Market Overview

The Estée Lauder Companies Delivers Outstanding Fiscal Year 2018 Results

Share:

– Fourth Quarter Reported Net Sales Increased 14%; Up 12% in Constant
Currency –

– Full Year Reported Net Sales Rose 16%; Up 13% in Constant Currency –

– Strong Constant Currency Growth Expected to Continue in Fiscal 2019

The
Estée Lauder Companies Inc.
(NYSE:EL) today reported strong
financial results for its fourth quarter and fiscal year ended June 30,
2018. The Company reported fiscal year 2018 diluted net earnings per
common share of $2.95 compared with $3.35 reported in the prior year.
Excluding restructuring and other charges and adjustments, adjusted
diluted net earnings per common share increased 30% to $4.51, and in
constant currency rose 24%.

Fabrizio Freda, President and Chief Executive Officer, said, "Fiscal
2018 was an outstanding year for our Company. We generated higher sales
in every region and product category and gained global share. By
investing in our hero franchises, fast-growing channels and digital and
social media, we delivered double-digit sales and adjusted earnings per
share growth. We achieved record net sales in fiscal 2018 and one of our
best performances in the last decade.

"Sales climbed in virtually all our brands and we hit milestones along
the way. Among the top four brands, our flagship Estée Lauder brand
achieved record global sales and grew 22% in constant currency,
demonstrating the amazing equity of the brand. La Mer became the fourth
brand in our portfolio to contribute well over $1 billion in net sales,
and we increased sales at M•A•C and Clinique globally.

"Product innovation and creativity were strong across brands and Leading
Beauty Forward provided us the flexibility to invest more in digital
advertising behind our initiatives, which is accelerating our sales
growth."

Freda added, "In fiscal 2019, we will continue to create products that
appeal to a more diverse and growing middle class around the world and
we are confident that we can continue to achieve industry-leading sales
and double-digit earnings per share growth. With a successful strategy
that focuses on multiple engines of growth across products, geographies,
channels and demographics, we expect to once again gain share globally
in fiscal 2019."

For the three months ended June 30, 2018, the Company reported
net sales of $3.30 billion, a 14% increase compared with $2.89 billion
in the prior-year period. The Company posted net sales growth in most
brands and across-the-board gains in all geographic regions and product
categories. Net sales increased in several developed and emerging
markets, reflecting especially strong growth from the travel retail,
online and specialty-multi channels. Excluding the impact of currency
translation, net sales increased 12%.

Net earnings for the quarter were $186 million, compared with $229
million last year, and diluted net earnings per common share was $.49,
compared with $.61 reported in the prior-year period. Adjusted diluted
net earnings per common share rose 20% to $.61, and 11% in constant
currency, for the three months ended June 30, 2018, excluding
restructuring and other charges and adjustments, the impact of the new
tax law in the United States and the effect of currency translation, as
detailed in the table below.

         

Reconciliation between GAAP and
non-GAAP

  Three Months Ended June 30, 2018  

Three Months
Ended June 30

Net Sales Growth   Diluted EPS Change

Diluted Earnings
Per Share

(Unaudited)

Reported
Basis

 

Constant
Currency

Reported
Basis

 

Constant
Currency

2018   2017

Results including restructuring and other
charges and
adjustments

14 %(1) 12 % (19 %)(1) (29 %) $

.49

(1)

$

.61

(1)

Non-GAAP

Restructuring and other charges(2) .10 .15
Contingent consideration (.08 ) (.11 )
Transition tax resulting from the TCJA(3) .05

Remeasurement of U.S. net deferred tax
assets as of the TCJA
enactment date

(.03 )

Net deferred tax liability related to
foreign withholding
taxes on certain
foreign earnings resulting from the TCJA

.07
Intangible asset impairments .06
China deferred tax asset valuation allowance reversal               (.20 )
Adjusted results 14 % 12 % 20 % 11 % .61 $ .51  
Impact of currency translation on

earnings per share

  (.05 )
Constant currency earnings per share $ .56  

_________________________

(1) Represents GAAP.

(2) Includes charges associated with Leading Beauty
Forward.

(3) Tax Cuts and Jobs Act ("TCJA").

Amounts may not sum due to rounding.
 
 

Net sales and operating income in the Company's product categories and
regions outside the United States were favorably impacted by a weaker
U.S. dollar in relation to most currencies. The Company reported
operating income for the three months ended June 30, 2018 of $277
million, a 20% increase from $230 million in the prior year. Total
operating income excluding the favorable impact of currency translation
of $13 million and before charges and other adjustments, declined 1%,
largely reflecting strategic investments made in digital and social
media advertising to support long-term growth in fiscal 2019 and beyond.

 

Fourth Quarter Results by Product Category

  Three Months Ended June 30
(Unaudited; Dollars in millions) Net Sales   Percent Change  

Operating
Income (Loss)

 

Percent
Change

2018   2017

Reported
Basis

 

Constant
Currency

2018   2017

Reported
Basis

 
Skin Care $ 1,379 $ 1,072 29 % 26 % $ 292 $ 186 57 %
Makeup 1,358 1,311 4 2 35 151 (77 )
Fragrance 403 362 11 9 (19 ) (42 ) 55
Hair Care 151 140 8 6 19 13 46
Other 12   9 33 33    
Subtotal 3,303 2,894 14 12 327 308 6
Returns and charges associated with restructuring and other
activities
(8 ) (50

)

(78 )
Total $ 3,295   $ 2,894 14 % 12 % $ 277   $ 230   20 %
 
 

Skin Care

  • Skin Care net sales increased double-digits in every geographic
    region. Growth was particularly strong in Europe, the Middle East &
    Africa, travel retail, and China. By brand, the Estée Lauder, La Mer
    and Clinique brands were the largest contributors to growth.
  • Operating income increased primarily from Estée Lauder and La Mer,
    reflecting higher net sales in Asia/Pacific and Europe, the Middle
    East & Africa, with the strongest growth in China and travel retail.

Makeup

  • Makeup net sales increased. Strong double-digit growth from Estée
    Lauder, Tom Ford, Too Faced, BECCA and La Mer were partially offset by
    declines from M•A•C and Clinique.
  • Makeup operating income declined primarily due to lower operating
    results from M•A•C that mainly reflected investments to support its
    turnaround in North America, stock adjustments in the Middle East, and
    higher advertising in Asia/Pacific to drive net sales in the
    fast-growing region.

Fragrance

  • Higher fragrance net sales reflected growth across all geographic
    regions. Jo Malone London, Tom Ford and Le Labo all had strong
    double-digit gains.
  • Fragrance operating results improved, reflecting higher net sales from
    Tom Ford, primarily in North America, as well as the Europe, the
    Middle East & Africa region, which benefited from strong growth in
    travel retail. By Kilian also contributed to the growth. The category
    performance also reflected a decline from Estée Lauder fragrances in
    the United States.

Hair Care

  • Hair care net sales increased primarily due to the successful launch
    of new Aveda products.
  • The increase in hair care operating income reflected the higher net
    sales.
 

Fourth Quarter Results by Geographic
Region

  Three Months Ended June 30
(Unaudited; Dollars in millions) Net Sales   Percent Change  

Operating
Income (Loss)

 

Percent
Change

2018   2017

Reported
Basis

 

Constant
Currency

2018   2017

Reported
Basis

 
The Americas $ 1,197 $ 1,173 2 % 2 % $ (20 ) $ 48 (100+ %)
Europe, the Middle East & Africa 1,398 1,173 19 16 329 247 33
Asia/Pacific 708   548 29 24 18   13   39
Subtotal 3,303 2,894 14 12 327 308 6

Returns and charges associated with restructuring and other
activities

(8 ) (50 ) (78 )
Total $ 3,295   $ 2,894 14 % 12 % $ 277   $ 230   20 %
 
 

The Americas

  • Net sales in The Americas increased, led by strong growth in Canada
    and Latin America. Net sales in the United States increased slightly.
  • Operating income in The Americas decreased, primarily reflecting lower
    operating results from M•A•C due to investments in North America to
    turn around its business. The Company also strategically increased
    digital and social media investments across the brand portfolio.
    Higher general and administrative expenses, including an increase in
    employee compensation and investments in information systems, also
    contributed to the operating income decline.

Europe, the Middle East & Africa

  • Net sales increased, with double-digit gains in travel retail and in
    the Balkans and India, partially offset by stock adjustments in the
    Middle East as well as a decline in the United Kingdom.
  • Operating income increased, led by strong double-digit growth in
    operating results in travel retail. The higher results were partially
    offset by lower results in the Middle East due to stock adjustments
    for several brands.

Asia/Pacific

  • Net sales increased led by strong double-digit growth in China and
    Hong Kong.
  • Operating income increased due to higher results in Hong Kong,
    partially offset by higher advertising expense to build awareness and
    drive continued sales growth over the next year.

For the fiscal year, the Company achieved net sales of $13.68
billion, a 16% increase compared with $11.82 billion in the prior year.
The Company posted net sales growth in each major product category and
each geographic region. These results reflect, in part, the Company's
strategy to drive growth by targeting its investments to shifts in
consumer and market dynamics across product categories, geographic
regions, brands and distribution channels. This strategy positioned the
Company well for the resurgence in global prestige skin care growth as
well as the strong increase in demand among Chinese consumers.

Net sales increased in several developed and emerging markets, and
reflected strong growth from the travel retail, online and
specialty-multi channels. Skin care net sales benefited from increases
at Estée Lauder, La Mer, Origins and Clinique. Makeup net sales growth
was driven by increases from Estée Lauder, Tom Ford and M•A•C, as well
as both incremental and higher comparable net sales from our fiscal 2017
acquisitions of Too Faced and BECCA. Fragrance net sales growth
reflected increases from Jo Malone London, Tom Ford, Le Labo and By
Kilian. Hair care net sales increased, reflecting growth from Aveda.
Excluding the impact of currency translation, net sales increased 13%.

The Company reported operating income for the fiscal year ended June 30,
2018 of $2.05 billion, a 21% increase from the prior year of $1.69
billion. Total operating income excluding the favorable impact of
currency translation of $103 million and before charges and other
adjustments, increased 15%, largely reflecting strong sales growth
partially offset by investments made in digital and social media
advertising to support long-term growth in fiscal 2019 and beyond.

Net earnings for the year were $1.11 billion, an 11% decline, compared
with $1.25 billion last year, and diluted net earnings per common share
decreased 12% to $2.95, compared with $3.35 reported in the prior year.
Adjusted diluted net earnings per common share increased 30% to $4.51,
and in constant currency rose 24%, for the fiscal year ended June 30,
2018, excluding restructuring and other charges and adjustments, the
impact of the new tax law in the United States and the benefit of
currency translation as detailed in the table below. The fiscal year
2018 diluted net earnings per common share also includes the tax benefit
of the adoption of a new accounting pronouncement for share-based
compensation, which added $.13.

 

Reconciliation between GAAP and
non-GAAP

  Year Ended June 30, 2018   Year Ended June 30
Net Sales Growth   Diluted EPS Change

Diluted Earnings
Per Share

(Unaudited)

Reported
Basis

 

Constant
Currency

Reported
Basis

 

Constant
Currency

2018   2017
Results including restructuring and other charges and adjustments 16 %(1) 13 % (12 %)(1) (18 %)

$

2.95

(1)

$

3.35

(1)

Non-GAAP

Restructuring and other charges(2) .51 .38
Contingent consideration (.09 ) (.12 )
Transition tax resulting from the TCJA .94
Remeasurement of U.S. net deferred tax assets as of the TCJA
enactment date
.08
Net deferred tax liability related to foreign withholding taxes on
certain foreign earnings resulting from the TCJA
.12
Intangible asset impairments .06
China deferred tax asset valuation allowance reversal               (.20 )
Adjusted results 16 % 13 % 30 % 24 % 4.51 $ 3.47  
Impact of currency translation on

earnings per share

  (.20 )
Constant currency earnings per share $ 4.31  

_________________________

(1) Represents GAAP.

(2) Includes charges associated with Leading Beauty
Forward.

Amounts may not sum due to rounding.
 
 

Cash Flows from Operating Activities

  • For the twelve months ended June 30, 2018, net cash flows provided by
    operating activities were $2.57 billion, a strong increase of 43%
    compared with $1.80 billion in the prior year.
  • The improvement primarily reflected higher earnings before income
    taxes and a net increase in cash from certain working capital
    components.

Outlook for Fiscal 2019 First Quarter and Full
Year

Global prestige beauty is continuing to perform exceptionally well and
is estimated to grow 5% to 6% during the fiscal year. The Company
expects to grow ahead of the industry.

Last quarter, the Company disclosed it was conducting a review of
certain testing related to product advertising claims support. The
review is ongoing and, based on the review to date, the Company does not
believe that this matter will be material.

For fiscal 2019, there are two items expected to negatively impact sales
growth. The Company has adopted the new revenue recognition accounting
standard using a modified retrospective adoption method, which means
fiscal year 2018 is not restated. As fiscal 2019 is the transition year
for this accounting change, the year-over-year growth rate will be
reduced as a result of adopting this new standard. The recent
strengthening of the U.S. dollar is also expected to negatively impact
growth.

In May 2016, the Company announced its Leading Beauty Forward initiative
to build on its strengths and better leverage its cost structure. The
Company previously estimated that Leading Beauty Forward would result in
related restructuring and other charges totaling between $600 million
and $700 million, before taxes. After reviewing additional potential
initiatives and the progress of previously approved initiatives under
Leading Beauty Forward, the Company now expects restructuring and other
charges to be between $900 million and $950 million, before taxes. The
Company is also revising its previous estimate of annual net benefits of
between $200 million and $300 million, before taxes. After its full
implementation, the Company now expects Leading Beauty Forward to yield
annual net benefits of between $350 million and $450 million, before
taxes. These savings can be used to improve margin, mitigate risk and
invest in future growth initiatives.

The Company is also mindful of risks related to social and political
issues, geopolitical tensions, regulatory matters, including the
imposition of tariffs, global security issues, currency volatility and
economic challenges affecting consumer spending in certain countries and
travel corridors. The Company is also cautious of the decline in retail
traffic, primarily related to certain brick-and-mortar stores in the
United States and the United Kingdom.

First Quarter Fiscal 2019

Sales Outlook

  • Reported net sales are forecasted to increase between 5% and 6% versus
    the prior-year period, including a 2% impact from currency translation
    and a 2% impact from the adoption of the new revenue recognition
    accounting standard. Excluding these items, net sales are expected to
    grow between 9% and 10%.

Earnings per share Outlook

  • Reported diluted net earnings per share are projected to be between
    $1.07 and $1.12. Excluding restructuring and other charges, diluted
    net earnings per share are projected to be between $1.18 and $1.22.
  • On a constant currency basis, before charges associated with
    restructuring and other activities as well as the impact from the new
    revenue recognition accounting standard, diluted earnings per share
    are expected to increase between 7% and 10%.
    • The Company expects to take charges associated with Leading Beauty
      Forward of approximately $50 million to $55 million, equal to $.10
      to $.11 per diluted common share.
    • The adoption of the new revenue recognition accounting standard is
      expected to reduce diluted net earnings per share by approximately
      $.07, reflecting the cumulative impact of revenue deferrals in the
      first half of the year that we expect to be recognized in revenue
      in the second half of the year.
    • Currency exchange rates are volatile and difficult to predict.
      Using the June 30th spot rate, the negative currency
      impact equates to about $.04 of earnings per share.

Full Year Fiscal 2019

Sales Outlook

  • Reported net sales are forecasted to increase between 4% and 5% versus
    the prior-year period, which includes a 2% impact from currency
    translation and 1% impact from the adoption of the new revenue
    recognition accounting standard. Excluding these items, net sales are
    forecasted to grow between 7% and 8%. This is on the high-end of the
    Company's long-term growth goal of 6% to 8% in constant currency.

Earnings per share Outlook

  • Reported diluted net earnings per share are projected to be between
    $4.38 and $4.51. Excluding restructuring and other charges, diluted
    net earnings per share are projected to be between $4.62 and $4.71.
  • On a constant currency basis, before charges and adjustments as well
    as the impact from the new revenue recognition accounting standard,
    diluted earnings per share are expected to increase between 9% and
    11%. This is consistent with the Company's long-term growth goal of
    double-digit earnings per share growth in constant currency.
    • The Company expects to take charges associated with previously
      approved restructuring and other activities relating to Leading
      Beauty Forward in fiscal 2019 of approximately $100 million to
      $120 million, equal to $.20 to $.24 per diluted common share.
    • The adoption of the new revenue recognition accounting standard is
      expected to reduce diluted net earnings per share by approximately
      $.10.
    • For the full fiscal year, the Company expects the global effective
      tax rate to be approximately 24%, before charges associated with
      the restructuring and other activities.
    • Currency exchange rates are volatile and difficult to predict.
      Using the June 30th spot rate, the negative currency
      impact equates to about $.20 of earnings per share.
 

Reconciliation between GAAP and
non-GAAP

  Three Months Ending September 30, 2018 (F)   Three Months September 30
Net Sales Growth   Diluted EPS Change Diluted Earnings Per Share

(Unaudited)

Reported
Basis

 

Constant
Currency

Reported
Basis

 

Constant
Currency

2018 (F)   2017
Forecast / actual results including charges 5-6 %(1) 7-8 %

(6%)-(2

%)(1)

(3%)-2

%

$

1.07- $1.12

(1)

$

1.14

(1)

Non-GAAP

Restructuring and other charges               .10 -.11     .07  
Forecast / actual results excluding charges 5-6 % 7-8 %

(2%)-1

%

1-4% $ 1.18 - $1.22 $ 1.21  
Impact from adoption of revenue

recognition accounting standard

2 % 2 %

6

%

6

%

  .07  
Forecast results excluding adoption

of revenue recognition accounting standard

7-8 % 9-10 %

3-7

%

7-10

%

$ 1.25 - $1.29
Impact of currency translation on

earnings per share

  .04  
Forecasted constant currency earnings per share $ 1.29 - $1.33  
_________________________

(1) Represents GAAP.

(F) Represents forecast
 
 
 

Reconciliation between GAAP and
non-GAAP

  Year Ending June 30, 2019 (F)   Twelve Months June 30
Net Sales Growth   Diluted EPS Growth Diluted Earnings Per Share

(Unaudited)

Reported
Basis

 

Constant
Currency

Reported
Basis

 

Constant
Currency

2019 (F)   2018
Forecast / actual results including charges / adjustments 4-5 %(1) 6-7 % 49-53 %(1) 55-60 % $

4.38 - $4.51

(1)

$

2.95

(1)

Non-GAAP

Restructuring and other charges .20 -.24 .51
Contingent consideration (.09 )
Transition tax resulting from the TCJA .94
Remeasurement of U.S. net deferred tax assets as of the TCJA
enactment date
.08
Net deferred tax liability related to foreign withholding taxes on
certain foreign earnings resulting from the TCJA
            .12  
Forecast / actual results adjusted 4-5 % 6-7 % 2-4 % 7-9 % $ 4.62 - $4.71 $ 4.51  
Impact from adoption of revenue

recognition accounting standard

1 % 1 % 2 % 2 %   .10  
Forecast results excluding adoption

of revenue recognition accounting standard

5-6 % 7-8 % 5-7 % 9-11 % $ 4.72 - $4.81  
Impact of currency translation on earnings

per share

  .20  
Forecasted constant currency earnings per share $ 4.92 - $5.01  

_________________________

(1) Represents GAAP.

(F) Represents forecast
 

Conference Call

The Estée Lauder Companies will host a conference call at 9:30 a.m. (ET)
today, August 20, 2018 to discuss its results. The dial-in number for
the call is 888-294-4716 in the U.S. or 706-902-0101 internationally
(conference ID number: 10665254). The call will also be webcast live at http://www.elcompanies.com/investors/events-and-presentations.

Cautionary Note Regarding Forward-Looking
Statements

The forward-looking statements in this press release, including those
containing words like "expect," "plans," "may," "could," "anticipate,"
"estimate," "projected," "forecasted," those in Mr. Freda's remarks and
those in the "Outlook for Fiscal 2019 First Quarter and Full Year"
section involve risks and uncertainties. Factors that could cause actual
results to differ materially from those forward-looking statements
include the following:

(1)   increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses;
(2) the Company's ability to develop, produce and market new products on
which future operating results may depend and to successfully
address challenges in the Company's business;
(3) consolidations, restructurings, bankruptcies and reorganizations in
the retail industry causing a decrease in the number of stores that
sell the Company's products, an increase in the ownership
concentration within the retail industry, ownership of retailers by
the Company's competitors or ownership of competitors by the
Company's customers that are retailers and our inability to collect
receivables;
(4) destocking and tighter working capital management by retailers;
(5) the success, or changes in timing or scope, of new product launches
and the success, or changes in the timing or the scope, of
advertising, sampling and merchandising programs;
(6) shifts in the preferences of consumers as to where and how they shop;
(7) social, political and economic risks to the Company's foreign or
domestic manufacturing, distribution and retail operations,
including changes in foreign investment and trade policies and
regulations of the host countries and of the United States;
(8) changes in the laws, regulations and policies (including the
interpretations and enforcement thereof) that affect, or will
affect, the Company's business, including those relating to its
products or distribution networks, changes in accounting standards,
tax laws and regulations, environmental or climate change laws,
regulations or accords, trade rules and customs regulations, and the
outcome and expense of legal or regulatory proceedings, and any
action the Company may take as a result;
(9) foreign currency fluctuations affecting the Company's results of
operations and the value of its foreign assets, the relative prices
at which the Company and its foreign competitors sell products in
the same markets and the Company's operating and manufacturing costs
outside of the United States;
(10) changes in global or local conditions, including those due to the
volatility in the global credit and equity markets, natural or
man-made disasters, real or perceived epidemics, or energy costs,
that could affect consumer purchasing, the willingness or ability of
consumers to travel and/or purchase the Company's products while
traveling, the financial strength of the Company's customers,
suppliers or other contract counterparties, the Company's
operations, the cost and availability of capital which the Company
may need for new equipment, facilities or acquisitions, the returns
that the Company is able to generate on its pension assets and the
resulting impact on funding obligations, the cost and availability
of raw materials and the assumptions underlying the Company's
critical accounting estimates;
(11) shipment delays, commodity pricing, depletion of inventory and
increased production costs resulting from disruptions of operations
at any of the facilities that manufacture the Company's products or
at the Company's distribution or inventory centers, including
disruptions that may be caused by the implementation of information
technology initiatives, or by restructurings;
(12) real estate rates and availability, which may affect the Company's
ability to increase or maintain the number of retail locations at
which the Company sells its products and the costs associated with
the Company's other facilities;
(13) changes in product mix to products which are less profitable;
(14) the Company's ability to acquire, develop or implement new
information and distribution technologies and initiatives on a
timely basis and within the Company's cost estimates and the
Company's ability to maintain continuous operations of such systems
and the security of data and other information that may be stored in
such systems or other systems or media;
(15) the Company's ability to capitalize on opportunities for improved
efficiency, such as publicly-announced strategies and restructuring
and cost-savings initiatives, and to integrate acquired businesses
and realize value therefrom;
(16) consequences attributable to local or international conflicts around
the world, as well as from any terrorist action, retaliation and the
threat of further action or retaliation;
(17) the timing and impact of acquisitions, investments and divestitures;
and
(18) additional factors as described in the Company's filings with the
Securities and Exchange Commission, including its Annual Report on
Form 10-K for the fiscal year ended June 30, 2017.
 

The Company assumes no responsibility to update forward-looking
statements made herein or otherwise.

The Estée Lauder Companies Inc. is one of the world's leading
manufacturers and marketers of quality skin care, makeup, fragrance and
hair care products. The Company's products are sold in over 150
countries and territories under brand names including: Estée Lauder,
Aramis, Clinique, Prescriptives, Lab Series, Origins, Tommy Hilfiger,
M•A•C, Kiton, La Mer, Bobbi Brown, Donna Karan New York, DKNY, Aveda, Jo
Malone London, Bumble and bumble, Michael Kors, Darphin, Tom Ford,
Smashbox, Ermenegildo Zegna, AERIN, Tory Burch, RODIN olio lusso, Le
Labo, Editions de Parfums Frédéric Malle, GLAMGLOW, By Kilian, BECCA and
Too Faced.

ELC-F
ELC-E

 
THE ESTÉE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; In millions, except per share data and percentages)
 
 

Three Months Ended
June 30

 

Percent
Change

 

Year Ended
June 30

 

Percent
Change

2018

 

2017

2018

 

2017

 
Net Sales (A) $ 3,295 $ 2,894 14 % $ 13,683 $ 11,824 16 %
Cost of sales (A)   697     613     2,844     2,437  
Gross Profit   2,598     2,281   14 %   10,839     9,387   15 %
 
Gross Margin 78.8 % 78.8 % 79.2 % 79.4 %
 
Operating expenses:
Selling, general and administrative (B) 2,288 1,947 8,556 7,469
Restructuring and other charges (A) 33 73 231 195
Goodwill impairment (C) 28 28
Impairment of other intangible assets (C)       3         3  
  2,321     2,051   13 %   8,787     7,695   14 %
 
Operating Expense Margin 70.4 % 70.9 % 64.2 % 65.1 %
 
Operating Income 277 230 20 % 2,052 1,692 21 %
 
Operating Income Margin 8.4 % 7.9 % 15.0 % 14.3 %
 
Interest expense 32 32 128 103
Interest income and investment income, net   16     9     56     28  
Earnings before Income Taxes 261 207 26 % 1,980 1,617 22 %
 
Provision (benefit) for income taxes (D)   73     (23 )   863     361  
Net Earnings 188 230 (18 %) 1,117 1,256 (11 %)
 
Net earnings attributable to noncontrolling interests   (2 )   (1 )   (9 )   (7 )
Net Earnings Attributable to The Estée Lauder Companies Inc. $ 186   $ 229  

(19

%)

$ 1,108   $ 1,249   (11 %)
 
 
Net earnings attributable to The Estée Lauder Companies Inc. per
common share:
Basic $ .51 $ .62 (18 %) $ 3.01 $ 3.40 (11 %)
Diluted .49 .61 (19 %) 2.95 3.35 (12 %)
 
Weighted average common shares outstanding:
Basic 367.2 368.1 368.0 367.1
Diluted 375.8 374.0 375.7 373.0
 

(A) In May 2016, the Company announced a multi-year initiative (Leading
Beauty Forward) to build on its strengths and better leverage its cost
structure to free resources for investment to continue its growth
momentum. Leading Beauty Forward is designed to enhance the Company's
go-to-market capabilities, reinforce its leadership in global prestige
beauty and continue creating sustainable value. During fiscal 2018,
including during the fiscal 2018 fourth quarter, the Company continued
to approve specific initiatives under Leading Beauty Forward. The
Company plans to approve additional initiatives through fiscal 2019 and
expects to complete those initiatives through fiscal 2021. The Company
previously estimated that Leading Beauty Forward would result in related
restructuring and other charges totaling between $600 million and $700
million, before taxes. After reviewing additional potential initiatives
and the progress of previously approved initiatives under Leading Beauty
Forward that are being implemented, we have revised our estimates for
cost approvals under the program. Inclusive of approvals from inception
through June 30, 2018, we now estimate that Leading Beauty Forward may
result in related restructuring and other charges totaling between $900
million and $950 million, before taxes. Once fully implemented, Leading
Beauty Forward is now expected to yield annual net benefits of between
$350 million and $400 million, before taxes, of which a portion is
expected to be reinvested in future growth initiatives.

THE ESTÉE LAUDER COMPANIES INC.

(B) The Company recorded $37 million and $43 million of income within
selling, general and administrative expenses for the three and twelve
months ended June 30, 2018, respectively, to reflect changes in the fair
value of its contingent consideration related to certain of its fiscal
2015 and 2016 acquisitions. During the three and twelve months ended
June 30, 2017, the Company recorded $58 million and $57 million of
income, respectively.

(C) The Company performs annual impairment tests for each of its
reporting units. In addition, the Company may perform interim impairment
tests as a result of changes in circumstances and certain financial
indicators. Such tests may conclude that the carrying value of certain
assets exceed their estimated fair values, resulting in the recognition
of impairment charges.

During fiscal 2018, no impairment charges were recognized as a result of
our annual goodwill and other intangible asset impairment testing.
During the fourth quarter of fiscal 2017, the Company recorded goodwill
impairment charges related to the Editions de Parfums Frédéric Malle and
RODIN olio lusso reporting units of $22 million and $6 million,
respectively. Additionally, during the fourth quarter of fiscal 2017,
the Company recognized impairment charges related to the RODIN olio
lusso trademark, customer relationship and persona intangible assets of
$3 million.

(D) The three and twelve months ended June 30, 2018 reflects the
reduction of the U.S. statutory tax rate, as well as provisional amounts
for the impact of the TCJA. During the fourth quarter, the Company
recorded a net $58 million charge representing adjustments to the
provisional TCJA amounts it recorded in the fiscal 2018 second and third
quarters. For the year ended June 30, 2018, the TCJA related impacts
totaled $450 million, equal to $1.20 per share. Certain calculations
included in these amounts remain provisional and may require adjustments
as anticipated guidance is issued and as additional analysis of the
provisions of the TCJA is completed. Any such adjustments will be
finalized within the allowable one year measurement period.

THE ESTÉE LAUDER COMPANIES INC.

Total returns and charges associated with restructuring activities and
other adjustments included in net earnings for the three months and year
ended June 30, 2018 and 2017 were:

 

   

Sales
Returns

 

Cost of
Sales

  Operating Expenses     Total  

After
Tax

 

Diluted
Earnings
Per Share

Restructuring
Charges

 

Other
Charges/
Adjust-
ments

(Unaudited)

(In millions, except per share data)    

Three Months Ended June 30, 2018

Leading Beauty Forward

$

8

$ 9 $ 2 $ 31 $ 50 $ 37 $ .10
Contingent consideration

 

(37 )

 

(37

)

(29

)

(.08 )
Transition tax resulting from the TCJA 19 .05

Remeasurement of U.S. net deferred tax
assets as of the TCJA
enactment date

(12 ) (.03 )

Net deferred tax liability related to foreign
withholding
taxes on certain foreign
earnings resulting from the TCJA

                28     .07  
Total   $ 8 $ 9 $ 2 $ (6 ) $ 13   $ 43   $ .11  
 
Year Ended June 30, 2018
Leading Beauty Forward

$

8

$ 18 $ 127 $ 104 $ 257 $ 193 $ .51
Contingent consideration

 

(43 ) (43 )

(33

)

(.09 )
Transition tax resulting from the TCJA 351 .94

Remeasurement of U.S. net deferred tax
assets as of the TCJA
enactment date

30 .08

Net deferred tax liability related to foreign
withholding
taxes on certain foreign
earnings resulting from the TCJA

                46     .12  
Total   $ 8 $ 18 $ 127 $ 61   $ 214   $ 587   $ 1.56  
   
               

Sales
Returns

Cost of
Sales

Operating Expenses Total

Diluted
Earnings
Per Share

Restructuring
Charges

 

Other
Charges/
Adjust-
ments

(Unaudited)

(In millions, except per share data)    

After
Tax

Three Months Ended June 30, 2017

Leading Beauty Forward

$

$ 5 $ 52 $ 21 $ 78 $ 55 $ .15
Contingent consideration

 

(58

)

(58

)

(42 ) (.11 )
Intangible asset impairments

 

31

31 23 .06

China deferred tax asset valuation
allowance reversal

 

 

              (75 )  

(.20

)

Total  

$

$ 5 $ 52 $ (6 ) $ 51   $ (39 ) $ (.10 )
 
Year Ended June 30, 2017  
Leading Beauty Forward

$

2

$ 15 $ 122 $ 73 $ 212 $ 143 $ .38
Contingent consideration

 

(57 ) (57 ) (44 ) (.12 )
Intangible asset impairments

 

31 31 23 .06

China deferred tax asset valuation
allowance reversal

 

 

              (75 )   (.20 )
Total   $ 2 $ 15 $ 122 $ 47   $ 186   $ 47   $ .12  
 
 
THE ESTÉE LAUDER COMPANIES INC.
SUMMARY OF CONSOLIDATED RESULTS
(Unaudited; Dollars in millions)
   
Year Ended June 30
Net Sales   Percent Change  

Operating
Income (Loss)

 

Percent
Change

2018   2017

Reported
Basis

 

Constant
Currency

2018

2017

Reported
Basis

Results by Geographic Region

The Americas $ 5,015 $ 4,819 4 % 4 % $ 211 $ 284 (26 %)

Europe, the Middle East & Africa

5,634 4,650 21 16 1,523 1,203 27
Asia/Pacific 3,042 2,357 29 25 575 417 38
Subtotal 13,691 11,826 16 13 2,309 1,904 21
Returns and charges associated with restructuring and other
activities
(8) (2) (257) (212)
Total $ 13,683 $ 11,824 16 % 13 % $ 2,052 $ 1,692 21 %
 

Results by Product Category

Skin Care $ 5,595 $ 4,527 24 % 21 % $ 1,511 $ 1,014 49 %
Makeup 5,633 5,054 11 9 549 713 (23 )
Fragrance 1,826 1,637 12 8 176 115 53
Hair Care 570 539 6 4 64 51 25
Other 67 69 (3 ) (4 ) 9 11 (18 )
Subtotal 13,691 11,826 16 13 2,309 1,904 21
Returns and charges associated with restructuring and other
activities
(8) (2) (257) (212)
Total $ 13,683 $ 11,824 16 % 13 % $ 2,052 $ 1,692 21 %

____________________

 

This earnings release includes some non-GAAP financial measures relating
to charges associated with restructuring and other activities, goodwill
and other intangible asset impairments, the changes in the fair value of
contingent consideration, the Transition Tax, the remeasurement of U.S.
net deferred tax assets as of the enactment date of the TCJA and the
establishment of a net deferred tax liability related to foreign
withholding taxes on certain foreign earnings resulting from the TCJA,
the China deferred tax asset valuation allowance reversal, the fiscal
2019 impact of the new revenue recognition accounting standard and the
effects of foreign currency translation. The following is a
reconciliation between the non-GAAP financial measures and the most
directly comparable GAAP measures for certain consolidated statements of
earnings accounts before and after these items. The Company uses certain
non-GAAP financial measures, among other financial measures, to evaluate
its operating performance, which represent the manner in which the
Company conducts and views its business. Management believes that
excluding certain items that are not comparable from period to period,
or reflect the Company's underlying ongoing business, provides
transparency for such items and helps investors and others compare and
analyze operating performance from period to period. In the future, the
Company expects to incur charges or adjustments similar in nature to
those presented below; however, the impact to the Company's results in a
given period may be highly variable and difficult to predict. Our
non-GAAP financial measures may not be comparable to similarly titled
measures used by, or determined in a manner consistent with, other
companies. While the Company considers the non-GAAP measures useful in
analyzing its results, they are not intended to replace, or act as a
substitute for, any presentation included in the consolidated financial
statements prepared in conformity with GAAP.

The Company operates on a global basis, with the majority of its net
sales generated outside the United States. Accordingly, fluctuations in
currency exchange rates can affect the Company's results of operations.
Therefore, the Company presents certain net sales, operating results and
diluted earnings per share information excluding the effect of currency
rate fluctuations to provide a framework for assessing the performance
of its underlying business outside the United States. Constant currency
information compares results between periods as if exchange rates had
remained constant period-over-period. The Company calculates constant
currency information by translating current-period results using
prior-year period weighted average currency exchange rates.

 
THE ESTÉE LAUDER COMPANIES INC.
Reconciliation of Certain Consolidated Statements of Earnings
Accounts
Before and After Returns, Charges and Other Adjustments
(Unaudited; In millions, except per share data and percentages)
 
Three Months Ended     Three Months Ended  
June 30, 2018 June 30, 2017
 

As
Reported

 

Returns/
Charges/
Adjust-
ments

 

Adjusted

 

Impact of
currency
translation

 

Constant
Currency

As
Reported

 

Returns/
Charges/
Adjust-
ments

 

Adjusted

 

% Change
versus Prior
Year Before
Charges

% Change
Constant
Currency

Net Sales $ 3,295 $ 8 $ 3,303 ($66 ) $ 3,237 $ 2,894 $ 2,894 14 %

12

%

Cost of sales   697     (9 )   688     613     (5 )   608  
Gross Profit 2,598 17 2,615 2,281 5 2,286 14 %
Gross Margin 78.8 % 79.2 % 78.8 % 79.0 %
 
Operating expenses   2,321     4     2,325     2,051     (46 )   2,005   16 %
Operating Expense Margin 70.4 % 70.4 % 70.9 % 69.3 %
 
Operating Income 277 13 290 230 51 281 3 %
Operating Income Margin 8.4 % 8.8 % 7.9 % 9.7 %
 
Provision (benefit) for income taxes 73 (30 ) 43

(23

)

90 67
Net Earnings Attributable to The Estée Lauder Companies Inc. 186 43 229 229 (39 ) 190 21 %
 
Diluted net earnings attributable to The Estée Lauder Companies Inc.
per common share
.49 .11 .61 (.05 ) .56 .61 (.10 ) .51 20 % 11 %
 
 
Year Ended June 30, 2018 Year Ended June 30, 2017

As
Reported

Returns/
Charges/
Adjust-
ments

Adjusted

Impact of
currency
translation

Constant
Currency

As
Reported

Returns/
Charges/
Adjust-
ments

Adjusted

% Change
versus Prior
Year Before
Charges

% Change
Constant
Currency

Net Sales $ 13,683 $ 8 $ 13,691 ($325 ) $ 13,366 $ 11,824 $ 2 $ 11,826 16 % 13 %
Cost of sales   2,844     (18 )   2,826     2,437     (15 )   2,422  
Gross Profit 10,839 26 10,865 9,387 17 9,404 16 %
Gross Margin 79.2 % 79.4 % 79.4 % 79.5 %
 
Operating expenses   8,787     (188 )   8,599     7,695     (169 )   7,526   14 %
Operating Expense Margin 64.2 % 62.8 % 65.1 % 63.6 %
 
Operating Income 2,052 214 2,266 1,692 186 1,878 21 %
Operating Income Margin 15.0 % 16.6 % 14.3 % 15.9 %
 
Provision (benefit) for income taxes 863 (373 ) 490 361 139 500
Net Earnings Attributable to The Estée Lauder Companies Inc. 1,108 587 1,695 1,249 47 1,296 31 %
 
Diluted net earnings attributable to The Estée Lauder Companies Inc.
per common share
2.95 1.56 4.51 (.20 ) 4.31 3.35 .12 3.47 30 % 24 %
 

Amounts may not sum due to rounding.

 
 
THE ESTÉE LAUDER COMPANIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; In millions)
 
    June 30     June 30

2018

2017

ASSETS
Current Assets
Cash and cash equivalents $ 2,181 $ 1,136
Short-term investments 534 605
Accounts receivable, net 1,487 1,395
Inventory and promotional merchandise, net 1,618 1,479

Prepaid expenses and other current assets

348 349
Total Current Assets 6,168 4,964
 

Property, Plant and Equipment, net

1,823 1,671
Other Assets 4,576 4,933
Total Assets $ 12,567 $ 11,568
 
LIABILITIES AND EQUITY
Current Liabilities
Current debt $ 183 $ 189
Accounts payable 1,182 835
Other accrued liabilities 1,945 1,799
Total Current Liabilities 3,310 2,823
 
Noncurrent Liabilities
Long-term debt 3,361 3,383
Other noncurrent liabilities 1,186 960
Total Noncurrent Liabilities 4,547 4,343
 
Total Equity 4,710 4,402
Total Liabilities and Equity $ 12,567 $ 11,568
 
 
SELECT CASH FLOW DATA
(Unaudited; In millions)
    Year Ended June 30
2018     2017
Cash Flows from Operating Activities
Net earnings $ 1,117 $ 1,256
Depreciation and amortization 531 464
Deferred income Taxes 175 (118 )
Other items 175 177
Changes in operating assets and liabilities:
Increase in accounts receivable, net (105 ) (92 )
Increase in inventory and promotional merchandise, net (147 ) (85 )
Decrease (increase) in other assets, net 12 (80 )
Increase in accounts payable and other liabilities   815     278  
Net cash flows provided by operating activities $ 2,573   $ 1,800  
 
Capital expenditures $ 629 $ 504
Acquisition of businesses 11 1,681
Proceeds (purchase) of investments, net (271 ) 41
Payments to acquire treasury stock 759 413
Dividends paid 546 486
Proceeds from issuance of long-term debt, net 1,498
 

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