic is there.

Then just a quick follow-up with Tracey. I think you said 20 to 30 days of inventory coming out. But I thought that you had said over time the numberwould be much more extensive than that. I thought you guys had said something like 130, 140 days of inventory might be more reasonable. Soany color there would be fantastic. Thank you.


In terms of the quarter -- and again some of it has to do with what we are anniversarying. We had major launch activity last year, and we have solidlaunch activity this year as well. There are some margin differences, gross profit differences, between the launch activity we had last year and thelaunch activity we have this year.

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So that is suppressing some of the margin expansion that you would normally expect to see, I think, in the first quarter. Clearly, it evens out overthe course of -- over the year. It is really a first-quarter phenomenon for us from a gross profit standpoint.

In addition to that, I talked about some of the investments that we have in the first quarter. We do have SMI Hyper-Care going on, so that is aninvestment this quarter that we didn't have last year.

We had SMI going on, but much of that activity was -- some of that activity was capitalized and some of that activity was expensed. It is all expensedthis quarter as we are in Hyper-Care, other than obviously the system itself.

We do have some consulting expenses for some projects that we have going on this year that are impacting us in the first quarter as well. So all ofthose things are impacting us in Q1 -- which is why we -- and Fabrizio made the comment, quarter to quarter, really the focus should be on the fullyear, as I think we demonstrated quite solidly last year.

As it relates to inventory, you're right on both accounts. What I said was we have near-term visibility to 20 to 30 days, and the team has the actionsin place to drive to that. And then we have visibility over time and plans over time to achieve greater than that. So you are right on both counts.


And I just want to add one thing on your question on reconciling the rest of the sales growth. Many of the investments that Tracey referred to arenot necessarily in advertising impacting immediately the sales growth within the quarter.

For example, we are investing in the first quarter into -- the big part of our R&D investment will happen there. In the direct channel going moredirect on-line sites and things will happen there. We a trial retail investment that will happen there.

And they will all benefit the rest of the fiscal year. And finally, we have investments on the consultants that was discussed on creating the savingsthat then will impact possibly the next fiscal year. And other capabilities, like in the area of supply chain fundamentals.

So some of these investments will not provide immediate results on sales within the quarter and will provide, first of all, sustainable growth in thelong term and results on profit in the second part of the year.

Chris Ferrara - Wells Fargo Securities - Analyst

Thank you very much.

Operator

Olivia Tong, Bank of America Merrill Lynch.

Olivia Tong - BofA Merrill Lynch - Analyst

First, why do you only expect operating margins to be up 40 basis points on a like-for-like basis in fiscal 2015? Perhaps can you parse out a bit morein terms of the major drivers there? I know you've got, obviously, some Hyper-Care expenses, but would have expected that to be offset more orless by the savings associated with SMI.

Then, Fabrizio, I just wanted to follow up on your comment about growth in the small and midsized brands versus the Cliniques and Lauders. Areyou seeing an acceleration in the divergence of the Lauder and Clinique brands relative to the others? Or is this just a continuation of what youhave already been seeing for some time? Thank you.

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I will answer first there on the growth profile of our Company. As I think I said in the last calls, the profile of our growth is that we have createdmultiple engines of growth: by brand, by channel, by region. Some of these engines go in certain moments at double-digit, others at single-digit,but they all provide support to the growth.

So from a brand standpoint, we have some brands -- and John commented on some, like M.A.C. or the luxury brands -- which are definitely drivinga double digit because of their level of development and their profile and their opportunity for expansion. There are other brands that are --definitely Lauder and Clinique are in this camp in that fiscal year -- that are driving a single digit.

The same profile is by channel. We have channels like online, travel retail, freestanding stores, which are driving the business at double digit; andother channels like our core department stores, which are driving a single digit in this moment.

And then during the years, this is changed. And our ability to flexibly react to these changes and make sure that we invest where the opportunitiesin a given moment of time, is also the strength of our model. So we do keep the flexibility to make these changes and these adjustments on purposein order to be able to leverage growth where growth is.

I'll let Tracey answer the other question.


In terms of the 40 basis points, the Hyper-Care just affects the Q1 year-over-year comparison. The SMI net is a benefit this year, and we have manyother cost-savings activities that are benefits this year.

Some of the investments that we have spoken about, as it relates to increasing R&D innovation and other investments to support capabilities forfuture growth, are impacting this year. But we feel very confident that if the sales growth materializes this year that we will very much deliverdouble-digit profit growth.

Operator

Steve Powers, UBS.

Steve Powers - UBS - Analyst

Great, thanks. Maybe, Tracey, if I could push on the capital structure point just a bit. I understand that you are returning much of the excess freecash flow that you are generating to shareholders. But looking forward, clearly you're confident in underlying P&L momentum, and you seem wellpositioned to accelerate free cash flow ahead of income growth, given the working capital opportunities.

So with that plus your starting point of a net cash position, why not take on a bit more positive leverage just in order to accelerate returns toshareholders? Or are there other cash uses, priorities, that we should be considering more near-term -- like M&A, for example?


Clearly, as we have spoken previously, M&A is a high priority for us. We certainly have lots of activity going on in terms of looking at acquisitionopportunities.

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And we certainly want to reserve flexibility for M&A activity. So that is certainly a piece of why we would not consider taking on additional debt atthis particular time.

As I mentioned in my prepared remarks, given the improvements that we have made and will continue to make in certain areas of working capital,and the improvement that we have in front of us as it relates to inventory, which now that SMI is behind us we can certainly expect more steadyimprovement as it relates to our inventory turnover, that should deliver very strong returns to the shareholders.

We are mindful that in order to keep and support the wonderful brands that we have it requires investment. It requires investment in advertising.It requires investment in infrastructure and in capability.

So we balance all of that when we look at the capital structure as well as our plans for any fiscal year.

Steve Powers - UBS - Analyst

Okay. That's great. Thank you.

Then maybe John, you talked a lot about the strength of your current brand portfolio. But with that M&A consideration, maybe looking at thingsthrough a different lens, where would you say you have the largest opportunities to fill gaps in the portfolio?

And I guess how many of those gaps can be filled with existing brands being extended, versus maybe looking outside to realize opportunitiesthrough acquisition?


Hi, this is Fabrizio. I think I will take this one, because I don't think we can really start talking openly about acquisition opportunity by brand or bygap. Because this would be, frankly, too much information to our competitors -- so more than to you.

But the key point, again,

we stated is our overall M&A strategy. Our overall M&A strategy, first of all, is a strategy looking at brands which have global potential. As you know,we don't have a strategy of big M&A partnership, but rather it is about buying brands that we can develop over the years.

M.A.C. is the example of the ideal acquisition strategy for Estee Lauder Companies: buying a medium-sized brand and making it huge over theyears. That is our strategy in M&A.

Now, in which areas we are focusing, I said it [repeatedly], obviously, skincare acquisition around the world, particularly in Asia, are an area wherewe are studying the market continuously. And then there are opportunities in all the areas which are highly profitable and growing and where ourportfolio is today not completely filled in.

But the last thing I want to say, it is not necessarily a gap fill-in strategy. Really our M&A strategy is about buying amazing brands with amazingpotential that we can leverage thanks to our great R&D and global reach, and create global brands a-la M.A.C. also in the future.

That is what we are looking for. We are scanning the global market continuously for opportunities. And we want to keep the flexibility to engagein these activities when the opportunity arises.

Operator

Connie Maneaty, BMO Capital Markets.

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Connie Maneaty - BMO Capital Markets - Analyst

Morning. I was hoping to get some detail on what is going on in China. Could you tell us what the same-store sales growth did in the fourth quarterin the Tier 1 cities, and why the sales growth in China picked up overall? Sounds like it was above 10% in the fourth quarter; is that right?

Also, what is the status of Osiao? Is it out of test and into full distribution yet?


Okay. China in the fourth quarter, net sales were up 20% and for the year were double digit, and about 13%. So very solid performance overall inChina across the year.

The like-door, the same-door sales in the quarter was actually plus 0.1%, so flat. This is a big improvement versus the decline of the overall prestigemarket same-door in China; and our previous performance in the previous quarter was minus 2.3% I think. So, an improvement trend.

What is driving that in China? Again, I explained that the big cities, because of the development of the online and because of the saturation of themarket are not growing anymore in same-door sales, for sure; while the big expansion is in secondary city, in Tier 3, Tier 4 cities and online, basicallyexpanding the reach of the many interested Chinese consumers and been able to sell to them.

That is what we are doing and that is why we are successful. We continue build the reach. So we get new consumers into our brands, new Chineseconsumers into our brands every quarter.

The other thing I said already but I want to repeat, the fact that the same-door sales are flattish should not scare. Because for example, our EsteeLauder brand has the highest productivity per-door in the world in China. So the stable sales same-door does not have a significant impact onprofitability.

The other positive of China, these new consumers that we are reaching, expanding in secondary cities, are also very good travelers. And when theytravel they are interested in our brands, because they get to know them better. And they buy more of our brands in travel retail or in their bigcapital travel like Paris, New York, or whatever.

That is the other big benefit that we are following up in our analysis on how to continue to build the Chinese market. So that is what is happening.And as I said, I have a big trust that China will continue to be a growth driver for us in the future, in the next 3 years of the plan that we are discussing.

Operator

Ali Dibadj, Sanford C. Bernstein.

Ali Dibadj - Sanford C. Bernstein & Company - Analyst

Hi, guys. I have two questions. The first one is -- so SMI this quarter, the shift is much larger than projected. So I wanted to use that as a jumpingpoint, because we have seen a lot of, over the years, SAP going to companies; and I think we have rarely seen it be as long or drawn-out orunpredictable as the implementation of this SAP or SMI implementation.

So I am trying to understand: Why so many challenges? Perhaps more importantly, if we believe your guidance, whether it be operating marginguidance or even at this point the inventory guidance, it is hard to see what benefit you are actually seeing from SMI.

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So can you help us unravel that a little bit and give us a sense of quantification of what you will be getting from SMI after all this pain? And is thatincluded or incremental to your guidance? Then I have a follow-up.


Okay, I want to take the first part of the question; and Tracey will take you through the benefits of SMI that we see in the next years, which by theway are significant. But the first one, why we got high order was mainly our travel retail customers that decided to order more than what weoriginally estimated. Because it is their decision how much they want to assess the risk of being underdelivered, undershipped in the month ofJuly, and they want to protect their business, because the business is doing well. So they want to protect and avoid the risk of out-of-stock becauseof SAP.

As you know, many companies in the past had issues in executing SAP, meaning that they have some periods where they cannot ship or theycannot deliver product after the implementation. Now -- so that is why our customers sometimes decided to protect themselves, because theyhave these bad experiences from the past.

Now the good news is that, first of all, we monitor that and we don't double-count that. Second good news is that we didn't give so far any issueto them. So that we really executing SAP with excellence, and I believe we are one of the best companies in the way we are executing SAP andavoiding the issues that probably you have seen, or volatility, inconsistency, that come from the implementation in other cases. So that is as far asthe volume orders.


Ali, you're right; it's been a long journey. The good news is that this last wave that we just went through is our last major wave. We have a fewmarkets left to go live on SMI, but we think we can manage those within normal course of business.

So the supply chain team, the finance team, the business teams that have been focused on SMI implementation are now focused on value realizationand really leveraging the benefits of the system, where the organization has been focused on a long, drawn-out SMI implementation, as youindicate.

The areas of improvement that I mentioned in my prepared remarks, the improvement in forecasting capabilities are real, and we are putting actionplans together. We have a good start to action plans to improve those forecasting capabilities.

That should help us in the areas of inventory. It will help us in the areas of margin. It will help us in the areas of freight.

So as we look throughout the P&L, we have identified where savings opportunities will occur. And as it relates to launches, some of the improvementsthat we expect to see in terms of some of the resources involved in launches from some of the better visibility that we get with SAP.

Indirect procurement savings: we have launched Phase 2 of our indirect procurement savings, which will deliver a meaningful amount of savingsover the next few years. As we look out over the next 3 years, the SMI savings, there are certainly some embedded within this fiscal year; and infiscal 2016 and 2017 even greater amounts of SMI savings.

As it relates to this year and why you are not seeing more of it, one of the things as a global company with lots of opportunities, we pace theinvestment of that opportunities. And right now it is based on some of the savings initiatives that we are generating from SMI and other initiatives.

So where in the past we have had more benefit from a combination of savings activities and margin expansion, gross profit margin expansion, Ithink I have indicated in the past that more of our margin-expansion opportunities will come in the cost-saving areas.

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So cost-saving actions have actually become more contributing in terms of our ability to not only expand margin but also to reinvest back in thebusiness. So what you are seeing is the net impact of all of that.

But Fabrizio mentioned R&D, innovation. There are lots of areas this year that we are ensuring our foundation for not only this year's growth butthe next few years of growth, that allow us to be able to say with a good degree of confidence, based on our insight right now, that we can continueto deliver double-digit growth.

Operator

Caroline Levy, CLSA.

Caroline Levy - CLSA Limited - Analyst

Thank you. I would like to go back to China if I might and just ask a couple more questions about that. The Chinese in travel retail, you mentionedyou were optimistic because more people knew your brand and were traveling out of China. But did you actually see a pickup in Chinese purchasesin travel retail of your brands?

Related to that, Korean brands appear to be doing very well in Korea, in China, and globally. I am wondering if that is having a negative impact onyou at all, or if there is perhaps an acquisition opportunity that you can look at, if there are any. Because it has been a while since you've actuallyfound something you have been able to land of any scale. Is that on your radar, the Korean brands?


First of all, travel retail. Chinese will continue for a long term to be one of the most important travelers. In the last year, we didn't see -- we saw anincrease of overall number of Chinese traveling, but their destinations have changed dramatically.

The Southeast issues, like turmoil in Vietnam or in Thailand or the Malaysia unfortunate situations, it created for example a decrease in travel ofChinese in Southeast Asia. The Chinese now travel much more in Japan and in Korea; some of this also influenced by currencies, interest of theChinese travelers.

The Hong Kong situation -- the Chinese travel will be less to Hong Kong. So it is a very volatile situation -- more than volatile: dynamic situationwhere the overall traveling trend of Chinese continue to be strong, although growing at a lower pace than in the past years, but continue to bestrong.

And where they travel is very dynamic. So the companies that are able to better understand this, analyze it, and make sure the plans are dynamicallymoved accordingly to their corridors are the companies that will do a better job. And I think we are very good at that.

We are following this up carefully. And as I said, we value the flexibility of our model exactly because of this.

The second part of your question is Korean brands. Now clearly in Korea, Korean brands have done very well. And as we said, we took a couple ofyears to understand how to more effectively compete.

I think we are seeing some interesting results. Some of our new brands like Jo Malone, Aveda they are doing fantastically well in Korea; so we arelearning how to compete also with our new brands in this market.

And in other markets like China we see Korean brands mainly in mass being very successful. Frankly, in prestige they are not yet impacted in anyway our trends; they continue to be very solid, as you see.

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And in travel retail in Korea, meaning in Seoul, Korean brands are significant. Has been significant; frankly it's not news. It has been significant forthe last 3 or 4 years.

But around the world it still is growing. You're right. But it is not to a pace which in any way is limiting our current growth.

But they are formidable competitors. Definitely they are an additional formidable competitor. Which net -- yes, we are monitor, we are looking, weare evaluating opportunities on how to compete or participate to this growth in a more efficient way in the future.

Operator

Javier Escalante, Consumer Edge Research.

Javier Escalante - Consumer Edge Research - Analyst

Morning, everyone. I would like to go back to travel retail. Perhaps, Tracey, if you could tell us, for Q4 specifically, what was your retail sales growthand your shipment growth. Because it seems to me that you ship ahead of retail sales, but it still fell below passenger traffic.

And if you can tell us what is happening in the travel retail channel -- LVMH commented on very low conversion rates. What gives you confidencethat sales in these channels are going to rebound? Thank you.


Just wanted to give you the data. Our retail sales for fiscal-year 2014 travel retail has been plus 8%; and our net sales just a little bit higher thanthat; and the traffic was about 5%. So just to put the record straight, we have been growing solidly ahead of traffic in terms of retail sales in travelretail. Now, Tracey?


Xavier, so in terms of -- obviously, they went live with SAP, so we certainly advance shipped in Q4 in support of the first few weeks of go-live. Andthey did increase -- our customers did increase their shipments as it relates to that.

We are starting to see passenger traffic pick up. One of the reasons why travel retail increased their orders was July is a very important travel periodfor travel retail. It is a heavy volume period. And to make sure that they have the product in order to support that volume period, if we had anyissues, they wanted to have a greater degree of certainty.

But we are starting to see passenger traffic pick up. And as Fabrizio said, we have continued to outpace passenger traffic in the last few years inour travel retail business. So we benefit from traffic growth.

We have also been, as John indicated earlier, expanding some of our brands, particularly our luxury brands and other brands, in the travel retailchannel, which has been an accelerator on our travel retail growth. And we continue to see opportunities, and that is certainly in our plans thisyear, to continue to have travel retail be an outperformer in our channel growth and our overall growth.

Operator

Neely Tamminga, Piper Jaffray.

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Neely Tamminga - Piper Jaffray - Analyst

I want to thank John upfront for spending so much time on his brands. He's had a fantastic career at Estee Lauder; it's great to hear from him.

For retail, I want to ask you a little bit more of a philosophical question around distribution in this digital era. As consumers are migrating moreonline for both their search and purchase behavior and activities, obviously essentially landing people directly to your brand sites -- so I am justwondering, hypothetically speaking in the future, how is the role between Estee Lauder and the retail and distribution partners, how is it going toevolve in this digital era? Any insights you can share with us? That would be helpful.


Yes. Frankly, my point of view is that the digital era will strengthen our relationship with our retail partners. We are constantly working side to sidewith them to support their e-commerce and their digital expansion of activities.

Both the customers which have -- the retail partners which have the best.com activities are also the ones which deliver the strongest brick-and-mortarsales. There is a clear, strong connection between success of a retailer online and success of the same retailer in brick-and-mortar.

So we are participating to the development of the business of our retail partners both in brick-and-mortar and on-line. And we are very supportive,including putting our capabilities in cooperating with them, in developing this business. Because this omni-channel approach that many of theglobal retailers that we partner with are taking, I believe is the future. It is the right future.

So it is true that we have also some of our brands with strong direct sites, which we sell direct to the consumer. Like is it true that we have someof our strong brands with great freestanding stores, where we sell in brick-and-mortar direct to the consumer as well.

So we see our direct side like our freestanding store -- M.A.C., for example -- and they are used to penetrate the markets where our retail partnersare not, or to create flagship brand equity-building activities and show creativity and strength, or to complement high-traffic areas. But they arenever used in competition with our retail partners.

So all the move to direct, online, and in brick-and-mortar is actually a great move for accessing the consumer around the world and to develop thebrand equities. And our wholesale business is actually benefiting from these activities in a big way. So my view is very positive and very constructivethere.

Operator

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 PM EasternTime today through August 29. To hear a recording of the call, please dial 855-859-2056, pass code 82074353.

That concludes today's Estee Lauder conference call. I would like to thank you all for your participation and wish you all a good day.

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