Dennis D’Andrea - IR William Lauder - President and CEO Rich Kunes - EVP, CFO Dan Brestle - COO

Wendy Nicholson - Citigroup Investments John Faulker - JP Morgan Elizabeth Montgomery - Cowen Lauren Lieberman - Lehman Brothers Bill Schmidt - Deutsche Bank Linda Bolton Weiser – Oppenheimer Alice Longley - Buckingham Research Chris Ferrara - Merrill Lynch Sandy Beebee – HSBC Amy Chasen - Goldman Sachs Amy Cedes - Banc of America Securities Fillippe Goossens - Credit Suisse Connie Manetti – Prudential

Good day and welcome to the Estee Lauder Companies fiscal 2007 first quarter conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Vice President of Investor Relations, Mr. Dennis D'Andrea. Please go ahead, sir. Dennis D’Andrea: Good morning, everyone. We have on today's call William Lauder, President and Chief Executive Officer; and Rich Kunes, Executive Vice President and Chief Financial Officer; Dan Brestle, our Chief Operating Officer is also here and he'll be available for the Q&A session. 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. I'll turn the call over the William.

Good morning. Thank you for participating in our first quarter conference call for fiscal 2007. I'm pleased to report that sales for the quarter grew 6%. Diluted earnings per share were $0.27 which was better than what we had forecast, in part because of more favorable gross margin and spending pattern slightly different than planned. Rick will provide more details a little later. The year is off to a solid start. Sales trends are in line with our overall expectations. We feel positive about the upcoming holiday season. Department stores September sales were robust and the retail climate is more upbeat than what we saw just a few months ago. Unlike this time last year, there haven't been any severe weather disruptions to impact our business or the economy. While we are pleased that fiscal '07 has started on a firm foot, we continue to be mindful that the periods which are typically our most profitable are still ahead of us. International sales grew by double-digits, led by strong showings in Korea, China, the United Kingdom and Germany. Developing brands continued to push into new markets as part of an orchestrated, steady roll-out across the globe to reach new consumers. A long-awaited opportunity, La Mer, opened in Bon Marche in Paris and has been well received. Our travel retail business performed nicely in the quarter with sales up in the high single-digits, in line with our expectations, despite a temporary ban on passengers carrying liquids on some flights. At this point, most travel retailing logistical issues have been resolved and duty-free sales have returned to normal levels. The ban and subsequent slowdowns at some duty-free shops in travel retail locations had little impact on our overall business. At this time we don't expect any lasting repercussions. During the quarter, every major U.S. department store chain switched to one gift date, which simplified our gift programs. We executed the events seamlessly. The Estee Lauder brand held the first national gift with purchase event with the new consolidated Macy's stores. The brand's gift-related sales at Macy's, measured on a same-store basis, rose slightly, in line with our expectations. Having one day throughout a chain enables all of our retail stores to focus on the event simultaneously; and, where appropriate, lets us advertise nationally, or at least throughout several regions of the country. For example, Estee Lauder advertises Macy's gift in People magazine for the first time. However, it will take time to get accustomed to holding the programs on different and more concentrated dates. We are working to stabilize these important promotional vehicles and looking forward to new gift concepts to be unveiled in the spring. At our year end conference call in August, we said we planned to spend significantly more than last year during the quarter. A portion of the added investment went to some of our rapidly growing brands including Mack, Aveda and Bobbi Brown. We spent more on a variety of initiatives, including special events, public relations, advertising, samplings, training programs and makeup artist education in an effort to garner incremental sales now and down the road. Some of those costs coincided with the Macy's name plate change. Additional outlays were directed to large sampling programs at Clinique. The brand has begun offering millions of trial-size foundations in three step samples to build traffic and to entice consumers to try its products for free. We incurred start- up costs in connection with launching our newest brand, Tom Ford Beauty, and invested behind the continued roll-out of Sean John and [Masoni]. We took numerous steps to plant the seeds for widening our distribution network. Our Beauty Bank division announced an exclusive partnership with Coach, a popular classic American brand, for a fresh and sophisticated fragrance that will debut in Coach stores in the spring. This is the first product developed by our entrepreneurial Beauty Bank division to be sold outside of Kohl's department stores and we have other such ventures in the pipeline. Moreover, we also intend to start selling Beauty Bank’s American Beauty and Daisy Fuentes fragrances in dozens of travel retail locations in the Caribbean in the coming months. Clinique announced it will expand to a small number of upscale beauty boutiques within Canada’s largest drug chain, Shoppers Drug Mart, where prestige cosmetics and fragrances line the shelves. Over the next few years, we expect to roll out the full range of Clinique products in all stand-alone Sephora stores in the United States. At this time, we've decided not to sell Clinique to Sephora inside J.C. Penney. However, designer fragrances will participate in the Penney/Sephora initiative with several scents. We also plan to produce special sizes of Sean John's Unforgivable fragrance for broader distribution starting in the spring. Additionally, [Dark Van], which is mainly sold through European pharmacies is making further in-roads into spas both here and abroad with products, services and training. We are committed to reaching high-end consumers wherever they shop. One way of achieving this is to broaden our channels of distribution where it is appropriate for our brands. We are encouraged, of course, by the vitality of department stores, which remain our largest and most important channel. We're also examining each brand to ensure they properly concentrate resources and launch products that will advance several of our strategic imperatives. At Bobbi Brown, sales climbed sharply during the first quarter, thanks to new colors and products as well as everyday staples. In the U.K. the brand's largest European market, sales surged nearly 50%. Bobbi Brown, which is currently available in 36 countries, has identified travel retail as a strategic focus over the next several years and we will commit additional funding to this channel. On the product side, Estee Lauder launched Advanced Night Repair concentrate. Using online marketing, the brand created a companion website for the best-selling Advanced Night Repair line, which explains the science behind the anti-aging treatments and gives consumers a voice through testimonials. Both the 21-day night-time concentrate and the online promotion -- the first of its kind in prestige beauty -- have generated attention and positive reaction. Another promising new entry is Donna Karan Gold, a high-end fragrance just hitting the stores now. Retailers have been enthusiastic. We're excited that next week we will introduce the exclusive Black Orchid fragrance, the first creation from Tom Ford Beauty. Although we expect Estee Lauder and Clinique will attract new and existing consumers with offerings incorporating our latest shades and science, the brand's main strategy this year will be strengthening core products in critical markets. They will focus on the items that embody the core values of each brand. Those stalwarts include products such as Estee Lauder’s Double Wear, [RenuTrue], More Than Mascara and Pure Color eye shadow, as well as Clinique's Three Step and Clinique Happy. We expect these products to benefit from revamped advertising, line extensions, improved packaging and intensive sampling. After building solid foundations, Estee Lauder and Clinique can then layer on the latest trends. Behind the scenes in operations, we recently began moving the Clinique distribution center from Long Island to our state-of-the-art facility in Pennsylvania, which has doubled its capacity. This is part of our ongoing effort to modernize and streamline the distribution network. In the last year or so, we have closed nine older facilities and moved warehousing and distribution operations to five more efficient automated plants. Distribution hubs opened in Canada, California, Belgium, China and Japan in the last year. We expect a new one in Spain to be up and running later in fiscal '07. Now that we are almost a month into the second quarter, which includes important holiday sales, we remain confident in our plans to show improvement over last year. The U.S. economy appears to be in good shape and much of the international retail environment is buoyant. Assuming current global conditions continue, we are optimistic about our performance in the second quarter. We believe that consumers will find our holiday sets, product launches and fall gift programs attractive. We continue to run the business with our five strategic imperatives as a constant back drop to help boost the top and bottom line which we believe will deliver increasing value to stockholders. On that note I am pleased to announce that the Board of Directors has raised the annual dividend to 25% to $0.50 a share. Now, I'd like to hand it over to Rick Kunes, our Chief Financial Officer, to take you through the financial details.

Thank you, William and good morning, everyone. My discussions today will focus on our results from continuing operations. Our sales this quarter totaled $1.6 billion, a healthy 6% increase over last year's quarter. In local currency, sales rose 5%. Net earnings from continuing operations for the quarter were $58 million, compared with $61.8 million last year. Diluted EPS was $0.27 versus $0.28. These results exceeded our projected levels due to lower than planned cost of sales and operating expenses. Let me refer you to today's press release for the detailed numbers on our net sales and operating income by product category and geographic region. In this year's first quarter each of our product categories except hair care was adversely impacted by fewer department store doors, resulting from the consolidation of Federated and May last year. Skin care sales were led by our European and Asian businesses where we benefited from several product introductions for Estee Lauder and Clinique. Skin care sales in the U.S. also increased, but at a more moderate rate. In makeup, our makeup artist brands continued to lead the category with double-digit sales growth worldwide, once again increasing sales in virtually every country they sell in. Certain of our core brands continue to post declines in the category. Fragrance sales were modestly lower compared with the prior-year quarter, with a majority of the decline coming in the Americas, while sales in Europe increased nicely. Overall, our lower sales of certain existing products more than offset some of our recent launch successes. In hair care, salon expansion, new product introductions and the acquisition of a distributor all contributed to solid double-digit sales gains. As far as our geographic results go, Europe and Asia each generated double-digit sales increases. In Europe, the Middle East and Africa our travel retail business grew high single-digits this quarter, despite the temporary disruption in this business that William mentioned. Virtually every market in the region had strong local currency sales gains, with most reporting double-digit growth. The strong sales growth reflects an easy comparison with the prior year quarter when sales in certain markets were adversely impacted due to the transition to a new regional inventory center in Belgium. Asia Pacific also had solid sales growth with most countries recording local currency sales gains. The strongest growth came from China, Korea, Hong Kong and Australia of which several exceeded our expectations. Low single-digit sales growth in the Americas reflected the strength of most specialty stores, but more modest growth in department stores. All product categories except fragrance were up and almost all developing brands posted increases. Strong sales gains came from our makeup artist lines, hair care products and online businesses. We continue to experience weakness in certain of our core brands as a result of competitive pressures and retailer consolidation. You may recall that store closures resulted from the Federated/May merger affect our core brands more than our developing brands. In comparison, the prior-year period was adversely impacted by severe weather conditions and consumer reaction to rising gas prices. Gross margin increased 110 basis points in the quarter to 73.1%, reflecting a favorable change in the mix of our business, a decrease in the level and change in the timing of promotional activities, decreased obsolescence charges and favorable exchange rates. As we described on our last conference call, we planned for a high level of investment spending in our fiscal ’07 first quarter to drive momentum. Operating expenses as a percentage of sales for the quarter increased to 66.9% from 65% last year. The increase reflects higher advertising, merchandising and sampling, as well as investment spending behind the national nameplate change at Macy’s, new product launches and growing and developing brands. Donations of proceeds from the increased sales Mack branded products also added to the operating expenses. Increased selling expenses reflect higher demonstration and education costs of beauty advisors and makeup artists, investments in new channel initiatives as well as incremental new store activities. Partially offsetting these increases were the company's aggressive and disciplined savings efforts, including incremental savings this year associated with our cost reduction program. As a result, our operating income was $99.9 million compared with $105 million year. Looking at operating profits by category, each of our product categories, except hair care, was negatively impacted by the carryover implications of the Federated/May merger. Still, skin care profits increased, reflecting the higher sales in the category. Operating results in fragrance increased as we balanced our efforts between sales and support spending. Makeup results were lower, reflecting declines in certain core brands, partially offset by improvements in our makeup artist brands. Operating results in hair care also decreased due to a higher level of spending for product launches, new distribution points and expenses related to our strategic modernization initiatives. By region, operating profits in the Americas and Europe declined, while Asia posted an increase. The competitive pressures and retailer consolidations that have negatively impacted certain o f our core brands in the Americas continued in the first quarter. This region's operating income was also impacted by strategic investments in certain brands to further build their businesses. These decreases were partially offset by operating income gains in our makeup artist brands and online businesses. In Europe, the Middle East and Africa, operating income decreased compared with last year's quarter, despite the sharply higher sales. The company continued to support key markets with increased advertising, merchandising and sampling, as well as higher selling expenses. Lower results in France, the UK, Switzerland and the company’s distributor business were partially offset by higher results in Germany and Italy. Our business in Asia Pacific generated strong operating income growth. China reported an operating profit this quarter where we are beginning to see positive results from our investments in that market, compared with an operating loss in last year’s quarter. Both Korea and Australia each reported healthy operating income gains due to sharply higher sales. The effective tax rate for the quarter was 35.9%. Regarding cash flows, our fiscal first quarter always reflects seasonal working capital levels as we gear up for the holiday season. As such, cash outflows for the quarter ended September 30, 2006 were $70 million compared with $62 million last year. Accounts receivable at September 30th increased by $65 million, compared with last September, due to higher sales. Our days sales outstanding were 55 days this quarter, equal to the number of days last year. Inventory at September 30th was $834 billion, a $19 million increase over the prior year period, while inventory days had a four-day improvement to 180 compared with 184 last year. During the quarter, we repurchased approximately 3 million shares of our stock at a cost of $111 million. As William mentioned earlier, we increased our dividend 25%, thus continuing to return excess cash to our stockholders through both share repurchases and dividends. We spent $67 million for capital expenditures during the quarter, which includes incremental spending for our company wide systems initiative. For fiscal '07, we anticipate approximate $685 million of cash flow from operations and expect capital expenditures of approximately $290 million. Now I'll update you on our assumptions for the balance of the fiscal year. We are reaffirming our previous sales growth estimate of approximately 5% to 7% in constant currency with foreign currency translation expected to positively affect reported sales by approximately 1%. We anticipate continued solid domestic and international sales growth. Our estimate of reported diluted EPS from continuing operations remains at $2 to $2.10. As a reminder, this EPS forecast includes the carryover impact of the Federated/May merger and an additional 15 expected store closures this year, equal to approximately $0.08. For the full year, we expect improvements in gross margin to offset increased operating expenses resulting in a relatively consistent operating margin versus last year. Our gross margins should benefit from supply chain savings, product mix and lower promotional spending. As I discussed on our last call, operating expenses are impacted by a number of factors, including higher levels of investment spending behind new product launches and new channel initiatives, more spending in selling and training, as well as for our faster growing and developing brands, and incremental spending related to our strategic modernization initiative. The costs reductions we made in the second half of fiscal ’06 are expected to result in an incremental $30 million of savings this year. These savings have been included in our overall expectations. Also, the new owners of Lord & Taylor have said they will continue to operate the chain as a going concern. Based on this information, we have approximately $50 million of net sales, equal to $0.06 per share, related to our business in the Lord & Taylor chain, included in our fiscal '07 estimate. We continue to be very aggressive in pursuing financially justifiable cost savings throughout the company and will act as opportunities present themselves. At this time, we expect our effective tax rate will be approximately 37% for fiscal 2007. Looking at our second quarter, our forecasted sales growth is approximately 6% to 8% in local currency. We anticipate a positive impact of foreign exchange of about 2%. We expect EPS for the three months ended December 31st, 2006 to be between $0.73 and $0.78. On our last call I mentioned that we are planning to hold an investor conference in spring of 2007 here in New York to update you on our strategic initiatives and lay out our financial goals for the next several years. We have set the date of our meeting for Tuesday, March 6, 2007. As we get closer we will provide a specific agenda. That concludes my comments for today and we would be happy to take your questions now.

(Operator Instructions)Your first question comes from Wendy Nicholson - Citigroup Investments. Wendy Nicholson - Citigroup Investments: The fragrance business, it was the only segment that showed a decline year-over-year in sales growths and I'm wondering how much of that is a strategic shift away from the business? I know you've had some terrifically successful new advertising in that business and some new product launches that have done well, but the business still isn't growing year-over-year. If you can address that and talk specifically about the Russia business. I know in your press release you said Russia was actually a strong business, but I would have expected that the alcohol-based import problems might have affected that market. Dennis D’Andrea: Wendy, I'm very sorry your question got cut into the middle of your question. Can you start again? Wendy Nicholson - Citigroup Investments: Sure, sure, sure. I'll make it shorter. It was just about the fragrance business and why even though you've got great advertising and lots of new products that are doing well, why the business is still down year-over-year from a sales growth perspective? And if could you address Russia specifically as it relates to the fragrance business, how Russia is doing and whether you're back on track in terms of managing through the alcohol based import issue.

Let me take the back end of your question first. Without specifically addressing the fragrance business in Russia, our total Russia business is actually doing quite well. We're very pleased with the growth we have year on year, store by store and quite honestly we're pleased with the growth we have because the predominant presence of our business to date has been in Moscow, and St. Petersburg. We're beginning to expand our footprint and presence to other major cities in Russia, as well as other CIS countries. We're finding our growth to be very effective. I think our primary growth engines in Russia are makeup and skin care. Our fragrance businesses are doing quite nicely but the primary engines really throughout Europe for our brands are makeup and skin care, with fragrance coming along. Our Russian business grew 45% which is very nice and it's getting to be a very meaningful business. We expect it will continue. As far as the general fragrance business is concerned, I think this is an ongoing theme we've talked about now for a number of years. There is a sector challenge in fragrance overall, which is a little more acute for us because of the mix of brands we have, which are predominantly American brands. The American fragrance business is a more challenged sector than any other. Our fragrance presence in Europe is not nearly to the same size as it is in North America because of our brand mix. The fragrance business in Europe in particular for us, while not meaningfully large or large enough, actually operates on a profitable basis. The issue for us is that our fragrance presence in North America is continuing to be challenged because we believe very strongly that two-thirds of our fragrance business is based on brands with larger brand equity beyond the fragrance category as a whole. I refer specifically to the Estee Lauder and Clinique brands. Where our other fragrance-only brands such as Tommy Hilfiger, Aramis, Donna Karan and whatnot, those are not as big in a much more sectorly challenged market where we choose not to go deep into the popular sector, which is where the vast majority of profit is earned in North America. Wendy Nicholson - Citigroup Investments: Frankly though, you've seen so many market share gains for the Gwyneth Paltrow advertising. I thought the Sean John line was doing well. I'm surprised year-over-year you're not seeing sales growth in the fragrance business. Are you seeing real declines in some of the more established brands?

Yes we are, most specifically in the Tommy Hilfiger brand which is really quite a concern for us. Wendy Nicholson - Citigroup Investments: What does that mean? Is that something would you consider discontinuing or at least putting less money behind in terms of reinvestment dollars.

Quite honestly, we're seeing good growth in the Tommy Hilfiger brand in Europe actually. The new management in Tommy Hilfiger today comes from the European region, where they have operated the total Tommy Hilfiger business on a far more effective basis. They've now taken over the North American Tommy business so we are hoping, in a reasonable period of time, that as they turn their brand around, we will see some turnaround also in the Tommy Hilfiger franchise in the fragrance area.

Your next question comes from John Faulker - JP Morgan. John Faulker - JP Morgan: Can you talk a little bit about the distribution changes? I don't want to read too much into this Canada thing, but it definitely seems like you guys are sort of more proactive in finding some distribution changes. Can you talk about maybe how that will impact the business going forward?

Well, quite honestly Shoppers Drug Mart in Canada is a baby toe in the water in this way. We certainly expect that we'll be finding other adventures, if I can use this word, like this that will both test our ability to take these great brands to new and different distribution where we believe the prestige consumer is shopping, to see both the financial impact as well as the branding impact as a whole, without jeopardizing the extraordinarily strong franchises we've established with our established retailers right now, which is a tremendously successful position for us. John Faulker - JP Morgan: Got it. Okay. Thank you.

Your next question comes from Elizabeth Montgomery - Cowen. Elizabeth Montgomery – Cowen: Hi, guys. Congratulations on a really good quarter.

Thank you. Elizabeth Montgomery – Cowen: I had one question, I apologize if this was in the opening comments because I was back on another call for a bit. But it seems as if you reduced your expected cost savings for this year by about $7 million. I wondered if you could discuss why that was?

You are correct. The main reason is because some of it has taken a little bit longer to execute so we were expecting about another $37 million and we're going to generate about $30 million. It's just an execution issue with moving some of our distribution facilities down to Pennsylvania and the timing of when those savings will kick in. Elizabeth Montgomery – Cowen: Also on the revenue line it seems as if despite the fact that revenue was higher than I think a lot of people were expecting in this quarter, that you didn't change your outlook for the year despite that FX will now be more of a help. Is that just conservatism or is that reflecting something that you see developing in the business in the upcoming quarters?

I think if you include the exchange we actually did take our year up because we said 5% to 7% without the benefit of much exchange last call and now we're seeing a 1% benefit from exchange. So our reported numbers we are now saying are going to be between 6% and 8%. We did take our numbers up based on the exchange. As far as normal business, we gave a range for the first quarter of 5% to 7% and that's sort of where we fell. Elizabeth Montgomery – Cowen: Okay. Great. Thank you.

Your next question comes from Lauren Lieberman - Lehman Brothers. Lauren Lieberman - Lehman Brothers: Thanks, good morning. I don't feel like I got a good understanding from what you guys have shared so far as to where all this very significant upside came from this quarter. In the way that I had modeled it out, the big difference is really currency. About three-quarters of the upside on revenues was currency. How much of that flowed through and actually impacted EPS?

Our revenue estimate for the quarter was a growth of 5% to 7%. We actually came in at 5%, with a 1% benefit from exchange, so 6% reported basis. So I think our revenue estimate was spot-on, quite honestly. As far as our profitability, you cannot underestimate the implications of going to a national gift program, because we said last year that this would have big implications on our numbers for this year and that's why we said listen, you need to focus on the year because quarter by quarter comparisons are going to be difficult to make. From our perspective, it was a big initiative to ship all of these gifts on a nationwide basis in the first quarter. Effectively what had happened was some of those gifts shipped in September, some will be shipped in October. Some of our Christmas sets that were planned to go out in the first quarter actually went out in October, which affects our basic business mix. So we were favorable in cost of goods. We spent a little bit less in operating expenses as we referred to in our call. We had a slightly favorable tax rate. I mean, all of those things are things which generated a slightly higher result in the first quarter, but a lot of those things are going to be offset in our second quarter and they're built into our second quarter guidance that we gave you. We still focus on the year. That's what's important to us. We're holding our year and we're comfortable with those numbers.

Your next question comes from Bill Schmidt - Deutsche Bank. Bill Schmidt - Deutsche Bank: Good morning. Can we just talk a little bit more about the shift in the promotional calendar and what the magnitude of it was? How much of that 110 basis points of gross margin expansion was just from that shift in the gift with purchase spending?

Bill, I think if you read the queue which we should be filing today, we give the break down of the benefits and the change in gross margin. A lot of it is related to shift. That's why we don't want to focus on the quarters. We are happy to talk about what will happen for the full year. We're comfortable with our guidance for sales and EPS for the full year. Bill Schmidt - Deutsche Bank: A follow-up on that, so the incremental training costs, will some of that also get pushed into the quarter? I know you put a lot more people in the stores because of the banner changeover. Will that continue throughout the year? Was that kind of a one-off event here in the first quarter?

Some of it will continue but there was some one-off spending associated with the name change, no doubt about it. We did a lot of in-store activity in the first quarter.

Your next question comes from Linda Bolton Weiser - Oppenheimer. Linda Bolton Weiser – Oppenheimer: Thanks. I was just hoping you could elaborate a little bit more about the Americas sales growths. It was just a little bit lower than we had thought and the comparisons get tougher as the year progresses. So I'm kind of wondering about your optimism for the remainder of the year. And would the sell-in of the Clinique to the remaining Sephora stores have to do with that? Can you also give us some idea whether the Kohl's shipments were up or down in the quarter?

The first quarter numbers were -- don't forget they are still impacted pretty substantially by the Federated/May door closures. So there's a big effect with that. Also, have you to remember that there's a lot of sales that happen around the gift programs and the Clinique gift program has shifted from first quarter to second quarter, year-over-year. So we're okay with the numbers. The numbers in the first quarter were what we expected in North America. For the year, we're anticipating mid digit, mid single-digit growth in the Americas region. So we're okay.

As far as Kohl's, Linda, our Kohl's business is down somewhat. Some of it has to do with some anniversary dates. But we encourage Kohl's to put in additional fragrances, which we think round out the cosmetics area for Kohl's. The good news was that went in in the middle of the quarter. The bad news was it has affected our sell through in that some of the gift business has now shifted to that dominant fragrance location. I think in the long-term it's going to be good but I think we had a little bit of a slowdown through these last two months in Kohl's, but we expect it to come back up for Christmas.

Our next question is from Alice Longley - Buckingham Research. Alice Longley - Buckingham Research: Good morning. My questions are about gross margin as well. Can you be more specific in the gross margin guidance for the year?

We said that our improvements in gross margin would be offset by our growth in operating expenses, so a flat operating margin. I think for the year, our gross margin is anticipated to improve about 75 to 100 basis points. Alice Longley - Buckingham Research: Okay. That's good. Thank you. And then if the first quarter came in well above your guidance mainly because of the shift in the gift program into the second quarter, it sounds as though that is not taking away from the second quarter because your guidance is fairly close to what you said before.

We never said anything on the second quarter, Alice, so -- Alice Longley - Buckingham Research: Well you had the first half guidance.

No, we only gave full year guidance and we gave an indication of sales and EPS for the first quarter. We never talked about second quarter. Alice Longley - Buckingham Research: But your gross margins are maybe going to be coming in in the December quarter a little lower than you had originally thought?

Yes. Alice Longley - Buckingham Research: As an offset? And then again on gross margins you said one of the benefits was mix. Can you tell us which brands are most driving the favorable mix?

It wasn't related to a brand issue, it was related to the fact that because of producing all of these gifts and the timing of manufacturing and shipping of those gifts, we shipped less of our Christmas set business, which is normal business but carries a higher cost of goods, less of our Christmas set business in the first quarter than we had anticipated and that was replaced by basic business which has a lower cost of sales. So it's just the timing of shipments of some of that Christmas set business which has shifted into the second quarter. Alice Longley - Buckingham Research: Okay. Got it. Thank you very much.

Your next question comes from Chris Ferrara - Merrill Lynch. Chris Ferrara - Merrill Lynch: Just on the timing of the gift with purchase, what does it mean for the top line? Did you have fewer gift with purchase days, per se, in Q1, out there at retail than you did in the year ago quarter?

Yes, year-over-year, that is correct.

Realize, Chris, in the markets where there were Federated and May doors, we have one less gift with purchase date. They're consolidated into one date now where they used to be two. Chris Ferrara - Merrill Lynch: So when you say that the same store gift with purchase sales numbers were slightly up year-over-year, what would be the total all in gift with purchase sales result for the quarter? I mean, it was much lower than that, I guess, right?

Well, you're talking about the closed doors? The closed door numbers are out of there for both gift with purchase and regular business. Chris Ferrara - Merrill Lynch: But the same store sales number, that does include an instance where you might have had a promotion last year but now under Macy's you didn't this quarter. Is that right?

Yes. That is correct. But again, the key thing, Chris, is one of the reasons we say it's very difficult to draw comparisons year-over-year is just the point that you're raising which is how many gift days were there in the first quarter of last year versus gift days in the first quarter of this year? What is shifting back and forth? That is why we're really focusing on the full year results and we're quite comfortable with our sales guidance and the EPS guidance for the full year at this point in time. That's why we really want to avoid the quarterly discussions. Chris Ferrara - Merrill Lynch: That's fine. I understand that. I'm just trying to get a sense because we have to model on a quarterly basis. Does that mean that you'll get a benefit on having more gift with purchase days year-over-year in the December quarter?

I think, Chris, to go back to what we said before, because of the reduction in number of nameplates with whom we do business and if you assume for a moment that with every name plate, we did a distinct gift with purchase, in all those markets where Federated and May merged and they eliminated one if not two nameplates, if you were to actually go market by market, distinct gift with purchase activity, market by market, and roll it up on a national basis and add them all up, there are fewer doors with distinct gift dates this year versus last year because of the merger. The shift quarter to quarter is really, truly very confusing because and I'll give you the example is Lauder and Clinique are now on national dates. As Rick said before, the national dates have moved. So basically what you'll see is sales in the second quarter will go up. Gross margin will go down. Primarily driven by the fact that there are more gift costs associated with what's going on. But I want to caution you to try to make that comparison year on year is extraordinarily difficult because of all the shifts. On top of all the shifts, with the date shifts themselves, some of the traditional dates with certain retailers in certain markets have moved. So where Estee Lauder may have been on promotion with Macy's West during their spring flower show over Easter, they may not be now and instead it may be Clinique. So the Estee Lauder brand may have shipped to a different promotional date on the calendar but Clinique was on gift in Macy’s East on its flower show. Now that Macy's is national and Clinique and Lauder will be national dates, there's all sorts of shifting going on and I just want to repeat it again: for this year, and this is what Rick has said and what Dan has said, trying to compare retail year on year, day to day, month to month, quarter to quarter, will be very difficult because of all the shifts going on. Chris Ferrara - Merrill Lynch: Thank you.

Your next question comes from Sandy Beebee – HSBC. Sandy Beebee – HSBC: I had one or two follow-up questions. I guess with all the shifts that are going on, how should we think about whether you're getting a good return on your investment spending and a good return on the changes that you've made with gift with purchase, when we look at the annual numbers? So what kind of expectations do you have for Estee Lauder and Clinique in the U.S. for fiscal 2007? Then I had another question about why you chose not to go into the J.C. Penney Sephora stores.

Let me answer the second part of your question first, then I'll ask Dan to respond to the first part of the question. We chose not to go into the J.C. Penney Sephora venture primarily because we could not agree between us on the business terms and conditions which would be favorable to the brand. Dan?

The first part of your question was Lauder and Clinique for the year. We expect both businesses to be up. We think that we're doing a great job in capturing the day in, day out business of the closed doors. Where we're still struggling is in the promotional business where a market would have two promotions in the season, now consolidated into one. We have a certain percent of our business, our customers although low, are gift shoppers and we're missing one day. But we really expect both Clinique and Lauder to have positive results at the end of this year in North America. Internationally, the businesses are fine and both brands will grow for the year. Sandy Beebee – HSBC: Okay and then in terms of not being able to agree on the business terms and conditions, is its more to do with how you wanted the brands to be presented?

It's all of the above.

I can't emphasize enough, in our minds Clinique is arguably one of the top three brands in the world and to enter a new distribution channel without some favorable terms was just unacceptable to us. We didn't want to get into the dialogue of what it meant to our existing distribution until we resolved that issue. Sandy Beebee – HSBC: On the U.K. market it sounded like it had gone pretty well this quarter. Is there just a recovery going on? I guess the market was a little bit weak a year ago. Or can you just give a little bit more color on that?

The U.K. was up high single digits so we're quite happy with the results in there and I think that William referenced specifically the performance of Bobbi Brown in that marketplace. So that was a solid result as well. So you know, is there a recovery going on? Our business is doing better, certainly. Sandy Beebee – HSBC: Thank you.

Your next question comes from Amy Chasen - Goldman Sachs. Amy Chasen - Goldman Sachs: Hi, good morning. Firstly, just on Sephora, did you guys say that you're expanding Clinique broadly into Sephora so that you're going to have broad distribution?

Let me be specific. We are expanding the distribution of Clinique in North America into the Sephora full line stores. Those are the bigger Sephora doors that are 4,000 or 5,000 square feet that exist in the middle of the mall. We are not taking the Clinique brand into the venture between Sephora and J.C. Penney's which are the somewhat smaller Sephora branded environments inside of the four walls of the larger J.C. Penney stores. Amy Chasen - Goldman Sachs: So what I don't understand, because I heard your comments about you couldn't agree on the terms and conditions and so on. I've seen the Sephora layout in J.C. Penney at least in one door and have spoken to their management and they basically said they took their top SKUs, its the exact same layout as what it is in the stores, it's the exact same terms with all of their vendors, so I don't understand what the disconnect is there.

I wouldn't really want to comment on what any of our retailers say and what their key strategies and terms and conditions are. I can only comment with some reasonable intelligence on what we know about our businesses and our brands. I think it's safe to say that Clinique and the Estee Lauder Companies could not come to terms with the management who is responsible for the joint venture between Sephora and Penney’s on acceptable terms and conditions on how we would do business together with the Clinique brand in that venture. Amy Chasen - Goldman Sachs: Can you also just go back to Estee Lauder and Clinique? I think you said something about focusing on the base business and then trying to do more to create newness or something like that? Can you just extrapolate on exactly what you mean by that and how that might be different on what you've been talking about over the past six months or so?

There's a couple of things, Amy. First and foremost, if you look at our trends in our business over the last ten years, one of the consistent themes has been that 30% of our sales come from products launched within the last three years. Which means that 70% of our sales are coming from products we launched more than three years ago. Yet the vast majority of our marketing efforts and our marketing dollars are spent on that 30% which is new. Obviously the consumer responds to newness and she is motivated to come to the store and pay attention to our brands because of the newness we present to her. But the fact of the matter is that when she does show up, seven out of ten times she says I like the product I know. So what we're trying to do is allocate a more meaningful portion of the total marketing efforts and dollars in advertising and promotion to those core established products which she really likes. For example, as I referenced in this script, Clinique's three step, Clinique foundation, Estee Lauder Advanced Night Repair franchises. These are solid, strong franchises, which when looked at on their own would be meaningfully sized brands on their own and yet they live within an even larger brand. We're trying to devote enough effort to it so we can promote to the consumer the solid, fabulous products they've come to know and love and use over many years and have relied upon so that we can grow our business on some of those core followings. Amy Chasen - Goldman Sachs: Great. That's very helpful. Thank you.

Your next question comes from Amy Cedes - Banc of America Securities. Amy Cedes - Banc of America Securities: On Clinique, is there any way you could discuss the productivity and margins of Clinique in Sephora versus the department stores? I am just wondering if the negotiations with Sephora and JC Penney’s are ongoing or whether this is something that has been ruled out. Also two quick questions. The charge in the Americas for an employment matter, what is this and how big is it? On guidance, has your guidance policy changed or why have we gotten guidance for next two quarters in a row now?

On average, we don’t talk margins, but on average a classic U.S. department store Clinique does anywhere between $750,000 and $800,000. In Sephora, that same Clinique presentation is doing about $150,000 to $200,000. That's the relative size of the two businesses.

Regarding the legal action, it was matter that was settled through mediation. It was really around an interpretation of law as opposed to any specific discussions with any employees. It's immaterial to our full year results but it did add about 20 to 25 basis points to our operating expense in the quarter. Regarding guidance, you know, we still believe strongly in running our business on an annual basis. We continue to provide hopefully most of our comments and color around our business related to our full year performance. Having said that, we understand that at times, and certainly that the importance to the investment community of understanding what's happening in the next quarter, so we felt that as appropriate, we will give you just the sales and EPS outlook for the next quarter, without going into a great deal of business details. But at least if it's important to you, you'll have a feel for what's happening in the next quarter. But again, most of our comments and discussions will be around the full year results. Amy Cedes - Banc of America Securities: Thank you.

Your next question comes from Fillippe Goossens - Credit Suisse. Fillippe Goossens - Credit Suisse: Yes, good morning, gentlemen and congratulations on a very good start to the year here. William, I would like to ask you a more strategic question with regard to the department store business. If we look at the overall veteran department stores it's clear that there are not that many more regional malls being built for that channel to build growth going forward. Secondly, within the cosmetics category, amongst others, you are also seeing some increased competition from new formats like J.C. Penney and Sephora. The discounters are trying to grab a little bit of that business as well. Now, as they search to grow earnings for their own shareholders, what risk do you see, if any, that they may knock on the door of some of their vendors, including yourselves, and say hey, what can you do to help us to grow our earnings per share? Therefore there is some risk that the business model that we've known for the last four to five decades, let's say, could come somewhat under pressure? If that were to be the case, how would you respond, if that request were to come from the retailers? Thanks so much, William.

That's a wonderful question. That's one of the key questions we ask ourselves on a daily basis. I think it fundamentally comes down to, if you will, a balance of power, for want of a better word, between ourselves and our key retailers in making sure that we have something that they want and they have something that we want. What we have is great brands with a great connection to our consumers. They've got a great retail brand name, great real estate presence in the right place where there are consumers who are shopping. So the mutual benefit we both have is putting our great brands in their retail space in a great location. Where the balance of power could get out of whack is if we no longer have something that they want, that they don't have, and therefore they feel that they can apply a form of leverage to us without our ability to respond. So the long-term challenge for us is to always have brands and positions and retail locations for which they would like us to consider expansion of distribution, which they do not have. Therefore, if you will -- and this is something we've been doing for 40 plus years -- the promise of expanded distribution with new brands comes on making sure you take care of the brands that exist. It's a fine balance between us and basically we have to make sure that we have that balance of power. Let's not forget that our focus right now, where we are very saturated and very highly penetrated with our key large brands, Clinique and Lauder, is that we're looking for most of our growth for those brands in particular to come from outside of North America while we aggressively expand our newer and emerging brands in North America as well as outside of North America. So the balance comes, we have said one of our long-term goals is that our balance of sales that will come from around the world on a geographic basis we expect to shift over time. Right now we're roughly a 50/50 between North America and the rest of the world. I would like to say in the next five to seven years that that shift would go 60/40 outside of North America, if not more. In addition to that, we must continue to innovate and create new brands that can be successful in the department store channel which we can grow behind the brands that are existing and growing so that we help the retailer with their growth in this key category of cosmetics, by continuously bringing new brands that will attract consumers while our existing brands continue to grow. Fillippe Goossens - Credit Suisse: Thank you so much for that insight, William. Maybe just a follow-up on that same theme. Over the last year, you've shared with us the impact on your business from the integration of May department stores into Federated. Can you provide us with any color as it relates to the integration of the businesses that were acquired by Bonton stores?

I think it's too early to tell. Everything is being sorted out. It was sort of hidden behind all the discussions about May company. Bonton is now a major player for us. Some of their franchises are wonderful, wonderful businesses for us. I think that between what the southern doors in the Saks group and what Bonton bought in the northern, we don't see a major impact. I think that at least in the Bell case there will even be a positive impact. So I think it's too soon to tell in the northern group. But the in the southern group we're looking for a more positive business with cosmetics. Fillippe Goossens - Credit Suisse: Thank you. Maybe if I can just conclude with one final question. On SAP, if I understand correctly, it is currently being rolled out at the Aveda brand. Any initial read and what are the other brands that you will put on the platform during the remainder of your fiscal year '07? Thank you.

In fiscal '07 it would just be Aveda but we will start other locations and it will be company-wide. The reason that it just happened to be related to a specific brand, Aveda, is because that is the location that we chose to do first. It's a stand-alone, if you will, a stand-alone business and it's something that we felt was appropriate to test and make sure that we have everything right before we roll out. So it will go live this fiscal year and we'll begin expansion into Europe and some financial backbone work here in North America as well.

Your next question comes from Connie Manetti - Prudential. Connie Manetti - Prudential: Not to beat this national gift date to death, but for housekeeping purposes, could we have a list of what the national gift dates were or the major gift dates were last year from your national accounts and how many they're going to and what those major dates might be in fiscal '07?

Connie, if we can do the Rubik's cube first, we can do that second. There were major shifts everywhere. An example, Clinique did Dillard’s historically in October. Dillard’s Clinique this year went in August. The consolidations are all across the board and I'm not sure what you could do with it. The shifts are such that it's going to take us a full fiscal year, both spring and fall to get through. William talked about shifting the other activities within the store and how they affected dates. How you come now between and what you're selling on the dates, if you're selling Christmas sets. It is a very complex thing and the pure dates don't mean that much. The calendars have been historic for years between those two big brands we have, and L’Oreal with Lancôme. There's nothing could you do with it. Connie Manetti - Prudential: Okay. Fair enough. One more question about what you had planned for Clinique and the gift program in the first quarter, shifting to the second quarter. If you could help us understand the dynamics of what went on there. Because from one point of view it seems like there's so much planning and long lead planning that goes into all of this and then all of a sudden things shift from one quarter to the next quarter. What shifted? Was it the gift date? Was it the timing of shipments? Was it the Christmas sets?

Well, it was the last two, primarily. We had some Christmas shifts because we had some late deliveries of some set-up boxes from September into October. Realize the Clinique Macy's gift with purchase was 88 trailers full of gifts and some of those didn't make it out in the end of the month and they went in the first couple days of October. It's a massive, massive logistic effort. So it's not a shift, it’s a matter of days or weeks. Connie Manetti - Prudential: And then you mentioned that Sean John was going to go to special sizes to reach more consumers. What exactly does that mean?

We think in the popular business in the pricing structure, especially when we get to the popular business with Sean John and even in the department store business, it's going to give a broader price point. It came out at a premium price point. And it's going to give it an entry level that is more acceptable for distribution. Connie Manetti - Prudential: Where would these special sizes be sold?

Everywhere. Connie Manetti - Prudential: I mean, like Walgreen’s or everywhere in department stores.

No, right now the Sean John brand is in the department store world. Connie Manetti - Prudential: Okay. Great. Thank you.

Your next question comes from Linda Bolton Weiser - Oppenheimer. Linda Bolton Weiser - Oppenheimer: Yes, you had mentioned in your commentary that you were experimenting with some new gift with purchase ideas for the spring. Could you give a little more information? Is that just different types of items to be offered as a gift or a different financial structure with the company that you might partner with?

No, what we're trying to do is take advantage of national dates. Now that we have them, what kind of national programs can reinforce this vehicle? The one that we're talking about, I guess we're just talking about, I'm assuming that Clinique has now shared with their retail partners, is that they are doing a joint venture with a lot of the magazines, where we had let the editors of the magazines select and put together the gift. So the Dillard’s gift may be from the editors of Allure magazine or from Vogue or from Glamour. I think it gives some credence to the gift itself and tells the consumer that someone thought about the quality of this gift and the components so it's not just a bunch of samples put together. Because we have a national date now, we can deal with national magazines. Before you had national dates, the regionalization of the gifts didn't give you permission to use national vehicles. That's one example. There are others we're doing but that's one we're talking about. Linda Bolton Weiser - Oppenheimer: Thank you very much. Dennis D’Andrea: That concludes today question and answer session. If you were unable to join for the entire call, the playback will be available at 12:00 noon ET today through November 1. To hear a recording of the call please dial 888-203-1112, passcode 3697411. That concludes today's Estee Lauder conference call. Thank you all for participating.