Dennis D'Andrea - Vice President of Investor Relations Fabrizio Freda - Chief Executive Officer, President and Director Thia Breen - Global President of Estee Lauder Brand and Group President of North America Tracey Thomas Travis - Chief Financial Officer, Principal Accounting Officer and Executive Vice President.

Nik Modi - RBC Capital Markets, LLC, Research Division Dara W. Mohsenian - Morgan Stanley, Research Division Wendy Nicholson - Citigroup Inc, Research Division Alice Beebe Longley - The Buckingham Research Group Incorporated Olivia Tong - BofA Merrill Lynch, Research Division Jason English - Goldman Sachs Group Inc., Research Division Caroline S.

Levy - CLSA Limited, Research Division Javier Escalante - Consumer Edge Research, LLC William Schmitz - Deutsche Bank AG, Research Division.

Good day, everyone, and welcome to The Estée Lauder Companies Fiscal 2014 Second 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; Tracey Travis, Executive Vice President and Chief Financial Officer; and Thia Breen, Group President of North America for The Estée Lauder Companies. Thia is going to give us the strategic overview of the region and a review of the holiday results.

Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements.

Our discussion of our financial results and our expectations are before restructuring and other charges. In addition, we will discuss results before the impact of accelerated retail orders that took place in the prior year quarter due to the implementation of our Strategic Modernization Initiative.

You can find a reconciliation between GAAP and non-GAAP figures in our press release and in the Investor Relations section of our website. And I'll turn the call over to Fabrizio now..

Thank you, Dennis, and good morning to everyone. I'm pleased to say that by executing our strategy successfully, we delivered strong sales growth in the fiscal 2014 second quarter, in line with our expectation and at the same time, advanced our business in many important ways.

Our strong performance came despite a mixed holiday season and several soft retail markets across the globe. Our balanced portfolio enabled us to capitalize on our winning brands, geographies and channels, culminating in strong sales growth.

We introduced exciting innovations, gained shares in pivotal markets, including China and the U.K., and increased our brand's penetration around the world. Our sales performance continue to an unbroken record of growth over the last 4.5 years.

Since our current structure began, our business has grown every single quarter, which underscores the strengths of our long-term plan. In the most recent period, sales rose 4% in local currency.

However, reflecting our true underlying business, sales grew more than 7% after adjusting for the $94 million of accelerated retail orders recorded in the second quarter last year prior to our Strategic Modernization rollout.

To put that performance in perspective, our 7% sales increase is about double our estimated annual prestige beauty growth worldwide. Our results were especially noteworthy given the headwinds we face, including heavy promotional activity in our largest markets. Diluted earnings per share came in at $1.09, which was better than we had forecast.

We overachieved our estimate by leveraging our strong results in several markets in high-profit channels and driving down costs. The beauty of having a diverse portfolio of 30 prestige brands is the balance and sustainability it provides.

If some brands experienced a period of softer growth, it has been our experience that they are more than offset by others which are flourishing. Similarly, if mature channels or countries grow slowly, that's usually been more than counterbalanced by faster-growing channels and emerging markets.

One of our strongest areas in the recent quarter was our makeup category, which remains critical to our growth. So we were pleased the sales rose sharply. M-A-C's ability to tap into consumer desire with a constant streams on new collection led to strong demand for its Holiday sets and its Rihanna products.

M-A-C continue to build distribution by opening freestanding store and department stores doors primarily in international markets. At Smashbox, the brand concentrated on foreign expansions in the U.K. and Germany and entered Russia and the Netherlands for the first time.

Smashbox also saw its good momentum continue at home in its core North America market. In Bobbi Brown, retail sales rose double digits in North America and the United Kingdom. Our 3 makeup brands each gained share in prestige beauty in the United States accordingly to NPD.

Strong product launches from brands such Estée Lauder and Clinique, most notably in foundations and eye products, also contributed to makeup sales gains. Adjusting for SMI shift, our skin care sales grew solidly. However, the category has been extremely competitive.

Skin care remains our key priority, and we are focused on continuing to profitable growth in the category. Our recent skin care innovations helped to drive the category growth this quarter as some of those gains were offset by decline in some existing products.

This year's biggest launches, Clinique's Dramatically Different Moisturizing Lotion + and Estée Lauder New Advanced Night Repair serum, were well received.

Our luxury skin care brand, La Mer, enjoyed strong retail trends globally, especially North America and travel retail, despite being up against its soft cream launch in the previous year which was its most successful launch ever.

Much of our global innovation will continue to be centered on skin care, and we are committed to remaining a leader in developing the most advanced skin care technology for a host of skin care for consumers in every region. In fragrance, our business as a whole did well. With the category, we had mixed results.

Our high-end offerings continue to excel globally. In the holiday seasons, Jo Malone retail sales in our heritage market of the U.S. and U.K. each soared at least 20%. Tom Ford fragrances were popular worldwide, and the brand launched the men grooming collection, which helped lift sales.

The men collection is also displayed in a second relocation in stores, creating greater visibility. Tom Ford high-end distribution expansion continued, particularly in the European region. We also saw terrific response to several new fragrance launches.

Tory Burch was the best-selling fragrance at Bloomingdale's, where it was sold exclusively during the quarter. Michael Kors new fragrance collection did very well everywhere it launched in the U.S. and Europe, and Estée Lauder Modern Muse fragrance got off to a very good start, performing as we expected.

Other scents from our beauty brands also were popular holiday gifts. However, some of our Designer Fragrances and Clinique fragrances didn't offer major new products, and they came up short of our expectations. Nonetheless, we gained share in fragrance in U.S. prestige store during the important second quarter.

Aveda led our improvement in the hair care category with additions to its best-selling product lines. In the U.S., growth came from salons and online. Its U.K. sales were particularly good, spurred by TV advertising and 3 new retail stores. In addition, we doubled Aveda business in travel retail.

Now looking at our business based on where our brands are sold. Some of our best-performing global channels were online, travel retail and freestanding stores. Our e-commerce sales rose significantly. We had strong growth across our brand sites, as well as authorized retailer sites worldwide.

Our sharp sales increase anchored our position as one of the largest online prestige beauty retailers. The channel has been so successful and grown so fast that our e-commerce business has doubled in the last 3 years. We expect our online business to remain a major growth engine for the company over the next few years.

With higher traffic and increased conversion driving our momentum, we continue to look for opportunities to expand our presence in these high-margin channels. And as an example, M-A-C launched e-commerce in Brazil and Israel in January.

In travel retail, our net sales grew sharply, helped by retailers ordering for about 50 new point-of-sales and also in advance of an earlier Chinese New Year. Travel retail's growth was by far the stronger in Asia Pacific, led by business at Japanese airports which are more attractive to local and foreigner shoppers because of the weak yen.

Our retail sales exceeded passenger traffic growth, and we expect that trend to continue for the rest of the fiscal year. For perspective, travel retail has also been a strong performer over the last 3 years as our net sales have climbed more than 70% and we gained more than 200 basis points on market share there.

One of our strategic initiative is to align our distribution to evolving consumer preferences and growth opportunities in emerging markets. As part of that effort, we increased our network of freestanding stores, opening 57 this quarter, mostly for M-A-C. Our global sales in the channel grew double digits.

We also continued our growth in specialty-multi retailers in North America. We had good momentum in this channel, and we are working to make some of our products available where appropriate in multi-brand stores in other countries as well. Turning to our geographies.

Our sales in heritage markets performed well despite heavy promotional activity by brand and retailers as consumers sought value. The number of holiday promotion our brands offered was consistent with past years, but they started earlier since there were 6 fewer shopping days between Thanksgiving and Christmas. In the U.S.

and Canada, our retail sales climbed solidly on the strengths of online, specialty-multi and prestige department stores. Our strong sales growth in the U.K. was exceeded by even stronger retail sales with many brands and channels contributing.

New doors and freestanding stores, compelling product and service, robust e-commerce and effective advertise made for a very positive holiday season. Japan economic expansion continued, which was reflected in our business. Our sales advanced in local currency, further strengthening this important market.

We feel positive about the remainder of the year and have plans to advertise major launches in Japan with television and enhance our High-Touch services. Our underlying business in emerging markets continue growing double digits.

To give you some example, sales in Brazil were vibrant, driven by M-A-C, Clinique and e-commerce, contributed to strong Latin America results. Russia, positive growth this quarter, reflecting solid retail demand and new doors opening. And sales in Turkey and the Philippines rose significantly.

While China is clearly our largest emerging markets, all the others, taken together, represents another major opportunity for growth. Our combined sales in these emerging countries are actually greater than our China business, and our sales in this group grew double digits in local currency this quarter.

Like the Chinese, more consumer in these markets are traveling more and also buying our products in travel retail location and along travel corridors. In China, prestige beauty growth remains solid even though it has slowed. The slowdown has been concentrated in Tier 1 cities, while the smaller cities are generating good growth.

We have aligned our strategy to this reality and opened in 6 new Tier 3 cities during the quarter. Our 14 brands sold in China maintain the leading position among prestige cosmetic groups in our distribution.

Additionally, when looking at the Chinese market, there are other factors to keep in mind, namely that although disposable income among Chinese middle-class consumer is rising, they are buying more outside the country when traveling.

While these issues have led to lower department store traffic, our sales in China adjusted for SMI shift remained solid, our retail sales grew mid single digit and we continue to gain share. Our robust sales growth online and in freestanding stores contributed to our improvement.

And although these channels are a small part of the total Chinese sales, we expect them to represent a greater portion in the coming years. Some countries remained challenging, including Korea, where the pace of recovery in prestige beauty remains slow.

However, several of our brands there are showing improvements and gained share, including Aveda and Darphin, and our travel retail sales in Korea grew. Thanks to more Chinese travel with greater purchasing power. Some large countries in Continental Europe were soft, particularly Germany which was weaker than we expected, Italy and Switzerland.

Additionally, the macroeconomic environment in Venezuela continues to be volatile. The country persistent high inflation poses a risk of potential currency devaluation, which could have a negative impact on our financial results, so we are closely monitoring the situation.

Our main focus for the rest of the fiscal year will be on our 2 biggest product categories, skin care and makeup, and we will launch major innovation in both areas throughout the second half. Makeup products that should create excitement include M-A-C VIVA GLAM Rihanna lip products, which we expect to generate a high level of media attention.

Additionally, the Estée Lauder brand is launching the Pure Color Envy Lipstick collection, which features a new formula and lux packaging at a higher price point. The new line is part of the brand's ongoing effort to be more modern and aspirational.

In skin care, we are demonstrating our commitment to the category through continued strong innovation supported by solid marketing activities. For instance, Estée Lauder and Clinique are rolling out major innovation in Asia this quarter in one of the region's biggest categories, watery lotions.

Estée Lauder Macro Essence Skin Activated (sic) [Activating] Treatment Lotion is the first of its kind essence in lotion that helps strengthen skin foundation and make it more resistant to signs of aging. Clinique's Even Better Essence Lotion, which is launching in Japan now, helps irritation irradiance [ph] with the newly developed complex.

Tapping into a universe of skin care concern, next month, Clinique will introduced an acne product that delivers results as effective as a leading topical prescription drug. The product, Acne Solutions Clinic Clearing Gel, rollouts first in the U.S. and Europe and then in Asia.

To support these innovations, we plan to invest more in advertising in our fiscal third quarter, which we believe will build momentum also into the final months of our fiscal year. We are proud of the progress we've made so far this year, and we believe fiscal year 2014 will be another winning chapter in our company long-term profitable growth story.

We expect global prestige beauty to rise 3% to 4% in fiscal 2014, and our forecast is to grow about twice as fast, which will continue to improve our competitive position.

We recognize that our risks in some markets are softening, but we have proven our ability to anticipate challenges, be flexible and react to market changes in order to manage our business accordingly. We stay focused on meeting our financial goals and have demonstrated our ability to succeed in both strong markets and soft ones.

And also because whether you look at our business by brand, by channel or by country, about 1/3 of our sales are increasing by double digits, while the rest is keeping at least abreast of the industry. Before closing, I want to thank all of our company employees for their continued creativity and dedication.

Their exceptional work is what keeps us -- our strategic journeys moving forward to continue to create profitable growth. Now I'll hand it over to Thia, who will discuss our North America business and strategy..

Thank you, Fabrizio, and good morning, everyone. Before I begin, let me give you a little background about myself. I am Group President, North America, and have led our teams in the U.S. and Canada for the past 4.5 years.

I've been with Estée Lauder Companies for more than 35 years in several brands and varied positions, starting as an account executive for Clinique in 1977.

When I was appointed to lead North America in July 2009, we renewed our focus on the U.S., our largest and home market, to reinvigorate our department store growth, working to enhance their competitiveness with mass, as well as fuel sales in other high-growth channels. We developed a winning strategy and enhanced market-specific capabilities.

This enabled us to continue to leverage the company's strengths and best practices in a more efficient and effective manner across brands and retailers with one strong voice. For us, North America also includes Canada, which is one of the top 10 markets for prestige beauty globally with many opportunities for growth.

To capitalize on these opportunities, we established Canada as an affiliate in 2012 and have seen increased sales results. With this distinct focus on the U.S.

and Canada, we've been able to successfully recruit consumers from mass by creating more innovative product, offering customized High-Touch services and experiences and tailoring marketing programs for specific consumers. This strategic focus has led to strong results for North America.

Over the past 4 years, we have grown retail sales by approximately $1 billion and continue to be the leader in prestige beauty in both markets. Now I will focus specifically on the U.S., first talking about holiday in the quarter, followed by what we see as the longer-term trends. Our U.S.

holiday business was solid, driven by outstanding programs across all categories, appealing gift offerings and strong online sales. This year, the holiday environment was more promotional. We started planning for this well in advance, understanding December would have 6 fewer selling days and that our growth in November would need to outpace December.

Our November results were strong with double-digit sales increases driven by robust performances across our portfolio of brands, channels and categories. We gained share in the fragrance category led by new scents like Estée Lauder's Modern Muse, Tory Burch and the Michael Kors collection.

We experienced record online sales for the quarter, over 25% versus last year. And Cyber Monday marked our company's biggest U.S. e-commerce sales day in history, a reflection of our online leadership and commitment to building winning platforms. Guided by our winning strategy, the U.S. continues to be an engine of profitable growth for the company.

We have demonstrated our ability to win against mass, drive growth in department stores and succeed in high-growth channels, particularly evident by outstanding online results and double-digit increases in specialty-multi. We are also now gaining share in our fragrance category.

In the quarter, we continue to grow our luxury fragrances, AERIN, Tom Ford and Jo Malone, along with our new fragrances in department stores. Our brands also continue to drive success in the makeup category. M-A-C, Bobbi Brown and Smashbox had very strong growth across all channels in the second quarter.

In addition, we have seen positive results with new offerings like Tom Ford Beauty. We expect these sales trends to continue with a robust launch calendar of new products, such as Estée Lauder's Pure Color Envy Sculpting Lipstick and Nail Lacquers coming in March, and Clinique's Lash Power Feathering Mascara launching in April.

In hair care, Aveda has continued solid performance and gained share on salons, driven by the success of Invati. Although we did have growth in skin care last quarter in North America, these gains did not meet our expectations. As Fabrizio mentioned, we saw softening with some existing products.

For the remainder of the fiscal year, we are focusing on strengthening our position in skin care, with the introductions of new innovations in key subcategories like moisturizers, anti-aging and acne. We will continue to leverage our ability to execute with excellence to reignite stronger growth in this priority category.

We are a strong leader in prestige beauty in North America and believe we will continue to win by identifying new ways to strengthen our position. North America on a granular level is full of new consumers, diverse in terms of ethnicity, culture, age, location, shopping preferences and so much more.

We are evaluating the market to identify and prioritize the area with the highest growth potential and see opportunities here similar to those in a fast-growing emerging market.

Driven by our creativity and innovation, we are developing strategies across regions, consumer segments, key accounts doors and channels to tap into these opportunities and drive growth.

The composition of our consumers continues to evolve in the U.S., culturally and generationally, and we are focusing on key customer segments to drive growth, specifically multicultural and consumers over 55. The Latina consumer is the fastest-growing group.

Among our many early initiatives to serve the multiethnic consumer and meet her product needs, several of our brands have added multilingual service elements, tailored product assortments and multiethnic models in advertising. Over the next 5 years, the population of women in U.S. 55 and older will increase by 5 million.

We refer to this key segment as the ageless consumer. These consumers shop primarily in department stores for prestige beauty and have 2.5x more household income than younger households. Many of our brands resonate extremely well among ageless consumer as we offer innovative antiaging technologies along with High-Touch service.

We also see opportunities on a door-by-door basis with key consumer segments driving category and subcategory growth. For instance, if you take a closer look at our biggest retailer in the U.S., Macy's, and 3 of its stores within a 12-mile radius of New York City, you see significant differences.

In Queens - Rego Park, the Latina consumer drives a majority of the beauty sales, while African American consumers over-indexed in Brooklyn, and fragrance accounts for about half of our beauty sales in both locations.

In contrast, just a few miles away at Macy's in Flushing, nearly 2/3 of the business is in skin care as consumer demographic shifts heavily to East and Asian. In each location, we have tailored our brand's presence, service model, product lines, shades and merchandising to better serve each customer segment.

Retail today is omni-channel, which presents another significant opportunity. Consumers expect a consistent and customized experience at every touch point, whether they're shopping on their mobile phone, laptop, tablet, in-store or in travel retail.

We plan to leverage our strong online business and network of freestanding stores to ensure a seamless prestige experience no matter where she shops. We are confident North America will continue to grow, given our focus on identifying emerging opportunities across regions, consumer segments, key accounts doors and channels.

Led by my dedicated team, we expect this granular approach to generate profitable, sustainable growth, maximizing the infrastructure, capabilities and resources we have as an established market. We are excited about the company's future in North America, and we look forward to leveraging our portfolio and strengthening our leadership position.

Now I will turn the call over to Tracey..

Thank you, Thia, and good morning, everyone. I will first review our second quarter financial performance and then share with you our outlook for the remainder of fiscal 2014. As a reminder, my commentary excludes the year-over-year impact of restructuring and other charges.

And as the quarter and year-to-date comparisons are impacted by the company's Strategic Modernization Initiative or SMI activity in the prior year period, I will highlight for you both the reported and adjusted comparable growth rates, which I would encourage you to reference as well in this morning's press release.

Net sales for the second quarter rose 3% to $3.02 billion, in line with our expectations. Excluding the impact of currency translation, sales grew 4%. Net earnings and earnings per share each decreased 6% to $430.2 million and $1.09, respectively.

EPS was above the top end of our expectations, reflecting strong growth in our makeup artist and luxury brands and high-profit channels and more disciplined cost management in response to some softening market trends.

As we have previously discussed, in the prior year, some retailers accelerated their orders into our second quarter that otherwise would've occurred in our third quarter in advance of the January 2013 rollout of SMI.

The impact of that shift was an additional $94 million in sales and $78 million in operating income, equal to approximately $0.13 per share. Excluding the impact of the SMI-related order shift and the restructuring activities from last year, local currency sales would have grown 7% for the quarter, and EPS would've grown 6%.

Looking at our sales growth by region. Net sales in our Americas region increased 6% in local currency, with 4% growth in North America and double-digit growth in Latin America.

The strongest performance in North America at retail came from double-digit sales growth, both in online, as well as in specialty multi-brand stores, as Thia indicated, and high single-digit growth in our freestanding stores and at prestige department stores. Latin American growth reflected increases in Brazil, Venezuela and Chile.

In the Europe, Middle East and Africa region, sales also increased 6% in local currency. We achieved double-digit growth in emerging markets such as Russia, South Africa and Turkey. The U.K. delivered a strong 9% increase in sales driven by strong performances in M-A-C, Jo Malone, Bobbi Brown and Aveda.

Among the more established markets in Western Europe, France rose mid-single digits after adjusting for the SMI shift in the prior year, and we were encouraged that Iberia appears to have stabilized after declining for the past 2 years. Sales in Switzerland, Italy and Germany were lower.

And in travel retail, we achieved double-digit net sales grains, driven by the continued benefits of high single-digit international passenger traffic, combined with new distribution and an earlier Chinese New Year, all of which more than offset the impact of a change in Chinese tour regulations.

Our sales in the Asia Pacific region declined 3% in local currency, reflecting the significant impact of the SMI-related sales shift in China last year.

Excluding the shift, local currency net sales in the region increased 5% and China rose double-digits, reflecting more moderate retail sales growth and the addition of nearly 20 new doors and 6 new cities during the quarter. Australia, the Philippines and Singapore saw strong growth, and Japan continued its low single-digit growth.

We believe Korea is beginning to stabilize with sales declines moderating to 3% this quarter. Sales in Thailand fell approximately 5%, as political and social unrest affected consumer shopping.

In my discussion of margins and operating expenses, I will refer to the SMI-adjusted shift comparison, which provide additional insight into our underlying performance for the quarter. As I mentioned before, a reconciliation table to our reported results is included in our press release.

Our gross margin improved 10 basis points to 80.7%, which largely reflected the net impact of pricing. Operating expenses -- expense dollars increased 5%. And as a percent of the SMI-adjusted sales, which grew 7%, operating expense margin declined 70 basis points to 59.1%.

The major factors driving the decrease in margin were lower marketing and selling costs of approximately 60 basis points each, partially offset by a prior year adjustment of accounts payable of approximately 50 basis points. Operating income rose 11% to $652.8 million, and operating margin increased 80 basis points to 21.6%.

Net interest expense declined 7% to $12.4 million, primarily due to higher interest income, and our effective tax rate was 32.4%. As a reminder, in the prior year, we recognized $21.3 million in other income related to the 2007 sale of the Rodan + Fields brand, which added approximately $0.04 to our EPS last year.

For the 6 months, cash flow from operating activities rose 19% or $127 million, primarily reflecting improved receivables and payables performance. Inventory days to sell rose to 186 compared with 163 days last year. Higher inventory was mainly due to anticipated sales growth and increased safety stock to maintain appropriate service level.

We invested $217 million in capital projects to support new counters, technology and retail stores. We repurchased approximately 2.9 million shares of our stock for $205 million and paid $148 million in dividends to stockholders. With the first half behind us, let's now turn to our outlook for the third quarter and the full fiscal year.

Starting with the full year, due to slower trends in Greater China and Asia, travel retail and continued softness in parts of Europe, we are narrowing our expectations for fiscal 2014 sales growth to between 6% and 7% in constant currency, in line with the SMI-adjusted growth we experienced in the first half of this fiscal year.

Currency translation is expected to negatively impact our full year sales growth by approximately 1% to 2%. Our estimate assumes weighted average exchange rates for the full year of $1.33 for the euro, $1.59 for the pound and $1.03 for the yen.

The combined benefits of gross margin expansion and operating leverage are expected to drive operating margin expansion by 50 to 60 basis points for the full year.

As previously discussed, we continue to drive cost savings from our initiative program while simultaneously strengthening our capabilities in many areas, such as innovation, retail stores, e-commerce and information system that support our company's future growth objectives.

Advertising, marketing and promotions are expected to remain fairly consistent as a percent of sales for the full year. As you are aware, Venezuela is a highly inflationary economy, and there are number of uncertainties that could affect our business.

While the country currently represents approximately 1% of our sales and 2% of our operating income, a hypothetical 45% devaluation of the Venezuelan bolivar could result in a remeasurement loss of approximately $20 million to $27 million after-tax, depending on both the timing and level of the devaluation.

Additionally, Venezuela recently imposed a law limiting the permissible profit margin to 30%. For your clarity, our guidance does include the assessment of the potential impact of the margin cap but does not, at this time, take into account an assumption for the devaluation loss. Our fiscal 2014 tax rate is planned at 30% to 32%.

At this time, we are comfortable reaffirming our forecast for full year EPS in the range of $2.80 to $2.87. Depending on the magnitude of exchange rate movements, the approximately 1% to 2% negative currency impact on our net sales equates to about $0.05 of EPS.

As a reminder, the next wave of our SMI rollout is scheduled for July 2014 and will include our North America order-to-cash, travel retail division, Japan and the Middle East. As has been the case in previous rollouts, we expect retailers will increase their orders in advance of the go-live to mitigate any potential disruptions from the transition.

The impact of this potential shift in orders will be to increase sales into our fiscal 2014 fourth quarter and full year from our fiscal '15 first quarter. We plan to provide an estimate of the shift on our third quarter call in May when we expect to have a better indication of the needs of our retailers.

The guidance we are giving today does not include this shift in sales and profits. For the third quarter, our sales are expected to grow 10% to 11% in local currency. Translation could contract growth by approximately 1 to 2 percentage points. We expect EPS will come in between $0.52 and $0.55.

Remember that the prior year SMI shift in sales of $94 million or $78 million in operating income and $0.13 in EPS will have a favorable impact on comparisons in our third quarter. Adjusting for the shift, our sales growth is expected to be between 6% and 7% in local currency.

Additionally, our tax rate is expected to be consistent with our full year guidance in the third quarter compared to the lower rate in the prior year quarter. That concludes our prepared remarks, and we'll be happy to take your questions now..

[Operator Instructions] Our first question today comes from Nik Modi with RBC Capital Markets..

Just a quick question on some of the competitive activity you're talking about. If you could just provide a little bit of clarity on exactly kind of where it's coming from, if it's focused in a particular region or category, just to give us a little bit of color around that would be really helpful.

And then just a quick follow-up to that, unrelated, is how did e-commerce impact margins this quarter? I'm just curious on what the mix shift impact was on profitability..

So on the last one, how e-commerce impact margin, the more we grow e-commerce or online as a mix in our business, the better the margin goes because it's a high-margin channel for us.

I don't think we can share specific indication and numbers, but basically, you need to associate the growth of online above average of the growth of the company to margin increase in general. The -- in terms of competitive activities, we see many.

I mean, here in North America, the biggest competitive activity, and Thia can expand on it later, has been the promotionality of the holidays in general, and a lot of launches in the fragrance categories and the important activity in skin care, particularly in the cleansing and device areas.

In Asia, we see a -- we see strong performance from us and some other international brands, but also we see strong performance from Korean brands that are growing market share in the region. And in terms of Europe, I think, it's the traditional competition, just that because of the recessionary environment that's been in general more promotional..

Your next question comes from Dara Mohsenian with Morgan Stanley..

Tracey, could you discuss your regional and profit results a bit more in the quarter? I was surprised Americas was up so much and then Asia looked weak, so I just wanted to get some detail on the drivers behind that. And also, ad spend you had slated to be up substantially year-over-year in Q2.

I'm wondering, did you spend in line with that given SG&A came in better than we expected, or some of that shifting into Q3?.

Sure. So regarding our regional performance, as Thia indicated, we had a good holiday season in the North America and certainly in the U.S., so our growth was quite strong given some of the holiday programs that we had. In Latin America, as I mentioned, it was up double digits.

So overall, from Americas standpoint, we certainly had strong growth as we -- as I spoke in the call and as we reflected in the press release.

Asia had a number of issues, and even adjusting from an SMI standpoint, we continue to see, although we mentioned it was stabilizing, softer growth in Korea, we have low mid -- low single-digit growth in Japan. And then China was softer this quarter for the reasons that we mentioned.

So the Asia region was a bit softer than we have experienced in prior quarters. And part of the reason that we looked to bring down our guidance for the full year was because of some continued softness although picking up in the second half of the year relative to what we've seen, certainly, in the fourth quarter.

But we do expect some muted performance out of that region for the balance of the year. In terms of expenses and your question on advertising, yes, we did, as we looked at some trends in the quarter, did reduce some of our advertising spend and certainly some of our G&A spend..

Your next question comes from Wendy Nicholson with Citi..

I have a question going back to some of the weakness in the skin care category, and maybe, Thia, this is for you.

But is the weakness that you've seen in some of your existing products related at all to pricing that you might have taken? I know pricing is a new idea sort of for the company, and I'm wondering if you've taken some pricing and maybe pushed it too hard.

And do you have a sense -- sounds like the new DDML+ is doing okay but maybe not as well as you had expected.

Again, do you think the $1 price increase had any impact on that? And then just a quick question, Tracey, is there a specific time frame for when we might start to see improvements in the inventory levels?.

So Wendy, it's Thia. The pricing really had nothing to do with the performance of whether it's Advanced Night Repair or DDML+, as evidenced in our tremendous growth that we've had in some of our high-end skin care such as La Mer. So it would not be a pricing issue. And we did very well with the new introductions.

But as Fabrizio and I indicated, there was just more cannibalization in some of our existing products, a bit more than we had planned for.

Certainly, as we move forward into the second quarter, we have looked at this, examined it and we focused our promotional -- our activity in terms of innovation to see a turnaround in skin care in the second half..

And Wendy, regarding inventory, we are taking some various specific actions towards the end of the year to reduce our current level of inventory. We do, however, have another rollout of SMI.

And so even though that's not in our financial results right now, that will result in a build -- of the residual build of inventory in addition to additional shipments towards the end of the year.

So in fairness, I would say that our inventory levels will start to sustainably improve after this last wave of SMI when we can start to manage them down far more aggressively than we have been over the last couple of years with the SMI rollout..

Your next question comes from Alice Longley with Buckingham Research..

I have a couple of follow-up questions.

Why do you expect your results in Asia, in China in particular, to pick up especially in the fourth quarter? And similarly, what are you doing to make skin care pick up again, it sounds like, by the fourth quarter? And the final part of that is, could you list which categories grow fastest in fiscal '14 adjusted for currency? I think in the past, it was skin, followed by color, followed by fragrance.

Could you give us an update on that for global results and also for the U.S.?.

Okay. Well, we'll look at the ranking of categories. The -- let's talk about Asia. First of all, what's happening in Asia is a combination of factors, as we explained. First of all, in this moment, you have China with a slowdown. Let's talk first about that.

The China slowdown is characterized by stronger slowdown in Tier 1 cities and in the luxury interest in general of Tier 1 cities population. But in Tier 2, 3, 4 cities, meaning the new population on China now, the growing middle class now are approaching more prestige products, actually the growth continued very solidly.

So we are adjusting our strategy to this new reality. Meaning, we are building distribution and penetration in Tier 2, 3, 4 cities and aggressively building our online penetration in China. For example, the Clinique Tmall side has been extremely successful, and we are clearly ahead of goals.

Because of this, we believe that we are sitting and adjusting our strategies to the new profile of growth in China, and in this sense, we should get better results even in a slowing down environment in the future months. By the way, we saw already a pickup in the month of January previous to the Chinese New Year.

The second situation in Asia is temporary. I mean, Thailand is a big business for us, and Thailand, as we said, was minus 5% because of the political unrest.

This was not expected, and we hope that as soon as Thailand will go to normalize the political environment, we'll continue to see the trend -- growing trends that, by the way, was double digit before the political unrest. So we are growing double digit to minus 5%. That's temporary. That's, obviously, for us, was a surprise.

Then you have Korea that is stabilizing, although still declining. So we believe that in the next month, we will reach real stabilization and possibly, we will start growing again in this very important market for us. And then there are some good news that we have shared.

Japan picking up, Australia doing better and the other markets like Singapore, Philippines really performing. So we believe this will pick up. Now in terms of skin care, in skin care, we are going back to do some innovation, which we believe in very strong in our key brands, which are what we define white spaces.

I mentioned in my prepared remarks that Lauder and Clinique are entering the watery lotion category in Asia. To be very clear, this is a white space, so it's supposed to cannibalize much less because it's a space in which we are not and our competition is.

And our products are superior, very strong, very liked by the consumers, so this will be net extra. Our skin care strategy in the future would be more focused on this net extra space. There are others which I cannot mention for competitive reasons that will happen in the last quarter.

And then the example of Clinique Acne also is much more a white space for us, so it's a net extra additional space that our brands will build in skin care, by the way, in very profitable segments. And that's why we believe we will pick up again the trend in skin care.

And I wanted to close saying, although in skin care, we have grown less than what we wanted in the quarter, we are still been growing and growing very well..

And regarding your question on full year category growth, so makeup, as we've called out, has been a strong performer year-to-date, and we expect that it will continue to be a strong performer balance of the year. We are seeing tremendous, tremendous growth in our M-A-C brand and Tom Ford and others. So that will be our fastest-growing category.

Second would be hair care, with the success of the Aveda brand and some of the expanded rollouts there. Third would be skin care. And as Fabrizio mentioned, we do have plans in the second half in addition to picking up in Asia that will impact the skin care growth to be faster in the second half than it was in the first half.

So that's the ranking, and then fragrance would be last..

Your next question comes from Olivia Tong from Bank of America..

Are we to assume that skin care margins will be down for fiscal '14? And then on the U.S., what have you expected U.S. category -- the U.S.

category to grow at, and where do you see category growth now? And can you give a little bit more color on sales growth for the bigger brands versus the smaller ones, since it looks like the bigger ones were perhaps a bit more sluggish than you thought but the smaller brands are clearly more than offset? So is that growth disparity between those 2 ends of the portfolio widening? And what implications does that have on spending need and ability to leverage fixed cost by brands?.

Okay. I'll take this last one, while Thia and Tracey will prepare to answer the first 2 questions. Actually, you are correct. Our midsized brands are today growing in our portfolio faster than our biggest brand, with the exception of M-A-C which is one of our fastest-growing brand.

And this is having a very healthy impact on our business because it's making our portfolio broader, meaning the amount of brands that, if growing, have a significant impact on our growth is increasing.

And the fact that the midsized smaller brands today are becoming bigger and are growing faster is another balancing factor to our portfolio that actually reduce our risk of being exposed to 1 brand or another being soft for a short period of time, or being exposed to one competitor [ph] or another.

So we are broadening our portfolio geographically, we are broadening our portfolio in terms of channel -- growing channel like the expansion in e-commerce as an example, and we are broadening our strengths by brand portfolio. All this is a very positive trend.

Now, Thia?.

In terms of the market and growth, we are thrilled because we are part of a dynamic market in terms of prestige beauty growth.

If we take a look at the categories, department stores are certainly a major portion of our business today, and we have really figured out a way of attracting that mass consumer and recruiting for mass in our department store channel.

We also have, in terms of high-growth channels, a tremendous growth in terms of online, also in terms of freestanding stores and specialty-multi. So we -- and you've seen the numbers and certainly makeup has been a key driver and it's a significant portion of our North American portfolio.

We see the turnaround in terms of skin care, and Fabrizio had mentioned the white space in terms of acne and we have a new product in Estée Lauder as well that attacks that. And certainly, as we look at it, because of this growing marketplace, we're going to be a major player and expand our leadership position..

And lastly, regarding skin care margins, we do not expect them to be down for the full year. Obviously, skin care will grow a bit less than makeup. So from a mix standpoint, it will represent less of those margin mix upside for us. But that margin should be up year-over-year in the category..

Your next question comes from Jason English with Goldman Sachs..

I want to come back to China because, I guess, I'm still confused here. You gave us a lot of color, but I've heard some conflicting numbers.

So first, can you just tell us what your growth in the market was, excluding the shift in retail ordering, both in all-in and same-store sales basis, as well as your view of the current category growth? And I guess a little more color on your deceleration. I suspect the same-store sales number is going to be behind where the category was growing.

If so, what's driving the market share weakness?.

So what was the growth?.

So for the quarter, our comp growth adjusted for SMI was 10% in the quarter. And then in terms of the year-to-date number, so the 6-month number, the comp growth adjusted, Jason, was 16%..

Okay. And in terms of our -- we are growing market share because we are growing in this market above the market trend, and so we continue to beat market share. And the strategy is to expand our penetration into Tier 2, Tier 3, Tier 4 cities and online, which are within China, the fastest-growing segment of the market. So the strategy is pretty simple.

We are exposing our brands to the fastest-growing segments of the market. And thanks to that, we are able to continue growing above the market. But however, the market is lowering and has lowered in the last quarter, and so that's -- those are the facts.

Now the other important thing to understand are the China investment for taking a bit longer-term view is that the Chinese consumer continues to -- the middle class continues to grow and the Chinese consumers continue to spend.

But they are -- some of them are traveling more, they're spending more when they travel in travel retail or in the countries they visit, and in a way, this is part of the reason why there's some slowdown internally, in our opinion.

And so the combination of our sales with the Chinese consumer is still very, very strong, even if there is this slowdown trend internally. And that's the way we look at it for the long term..

Your next question comes from Caroline Levy with CLSA..

Just wondering, for both Thia and for Fabrizio, have you sort of given up on the idea or are you sticking with the idea that you don't want to be in the device business? Just given how successful L'Oréal has been there, it seems to be both a big and growing opportunity, and I know up until now you've said that's nothing that you want to do.

Are you still of that view? And just similarly, with acquisitions, you spent a while getting Smashbox to perform as you hoped, I guess, and does that mean you're maybe more willing to step up to the plate now? And then just finally, the big investment in fragrance feels awfully disappointing looking at the results.

And I'm just wondering if we could expect a big pullback in spending next -- as you move out because you're not getting the return on investment that you would've liked to have seen..

Okay. Let me start on this last one. It's that -- we -- as you see, we are managing our business very flexibly and focus on our financial results and on maximizing return of our investments.

So we learned, and we have learned this year that certain investment we mentioned before, some cannibalization of some skin care launches, we mentioned some countries, now you mentioned fragrances where we had lower return, in some cases, than what we expected, and frankly, higher returns in other cases.

Within fragrances, I mentioned some great success stories in our launches in my prepared remarks, and I also revealed there were some areas where we did less than expected.

So yes, you can expect us to adjust to this new reality and to learn from what we're doing, and to refocus and rebalance our investment in the future based on the successful stories, and minimize or avoid to invest in areas with wrong rate of return.

The -- so there was the -- what's the other point?.

Devices..

Oh yes. The question on devices. Again, we watch the market, we watch the consumers and we learn. So I don't think we said never do anything about it, but we said that we were not going to launch devices at the point in time.

The -- our strategy here is to try to create sustainable propositions to address the consumer benefits in that area, and we are working on it. So if we call it devices or different thing, or different kind of innovation, this is something I cannot discuss.

But definitely, the benefit area of cleansing is a very important benefit area for the company, and we are going to address it in the future and I believe, very competitively. There was a third question..

M&A. Acquisition..

Acquisition, sorry. There were many questions. The acquisition, well, we continuously look at the market. We are very interested in growing acquisition. As you know, in our goals, we have the intent to build 1 point of growth out of acquisitions. So we are continually monitoring the market and we are ready to do the right steps when opportunity arises.

Smashbox is a happy story so far, and we are definitely ready to consider opportunities if they arise..

Your next question comes from Javier Escalante with Consumer Research..

My question has to do with your margin goal. Early back in August, I understood that you said that the expansion in margins dependent upon making marketing and promotional spending more efficient, and it seems like you are now being compelled to increase both because of competitors' activity and the recessionary environment.

And the other point that is also pressing margins, in my view, has to do with China. I don't fully understand the characterization that you are changing the strategy there.

We have been hearing about this expansion in Tier 2 to Tier 4 cities since 2012, and what's the point of making this spending in brick-and-mortar if incremental sales are going into travel retail and e-commerce? So if you can explain us where the impact of these 2 in your margin goals..

I mean, on the impact on margin goals, to be clear, we have a strategy where all our high-growth areas are margin accretive. That's intentional. So travel retail, online, emerging markets, China, the new segments, skin care category, within skin care category, certain areas of benefit are all margin accretive.

So our business is actually designed on purpose to grow faster in areas with higher marginality. And this is working so far. It's working very, very well. Now if you add cost-saving activity to this mixed asset, then you get the clear idea of what we are driving into margin progress and the way we're driving margin progress in long term.

If you add to this the third element, which is leveraging growth with productivity gains, then you get the full picture. So I don't believe there is any risk in the strategy to decrease margin.

Actually, I believe, we will continue to build margin gradually and we will relook our goals as opportunity arise and as our cost SMI saving programs become clearer.

In terms of the China strategy, the -- I'm not sure -- I'm not very clear what you don't understand on the strategy because basically, the Tier 2, Tier 3 cities, the awareness of the brand today is low. Building brick-and-mortar there makes -- by the way, very efficient brick-and-mortars because few doors which sell a lot of products.

And as you know, in our business, the profit is dependent from sales per door. So those few doors are very effective, very efficient. On top of this, they create awareness in this area, so these people that live in the city, when they travel, when they go online, buy our brands in travel retail, online or in Paris.

And if we were not in the city to create awareness, first of all, we will have less productive doors; and second, we will not have the awareness for these people buying and preferring our brands in those channels. In that way, this strategy is definitely accretive to margin..

And the only thing that I would add with respect to your commentary on advertising, marketing and promotion, we have spent against everything that we had planned to spend on at the beginning of the year. As -- and Fabrizio mentioned that we are flexible as we have seen results, we have recalibrated some of the levels of spending behind some programs.

But by and large, we have spent against everything that we had planned to spend on as we structured the year..

We have time for one more question. Your last question comes from Bill Schmitz with Deutsche Bank..

A few things. If I look at sort of the cash flow statement, obviously, cash flow from operations were up 19% for the year, but the share repurchase is down 37%. You obviously have this big, growing cash hoard and the multiple is coming down, so I couldn't think of a better opportunity to get more aggressive in the share repurchase.

And I always thought the strategy was, we don't want to add any more leverage but we're perfectly content sweeping the cash that we generate from this point forward.

So just any clarity on that? And then maybe I missed it, but can you just give us the actual travel retail sell-in and sell-through percentages? And then the real question, sorry for being so long-winded, but it seems like Clinique is having a real tough go of it right now especially in the U.S.

So I wonder if there's a triage plan there, and I know there's tough comparisons, obviously.

And then, if Jane being appointed as President of the business, if there's anything incremental that's going to happen with the brand?.

Okay, that was a lot. In terms of share repurchase, we see the opportunity that you see. And yes, we are still very committed to our share repurchase program.

In terms of travel retail, I assume you were asking about the second quarter, and the net sales in the second quarter, as we mentioned, were up double digit, and the sell-through was high single digit for the quarter..

Yes.

And then on -- yes, the question was Lauder and Clinique?.

Clinique..

Yes, I think -- by the way, as I said, we had a very strong program in the future on Clinique, so we are very comfortable for the plan to restart more aggressive growth on the brand in North America. And maybe Thia to say a few words..

And Bill, one of the many things we've heard since the appointment of Jane Lauder in this role, I worked with Jane when she was in the marketing role, actually, many, many years ago at Clinique, and the retail partners, retail community and internally, everyone is just thrilled with the fact that we have a family member now heading up this brand.

So I mean, everybody has great expectation, and Jane has all of our support in what will be a tremendous role for her with the Clinique brand..

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 p.m. Eastern Time today through February 19. To hear a recording of the call, please dial (855) 859-2056, and enter passcode 31881764. 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..