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Este Lauder Companies, Inc. 2008

Sharynn Tomlin Angelo State University EL
Based in New York City, Este Lauder is a manufacturer and marketer of four cosmetic product lines: 1) skin care, 2) makeup, 3) fragrances, and 4) hair care products. These products are sold in over 130 countries and territories under brand names that include Este Lauder, Aramis, Clinique, Prescriptives, Lab Series, Origins, MAC, Bobbi B r own, La Mer, Aveda, Jo Malone, Bumble and Bumble, Darphin, Rodan + Fields, American Beauty, Flirt!, Good Skin and Grassroots. Este Lauder also has global licenses for fragrances and cosmetics sold under brand names that include Tommy Hilfiger, Donna Karan, Michael Kors, Donald Trump, Sean John, Missoni, and Daisy Fuentes. Este Lauder announced in June 2007 that it might acquire skin care company Murad Inc., based in El Segundo, California. Murad sells skin care products and dietary supplements on the Internet and via infomercials, and also in spas and stores such as Sephora and Bath and Body Works. Este Lauders final 2007 sales increased 7 percent to $7.037 billion. E s te Lauder sells its products mainly through upscale department stores, specialty retailers, upscale perfumeries and pharmacies, and prestige salons and spas. In addition, its products are sold in freestanding company-owned stores and spas as well as its own and other authorized retailers Web sites. You can also find Este Lauder products for sale at stores on cruise ships, on television direct marketing channels, and at in-flight and duty-free shops. Este Lauders range of skincare products for women and men include moisturizers, creams, lotions, cleansers, sunscreens, and self-tanning products, a number of which are developed for use on particular areas of the body, such as the face, the hands, or around the eyes. Skincare products account for about 37 percent of net sales as compared to makeup products that account for about 39 percent of sales. The companys makeup products include lipsticks, lip glosses, mascaras, foundations, eye shadows, nail polishes, and powders, as well as related items such as compacts, brushes, and other makeup tools. Fragrances for women and men comprise about 19 percent of sales. Fragrances are sold in perfume sprays and colognes, as well as lotions, powders, creams, and soaps. Finally, Este Lauder sells hair care products in salons and freestanding retail stores. These products include hair color and styling products, shampoos, conditioners, and finishing sprays. In fiscal 2006, hair care products accounted for about 5 percent of sales. Each of the companys brands has a single global image that is promoted with consistent logos, packaging, and advertising designed to differentiate it from other brands.

Beauty, youth, and being forever young are common themes in the personal products industry. A young entrepreneur named Este Lauder felt that she could provide a product that espoused those qualities. Este Lauder Company was founded in 1946 by Este Lauder and her husband Joseph Lauder. Este was always interested in beauty and began her business selling the skin care products her chemist uncle, John Schotz, developed. Her first products were sold to beauty salons and hotels.


In the early years, Este was unable to convince Madison Avenue to carry her products. Facing this rejection, she began to market her products directly to customers. With that success, the Lauders began targeting high-class customers by selling products exclusively through boutiques and department stores. In 1948, Este Lauder established their first department store account with Saks Fifth Avenue in New York. During the next 15 years, the products were selectively distributed in other stores in the United States. In 1960 the company globalized their operations with the introduction of Este Lauder products at Harrods in London, with the Hong Kong market opening the following year. The first Este Lauder products sold were Super Rich All Purpose Creme, Creme Pack, Cleansing Oil, and Skin Lotion. Additional brands such as Aramis, a line of prestige fragrance and grooming products for men was launched in 1964, and Clinique, the first dermatologist-guided, allergy-tested, fragrance-free cosmetics brand was launched in 1968. Prescriptives and Origins Natural Resources were early brands too. Este Lauder acquired more brand licensing of names such as Tommy Hilfiger, MAC, Bobbi Brown, La Mer, Kiton fragrances, Donna Karan, and Aveda. Mrs. Este Lauder was named one of ten Outstanding Women in Business in the United States by business and financial editors in 1967. A year later she received the Spirit of Achievement Award from Albert Einstein College of Medicine at Yeshiva University. This was the same year that the company expanded again by opening Clinique Laboratories, Inc. In 1983, their products were introduced in the Soviet Union. In 1998, Este Lauder began selling a variety of products over the Internet and was one of the first major cosmetics firms to offer online shopping. A new division called ELC Online was created to manage all online strategies and activities for all of its brands. During this same time frame other acquisitions included Jo Malone, Stila Cosmetics, and New York-based Bumble and Bumble LLC was acquired. In 2003, Darphin and Rodan + Fields were acquired and a license with Michael Kors was signed shortly afterward. In 2004, the companys teen-oriented Jane business was sold and Este Lauder launched Beauty, Flirt, and Good Skin through its BeautyBank division, followed by Grassroots in 2005 and Daisy Fuentes in 2006. The year 2006 also saw license agreements with Sean John, Missoni, and Donald Trump, and the Stila brand was sold. Today Este Lauder Companies has 26 brands, sells products in over 130 countries and territories, and employs over 22,000 people worldwide. Although Mrs. Este Lauder passed away in April 2004, she witnessed the growth of a small home operation into a worldwide corporation with annual revenues of more than $5 billion. She was very proud that her company went public in 1995 and today is led by Este and Josephs children and grandchildren.

Mission Statement
In a short, succinct statement, Este Lauder Companies, Inc. states that their vision is bringing the best to everyone we touch.1 Furthermore, the company is committed to uncompromised ethics and integrity. For all employees domestically and globally, and the board of directors, the highest standard of ethics is a condition of employment. The companys official home page elaborates by stating the following:
We are a family company committed to working together with uncompromising ethics and integrity. We strive to always: 1. 2. 3. 4. 5. 6. Provide customers with innovative cosmetic products of the highest quality. Deliver outstanding service by treating each individual as we ourselves wo u l d like to be treated. Create an environment that fosters personal growth and well being. Build partnerships with our suppliers, retailers and colleagues based on fairness and trust. Enhance our reputation of image, style and prestige. Pursue profit, but never at the expense of quality, service or reputation.


7. 8.

Eliminate waste and reduce inefficiencies in order to provide maximum value to our customers. Be responsible citizens in every community we serve.2

O rganizational Structure
As illustrated in Exhibit 1, it is not clear whether Este Lauder uses a traditional functional structure or some type of divisional structure. It is managed primarily by Lauder family members as both the chief executive officer (CEO) and chairman of the board are Lauders. There are


Organizational Chart

Source: Adapted from



Firms Facilities

Manufacturing 15 focused factories Research and Development 400 scientists Business Offices 43 worldwide

United States, Belgium, Switzerland, United Kingdom and Canada Melville, New York; Oevel, Belgium; Tokyo, Japan; Markham, Ontario; Blaine, Minnesota; Shanghai, China; Kobe, Japan North America, South America, Central America, Asia, Europe, Middle East, Australia, New Zealand, Africa


four group presidents who report to the CEO, but it is not clear whether these four persons have authority over the four product lines or four geographic areas of the world. The management systems at all Este Lauder manufacturing operations conform to the ISO 14001 standards. Este Lauder has offices, stores, and facilities all over the world as indicated in Exhibit 2.

Financial Position
As indicated in Exhibit 3, Este Lauders 2006 sales increased 3 percent to $6,463.8 million due to growth in their makeup, skin care, and hair care product categories, which was partially offset by lower sales in the fragrance product category. The net increase reflects EXHIBIT 3 Consolidated Statements of Earnings
2007 2006 2005 2004

Year Ended June 30 (In millions, except per share data)

Net Sales Cost of sales Gross Profit Operating expenses: Selling, general and administrative Special charges related to cost savings initiative Related party royalties Operating Income Interest expense, net Earnings before Income Taxes, Minority Interest and Discontinued Operations Provision for income taxes Minority interest, net of tax Net Earnings from Continuing Operations Discontinued operations, net of tax Net Earnings Basic net earnings per common share: Net earnings from continuing operations Discontinued operations, net of tax Net earnings Diluted net earnings per common share: Net earnings from continuing operations

$ 7,037.5 1,774.8 5,262.7 4,511.7 1.1 749.9 38.9 711.0 255.2 (7.1) 448.7 .5 $ 449.2

6,463.8 1,686.6 4,777.2 4,065.5 92.1 4,157.6 619.6 23.8 595.8 259.7 (11.6) 324.5 (80.3) 244.2 1.51 (.37) 1.14 1.49

6,280.0 1,602.8 4,677.2 3,950.4 3,950.4 726.8 13.9 712.9 293.7 (9.3) 409.9 (3.8) 406.1 1.82 (.02) 1.80 1.80

5,741.5 1,464.3 4,277.2 3,609.5 18.8 3,628.3 648.9 27.1 621.8 234.4 (8.9) 378.5 (36.4) 342.1 1.66 (.16) 1.50 1.64 continued



Consolidated Statements of Earningscontinued

2007 2006 2005 2004

Year Ended June 30 (In millions, except per share data)

Discontinued operations, net of tax Net earnings Weighted average common shares outstanding: Basic Diluted Cash dividends declared per share

(.37) 1.12 215.0 217.4 .40

(.02) 1.78 225.3 228.6 .40

(.16) 1.48 228.2 231.6 .30

sales growth in all geographic regions. Note that cost of sales as a percentage of total sales increased to 26.1 percent as compared with 25.5 percent in the prior year. Operating income decreased 15 percent to $619.6 million, and the operating margin was 9.6 percent of sales in fiscal 2006 as compared with 11.6 percent in the prior year. Note in Exhibit 4 that Este Lauders long-term debt decreased 4.6 percent to $431 million in 2006. EXHIBIT 4 Consolidated Balance Sheets
All Amounts in Millions Except Share Data (Year Ended June 30) 2007 2006 2005

ASSETS Current Assets Cash and cash equivalents Accounts receivables, net Inventory and promotional merchandise Prepaid expenses and other current assets Total Current Assets Property, Plant, and Equipment, net Other Assets Investments, at cost or market value Goodwill Other intangible assets, net Other assets, net Total Other Assets Total Assets LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities Short-term debt Accounts payable Accrued income taxes Other accrued liabilities Total Current Liabilities Noncurrent Liabilities Long-term debt Other noncurrent liabilities Total Noncurrent Liabilities

$ 253.7

860.5 855.8 269.4 2,239.4 880.8 22.2 651.3 113.4 218.6 1,005.5 $ 4,125.7

368.6 771.2 766.3 270.8 2,176.9 758.0 13.4 635.8 77.0 123.0 849.2 3,784.1

553.3 776.6 768.3 204.4 2,302.6 694.2 12.3 720.6 71.8 84.3 889.0 3,885.8

60.4 1,440.3 1,500.7 1,028.1 376.6 $ 1,404.7

89.7 264.5 135.5 948.5 1,438.2 431.8 266.4 698.2

263.6 249.4 109.9 874.8 1,497.7 451.1 228.4 679.5 continued



Consolidated Balance Sheets continued

All Amounts in Millions Except Share Data (Year Ended June 30) 2007 2006 2005

Commitments and Contingencies Minority Interest Total Liabilities Stockholders Equity Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares issued: 164,837,563 at June 30, 2006 and 159,837,545 at June 30, 2005; 240,000,000 shares Class B authorized; shares issued and outstanding: 85,305,915 at June 30, 2006 and 87,640,901 at June 30, 2005 Paid-in capital (capital surplus) Retained earnings Accumulated other comprehensive income Less: Treasury stock, at cost; 38,382,458 Class A shares at June 30, 2006 and 27,174,160 Class A shares at June 30, 2005 Total Stockholders Equity Total Liabilities and Stockholders Equity

21.3 2,926.7



2.6 801.7 2,731.5 54.7 3,590.5

2.5 581.0 2,361.9 64.7 3,010.1

2.5 465.2 2,203.2 9.4 2,680.3

(2,391.5) 1,199.0 $4,125.7

(1,387.8) 1,622.3 3,784.1

(987.5) 1,692.8 3,885.8

Finances by Pro d u c t
As indicated in Exhibit 5, the companys sales of skin care products increased 2 percent or $48.7 million to $2,400.8 million primarily due to new product launches. Makeup net sales increased 6 percent or $137.4 million to $2,504.2 million, reflecting growth from the makeup artist brands of approximately $179 million. Net sales of fragrance products decreased 4 percent or $47.3 million to $1,213.3 million as the company continue to struggle in this product category, particularly in the Americas region. Hair care net sales increased 16 percent or $44.8 million to $318.7 million, primarily due to sales growth from Bumble and Bumble and Aveda products.

Finances by Geographic Region

Exhibit 5 also reveals that Este Lauders sales in the Americas increased 3 percent to $3,446.4 million, led by growth in the United States of about $190 million, primarily attributable to makeup artist and hair care brands, Internet distribution, and the introduction of new fragrances. Net sales growth in Canada, Latin America, and Mexico contributed an additional $48 million to the increase. In Europe, the Middle East, and Africa, net sales increased 2 percent to $2,147.7 million. Markets in Russia and the United Kingdom benefited from the success of the DKNY Be Delicious franchise and the sale of MAC products. These increases were partially offset by decreases of approximately $26 million in Spain and Italy. Spains and Italys sales were adversely affected by changes in the distribution policy and a difficult retail environment. Net sales in Europe, the Middle East, and Africa increased 5 percent. The companys 2006 sales in the Asia/Pacific region increased 6 percent to $869.7 million. Strategic growth in China combined with positive results in Korea and Hong Kong, contributed about $57 million to sales growth of this region. These increases were partially offset by decreases in Japan and Australia of about $18 million. Japans results were negatively impacted due to the strengthening of the U.S. dollar against the Japanese yen. The decrease in Australia reflected a slower and difficult retail environment, particularly in the fragrance category. Net sales in Asia/Pacific increased 7 percent.



Financial Data per Segment for 20042007 (In Thousands)


Skin Care Makeup Fragrance Hair Care Other Total

2007 $2,601,000 2,712,700 1,308,600 377,100 38,100 $7,037,500

2006 $2,400,800 2,504,200 1,213,300 318,700 26,800 $6,463,800

Operating Income

2005 $2,352,100 2,423,100 1,260,600 273,900 26,600 $6,336,300

2004 $2,140,100 2,148,300 1,221,100 249,400 31,500 $5,790,400

Skin Care Makeup Fragrance Hair Care Other Total

2007 $341,500 339,300 28,100 42,500 (1,500) $749,900

2006 $346,400 329,400 7,700 26,500 1,700 $711,700

2005 $365,800 294,900 35,800 22,800 1,300 $720,600

2004 $336,300 257,700 24,800 23,600 1,600 $644,000

Geographic Revenues Analysis

Asia/Pacific Europe/Middle East/Africa Americas Total

2007 $ 983,200 2,493,400 3,560,900 $7,037,500

2006 $ 869,700 2,147,700 3,446,400 $6,463,800

2005 $ 835,500 2,118,600 3,382,200 $6,336,300

2004 $ 771,400 1,870,200 3,148,800 $5,790,400


Este Lauder markets more than 9,000 quality products under its portfolio of brands. Exhibit 6 summarizes the various products and dates of product launch or acquisition. Este Lauder was the first major prestige cosmetics firm to offer shopping via the Internet. Department stores remain the best venue for high service and great brands since $7.6 billion in beauty sales were generated in U.S. department stores in 2006, representing 18 percent of the total beauty market in the United States. Dan Brestle, COO of Este Lauder, stated that distribution channels in North America, sales on TV, and sales in doctors offices are growing. However, the major shift has been in mall-based specialty stores. In Europe, the skincare business continues to migrate to pharmacies. While there is growth in perfumeries in Asia, the Asian department store continues to dominate that channel.3

Este Lauder was the first cosmetics company to offer free samples and gift-with-purchase and continues this strategy today. The company was also the first in the industry to introduce consistent brand imagery around the world. For this purpose, the company uses celebrities as endorsers in testimonial advertising for commercials on TV, as well as in magazines. Elizabeth Hurley, Carolyn Murphy, Liya Kebede, Gwyneth Paltrow, and Anja Rubik have been signed by the company, as well as Hilary Rhoda, who was named the new face of Este Lauder in January 2007.



Este Lauder Brands


Brand Name Acquired

Este Lauder Aramis Clinique Prescriptives Lab Series Skin Care for Men Origins MAC La Mer Bobbi Brown Tommy Hilfiger Kiton Donna Karan Aveda Jo Malone Bumble and Bumble Michael Kors Darphin Rodan + Fields American Beauty good skin Flirt! Donald Trump, The Fragrance grassroots Sean John Fragrances MISSONI Daisy Fuentes

1946 1964 1968 1979 1987 1990 1994 1995 1995 1993 1995 1997 1997 1999 2000 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2006

Este Lauder prices vary from product to product and from brand to brand, but tend to be in the mid-high to high range of the industry. Prestige pricing appears to be an effective strategy given their target markets.

Industry Fa c t o rs
Much of the expected growth in the personal products industry will be fueled by the rising demand from emerging and developing markets. Estimates have shown that in the next 20 years . . . 70 million people across the globe [will] reach an income level that allows purchasing of cosmetic products.4 The U.S. Census Bureau predicts that by the year 2030, Americans over the age of 65 will represent one-fifth of the population, which is expected to devote a substantial part of their discretionary income to anti-aging products. Younger consumers, age 2030 years old, are choosing to invest their purchasing dollars in preventive cosmetics to battle the effects of aging, and even teens are spending money on these types of products. The worlds aging population will multiple by 2.5 times in the next 40 years, representing over 33 percent of the total population. All geographic regions will be impacted by this increase, including high growth countries such as China and India. Additionally, the



life ex p e c t a n cy of the aging population will continue to improve, with the difference between men and women gradually diminishing. Companies will continue to devote substantial sums to research and development of new and appealing products. However, given the competitive pricing at megastores such as Wal-Mart, companies may be challenged to continue their patterns of innovative research. Additionally, there have been consumer complaints and inquiries into the use of animal testing for new products and many personal care product companies are dropping this form of product testing for more humane and creative testing techniques. Though the federal Food and Drug Administration does not require testing of cosmetics, the agency has notified manufacturers that it would start to enforce labeling that included the statement Warningthe safety of this product has not been determined.5 However, these issues are not new, having affected the industry for more than 100 years. Concerns about the use of aerosols and fluorocarbons which first emerged in the mid-1960s still remains an issue, especially as the need for decreasing damaging environmental pollutants continues to be debated by governments, companies, and consumers. Recent restrictions on products that can be carried in-flight have created uncertainty in the outlook for the travel retail business. In fiscal 2006, the travel retail business comprised approximately 7 percent of total net sales, and accounted for approximately 20 percent of operating income.

Top competitors in the cosmetics business are dive r s i fied with many brand names and a wide range of products. A summary of key financial data on Este Lauder and competitors is shown in Exhibit 7.

L O re a l
LOreal is one of the worldwide leaders in cosmetics and distributes products in 130 countries with 19 global brands and offices in 58 countries. In 2006, the company statements reflected 15.7 billion in consolidated sales, operating profits of 2.5 billion, and a commitment of 3.4 percent of the annual sales to research and development.

Procter & Gamble

Procter & Gamble has consistently pursued globalization with over 135,000 employ e e s working in over 80 countries and distribution of consumer products in 140 countries. The P&G brand portfolio includes Pampers, Tide, Ariel, Always, Pantene, Bounty, Fo l g e r s , Pringles, Charmin, Downy, Iams, Crest, Actonel, and Olay. While probably the most diversified, with a greater depth of product lines, Procter & Gamble continues to show strong growth and profitability. For the 2006 fiscal year, the company saw their fifth consecutive


Info on Competitors (2006) (in millions; amounts in US$ unless denoted otherwise)
Revenues EBITDA Net Income Total Assets Total Liabilities PE Ratio

Alberto-Culver Avon Products Colgate-Palmolive Este Lauder LOreal (euros) Procter & Gamble Revlon Unilever (euros)

$ 3,772 8,763.9 12,237.7 6,463.8 15,729.3 68,222 1,331.4 39,642

378.9 477.6 2,489.2 818 3,157.4 16,159 60.5 4,687

205.3 917.0 1,353.4 244.2 2,062.1 8,684 251.3 5,015

2,582.5 5,238.2 9,138 3,784.1 24,783 135,695 931.9 37,072

823.6 4,447.8 7,727 2,136.4 10,158.8 72,787 2,161.7 25,400

20.80 28.91 22.98 23.25 NA 20.11 2.62 NA



year of sales growth and free cash flow productivity. P&G reported $68.2 billion of revenues with a net income of $8.6 billion in 2006.

Unilever, the Anglo-Dutch food and personal products group, has 400 brands that span over 14 categories of home, personal care, and food products. Examples of their brands include Sunsilk, Suave, Dove, Lipton, and Hellmans. With a sales growth of 3.8 percent, increased operating margins, and net profits increasing 10 percent (5.4 million) since 2005, the company remains a strong competitive player. The growing financial health of the company enabled Unilever to return 750 million to shareholders as a one-off div idend. The personal care products division continues to represent an impressive share of their growth, showing an increase of 6.3 percent in 2006. The percentage of Unilevers U.S. research conducted online has more than doubled to 80 percent in five years. While the U.S. is its most advanced market, Unilever envisages similar trends in countries where Internet access is widely available, such as the United Kingdom and Japan. The shift to Internet projects by Unilever, which spends an estimated 400 million a year (2006) on research, reflects the Webs accelerating impact on the global market research industry.

Colgate-Palmolive, who marks their 200th year in 2006, markets a variety of products in the oral, personal, and home care segments. The company had industry-leading revenues of $11.3 billion in 2006 with a gross margin of 54.4 percent and a price earnings ratio of 26.77. The company reported a net income of $1,351,400,000 in 2006. Colgate-Palmolive also has a strong and supportive relationship with professional and trade groups that has increased with the introduction of new dental products.

Av o n
Avon Products Incorporated sells beauty and related products consisting of cosmetics, fragrances, skin care, and toiletries. Their principal offices are located in New York City near Este Lauder. As the worlds largest direct seller of personal products (primarily cosmetics), Avon markets their products in over 100 countries through over 5 million independent sales representatives. Avons product line includes beauty products, fashion jewelry, and apparel. Their top-selling products include brand names such as Avon Color, Anew, SkinSo-Soft, Avon Solutions, Advance Techniques, Avon Naturals, Mark, and Avon Wellness. Despite 2006, considered a transition year in the companys restructuring efforts, Avon Products had total revenues of $8.7 billion, with a gross margin of 60.80, a price earning ratio of 34.07, and net income of $477,600,000. Committed to their restructuring efforts, advertising increases by 83 percent, new market development such as China, and product and brand innovation, Avon continues to be a formidable competitor. Avon now has more than 700,000 saleswomen in China alone.

Alberto-Culver Company operates a beauty supply distribution network and deve l o p s , m a n u factures, and sells consumer beauty products with a strong presence in the professional salon market. The company is led by Carol L. Bernick as chairman and V. James Marino as chief exe c u t iv officer and president with headquarters in Melrose Pa r k , e Illinois. Alberto-Culver Company had $3.5 billion worth of revenues in 2006 with a gross margin of 50.22 percent, a price earnings ratio of 10.27, and a net income of $210,901,000.

Revlon Worldwide Corporation offers a variety of cosmetic and beauty products under multiple brands. Revlon is one of the best known brand names in the world and the company excels at mass marketing. The company is led by Wade H. Nichols, III as senior vice president and general counsel and Howard Gittis as chairman, with principal offices in New York, New York. Revlon Worldwide Corporation had $2.1 billion in total revenues in 2006



with a gross margin of 66.51 percent. The companys net income was $94,600,000 for 2006. International markets showed an increase in the first quarter of 2007 of 6.4 percent to $135.3 million, compared with net sales of $127.2 million in the first quarter of 2006.

At a recent meeting of the Este Lauder stockholders, William Lauder stated about the c o m p a ny s future plans that we expect to enhance our leadership in prestige beauty around the world. We will continue to deliver innovative, cutting-edge products and build strong global brands. We will target and reach diverse consumers by leveraging numerous distribution channels in key markets all over the world. Our goal is to optimize, diversify, and grow the business over the long term.6 With these goals in mind, Este Lauder has developed a long-term strategy based on five imperatives: Optimization of brand portfolio Strengthening of product categories Strengthening and expansion of global markets Diversification and strengthening of channels of distribution Operational and cost excellence.7

Acknowledgments: Joshua Colyar, Anna Flores, Pauline Gullett, Logan Mueller, Daniel Nichols, and Jasmine Reimann for their valued input.

Endnotes Toiletries and Cosmetics. Encyclopedia of Global Industries. Online Edition, Thomson Gale, 2006. 6. 7. www.elcompanies/el2006-10K
1. 2. 3. 4. 5.