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Edited Transcript of COTY earnings conference call or presentation 28-Aug-19 12:00pm GMT

Q4 2019 Coty Inc Earnings Call

New York Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Coty Inc earnings conference call or presentation Wednesday, August 28, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Pierre Laubies

Coty Inc. - CEO, Director & President of Consumer Beauty

* Pierre-André Terisse

Coty Inc. - CFO

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Conference Call Participants

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* Christina Marie Brathwaite

JP Morgan Chase & Co, Research Division - Analyst

* Faiza Alwy

Deutsche Bank AG, Research Division - Research Analyst

* Javier T. Escalante Manzo

Evercore ISI Institutional Equities, Research Division - Research Analyst

* Jonathan Patrick Feeney

Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner

* Joseph Bernard Lachky

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Lauren Rae Lieberman

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

* Sunil Harshad Modi

RBC Capital Markets, LLC, Research Division - MD of Tobacco, Household Products and Beverages

* Wendy Caroline Nicholson

Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Fiscal Fourth Quarter and Full Year 2019 Results Conference Call. As a reminder, this conference call is being recorded today, August 28, 2019. On today's call are Pierre Laubies, Chief Executive Officer; and Pierre-André Terisse, Chief Financial Officer.

I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from these forward-looking statements. All commentary on like-for-like net revenue reflects the comparison of the business at constant currency in the current and prior year, excluding the impact of acquisitions and divestitures. In addition, except when noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the Non-GAAP Financial Measures section of our earnings release. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release.

I will now turn the call over to Mr. Laubies.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [2]

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Thank you, Maria, and welcome everybody to Coty's Fiscal 2019 Full Year and Fourth Quarter Conference Call. Before letting Pierre-André, our CFO, delve into the divisional performance and financials, let me provide you with an update of where we are at and what we have been focusing on since the first time we spoke 6 months ago.

Our first priority at the time had been to stabilize the business operationally. This included resolving the various supply chain disruptions that meaningfully impacted our operations in the first half. Our service levels are now back in the high 90s across all divisions. Regaining control of cash -- of profit and cash flow and setting a relevant financial policy with a sustained dividend. Today, we can consider that these objectives have been achieved.

Our second priority has been to build a medium-term plan aimed at solving what we consider are our most pressing issues. By these we mean the trajectory of our Consumer Beauty business, our gross margin gap, an overly complex organizational design and a culture far too dependent upon personal genius versus collective mastery.

We analyzed in detail our Consumer Beauty business and now have concrete plans in each of our key countries to stabilize our market shares and improve our profitability for 50% of our business. These plans have been rigorously structured and timed, and some parts are already in action. For instance, in Q1, we are already accelerating our working media effort at the expense of promotion and discounts. Our plans have been shared with our key customers, and I can say confidently that they have been well received. We will now deploy, at a rapid pace, this support to the rest of our Consumer Beauty countries, and we expect the same findings, the same resulting actions and the same margin upside per country.

As shared in our call in early July, we've identified substantial value at stake in our direct and indirect costs as well as our G&A, and we shared with you the details of our strategy on the matter. Now we are mobilizing internal and external resources to unlock it. This is mission critical to us as it will give us the margin that we need to invest in brand building while at the same time improving our profitability.

Finally, we have built a diverse leadership team, which will be leading a leaner and more aligned organization. Its key feature will be a set of values reinforcing team alignment and collective effort, closer proximity between markets and the company's leadership, widespread competencies based on clear playbooks and a more cohesive culture illustrated by a move to a global headquarter in Amsterdam. We are finalizing the top 2 layers of our organization currently. Our organization transformation will be completed by the end of Q2, and we intend to start the move to our new HQ in the course of the third quarter of this fiscal year.

These 2 tasks, being either completed or in execution mode, we will now be turning our attention to the next theme of our transformation, our innovation portfolio. We want to strengthen our pipeline through the lens of growing the penetration of our brands. Our brands have the capacity to travel across more geographies and more consumer segments, and we want to leverage this opportunity. Gucci, who is entering color cosmetic; Clairol, with Root Touch Up; and the recent launch of vegan and natural weDo Professional hair care line are great examples of this strategy and our ability and -- sorry and of our ability to marry vision, creativity and operational discipline.

As you can see, we are moving at pace, but we are not taking shortcuts. I am very confident that we will turn around Coty and increase its growth potential. We will set up Coty on strong fundamentals with a solid portfolio of brands, categories and markets, a competitive cost structure, deep beauty expertise and a diverse and engaging culture so that our business partners, shareholders and associates can enjoy many years of lasting success. This is our agenda, and we are all committed to it.

I will now let Pierre-André walk you through the divisional performance and financial fiscal '19 and our fiscal '20 outlook. And then together, we will take your questions.

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Pierre-André Terisse, Coty Inc. - CFO [3]

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Thank you, Pierre, and good morning, everyone. So to start with, I'm on Slide #5. The fourth quarter and as well as the full year came very much in line with our expectations. Revenues at minus 4% for the quarter were consistent with the full year trend, albeit on higher comps. Specifically, for the quarter, we had some deloading in Professional but which were offset by another strong performance in Luxury, while at the same time Consumer on its side remained weak. The gross margin went up in Q4, and I think that's very important because it shows that the business is overall resilient and healthy when you take away the supply chain issues. So gross margin up was extremely important. Adding to this, gross margin for the fourth quarter, active cost cutting and being selective -- continuing to be selective on the A&CP, essentially on the nonworking media, helped our operating margin being up by a strong 220 basis points for the quarter. I'll come back later on the group earnings, and I will now turn to the divisions.

I'll start with Luxury, which trends remain strong. And here you have some examples of the activities during the quarter. We renewed 2 licenses, Marc Jacobs and Lacoste, reflecting the confidence of these 2 houses in Coty as a partner. The average license residual life of our total portfolio is 8 years, and we are proud to be considered as a top quality operator by many of our partners.

Gucci was strong once again after Alchemist's Garden, which is now in the Top 10 of ultraluxury in key markets. The launch of lipstick had a very strong start, as mentioned by Pierre, particularly in Asia. Burberry had a very good first full year within Coty with strong sales uplift. The launch of BOSS Bottled Infinite, which you see at the top of this screen, was successful, reinforcing its status as Top 5 icon franchise in the male luxury fragrance. And last, as we turn to fiscal '20, we're making 2 exciting launches now with Gucci Memoire and Bottega Veneta Illusione coming.

Slide 7. All this contributed to another strong quarter for Luxury with mid-single-digit growth. By geographies, this quarter, Travel Retail and ALMEA through emerging markets grew particularly strong. And the category, on the other hand, continued growing in the U.S., I think that's important to have in mind when you read -- everything you read about the U.S., the fragrance category is going up. Margins were strongly up, helped by operating leverage on the one hand, but also by cost reduction. And all together, Luxury, being 40% of Coty, it keeps being a strong and consistent growth and profit engine for the group and it's very important for us of course.

Turning to Consumer Beauty. It remains weak, we see that. However, we had several initiatives which were taken during the quarter.

In the U.K., the Rimmel Wonder'luxe mascara helped the brand gaining share. You see that on the left of the screen. Still in the U.K., Clairol Natural Instincts was a successful launch. And in the U.S., Sally Hansen continued bringing innovation to the market. You have example here showing significantly for the brand better resilience in the portfolio than some other brands.

Nonetheless, the persistent loss of shelf space in the U.S. and in Europe continued dragging on sales, which were down 11%, in line with the year. Brazil was satisfaction again with a good performance and price increases taken ahead of fiscal '20. And in the case of Consumer Beauty, of course, meaningful cost saving and A&CP reduction, mostly in nonworking media, helped delivering on profit with a 10.4% margin in Q4, which is not bad.

We're now turning to fiscal '20 with solid plans across the divisions, including, as Pierre mentioned, meaningful working media investment. We expect to see some positive signals in this first half of fiscal '20. In terms of share first where we do not expect material incremental losses anymore, and in some cases, we see some upward potential. And in terms of consumer as well, with the effect of improved execution and increased visibility, and we expect these positives to gradually improve Consumer Beauty top line trends.

And turning to Professional. The division was impacted by destocking, but the underlying trends remained positive. ghd continues being a strong growth engine with double-digit growth and successful innovation. Here you have the Glide hot-brush. Koleston Perfect continue to do well. And last, a complete and modern range for men was launched under the brand SEB MAN with success. And Pierre mentioned just a few minutes ago the launch of weDo as well.

Despite these positive trends, 2019 was not a good year from the revenue standpoint. The deloading in the U.S. coming after a major supply chain disruption in H1. Margin has progressed though, signing again the strength of the division, being up by 70 -- the gross margin, sorry, being up by 70 bps for the year, and the operating income margin, adjusted operating income margin, being up 190 bps to now 12%. And so beyond the temporary difficulties, Professional is definitely an asset for Coty, with a #1 brand in salon color with Wella, with a strong presence within the salons precisely and 2 brands which we believe have high potential; ghd, I mentioned already; and OPI. And we expect this strength to deliver profitable growth, of course.

Turning to Slide 12. At this time, you have seen the separate release, at this time, we are parting with Younique. We need to look at the work which has been accomplished by Coty in the past few years.

The percentage of A&CP being digital is now close to that of our peers and maybe a more significant as evidenced on this slide is the growth of our e-commerce business and the proportion of our revenues it now represents. 10% in Luxury, which is ahead of the fragrance category average; low teens in Professional, where we have been progressing in particular with the relationship with the salons; and Consumer is catching up rapidly, in particular, in the U.S. and in Asia. And as we move forward, we will organize to better leverage our resources in the divisional teams as well as our IT teams to continue progressing fast in this area.

And now coming back to the results and profits, which have been the focus of the year. So starting with the fourth quarter. The gross margin in this quarter was strongly up in Luxury, more than offsetting the decline mainly observed in Consumer. The adjusted operating income was strongly up at 12.2% for an EPS which was up $0.02 at $0.16.

If I turn to the year, 2019 was obviously impacted by supply chain issues, which pushed the gross margin down by 40 basis points. As mentioned several times, a big work of fixed reduction, of fixed cost reduction and selectively reducing the A&CP, primarily nonworking media, helped delivering an adjusted operating income at $990 million at constant FX, which is very much in the range of $950 million to $1 billion, which we had indicated in February. So we delivered this commitment. Op margin was up, as a result, to 11%, the operating margin adjusted. And our EPS was broadly stable, if you take into account the 4% negative impact from the evolution of the currency.

The free cash flow, Page 15, was obviously a key priority for the year as we aimed at deleveraging our balance sheet. After a negative start of the year on supply chain issues, we delivered for the entire '19 -- fiscal '19 $200 million of free cash flow against negative $30 million last year. So that's the beginning of a steady improvement.

The dividend amounted to $346 million, out of which $63 million for the last quarter, which reflected a 68% participation through the DRIP and 34% therefore of the dividend paid in shares. On an annualized basis, this will mean a $250 million cash dividend payment. And therefore, after stabilization of the debt in 2019, at $7.4 billion, we now expect in 2020 to start deleveraging and move towards the 4x leverage by 2023.

Before I conclude, a few comments on developments which took place during the quarter. First and foremost, we unveiled our Turnaround Plan on the 1st of July. This was very important internally as it sets the road map of actions to restore the competitiveness of our company and it sets the business and financial frame for action. And we are now in the process of implementing it, as Pierre has told you. At the same time, we also made public that we have agreed with our banks an amendment to our credit agreements with a view to get the necessary flexibility to the implementation of our Turnaround Plan. This is now in place.

This morning, we announced that we are exiting Younique and selling our stake to the other existing shareholders. This is a clear signal of focus. We have, as said earlier, gained a lot of digital knowledge during our years of cooperation, but both Younique and we are convinced that the best way forward is to focus on our respective businesses, which are very different. In our case, we will therefore focus on creating value with our Luxury, Consumer and Professional Beauty business.

Last and as anticipated, early July, we took an additional impairment of $2.9 billion in Q4 for a total for the year of $3.9 billion. This reflects our new Turnaround Plan as well as the revised expectations we had for Younique.

I'm now going to turn to fiscal '20, the new year, and basically confirm our expectations of solid dynamics for this year. After a year of decline of our net revenues, we expect trends to improve and net revenues to be stable to slightly down year-on-year on a like-for-like basis. This will be helped for a part by increased A&CP investments. Taking into account such investments, we expect our adjusted operating income to grow 5% to 10% year-on-year at constant scope and currency. Such growth will come across the second, third and fourth quarter while Q1 will be moderately down as we ignite our programs with strong A&CP investments. We expect the growth of our operating -- adjusted operating income to show a mid-single-digit growth over adjusted EPS. And last, we expect to capitalize on our 2019 progresses and keep improving our free cash flow in the fiscal '20 year.

I will conclude in saying that the many activities and everyone at Coty make us both energized and optimistic at the outset of this new year. And among these, I wanted to show on this slide the new campaign for Calvin Klein which is kicking off exactly today and is shown therefore on this page. Thank you for your attention.

And we, both Pierre and I, are going to take your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Faiza Alwy of Deutsche Bank.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [2]

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So I guess my first question was around -- you talked about positive retailer response to your plans in the U.S. So I wanted to get more color on that. Sort of are you seeing an improvement in sell-through trends at this point? Sort of how should we externally sort of assess your performance in the U.S. in the near term?

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [3]

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I think -- the conversation has been roughly -- I mean, in general, very positive. Because as I said earlier, what we presented made common sense and was focused on making our key SKUs more available and improving their operational performance; as well as one of the big driver of the conversation was our desire to return to high advertising investments behind our core brands. And I would say that, basically stating, the main -- the #1 takeout is that we anticipate moderation of shelf-space reduction going forward. And of course, we have not completed all these conversations, but we do believe that the outcome of this conversation suggests a moderation in the shelf-space reduction in the second part of 2020, whilst, of course, the first part of 2020 will reflect the previous decision which has been made in the spring of 2019.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [4]

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Okay. And then just a quick follow-up, just in light of your divestment of the Younique stake and your comments around focus, I was just curious how you're thinking about the rest of the portfolio. Are there other brands or businesses that you think may not fit with your go-forward strategy?

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Pierre-André Terisse, Coty Inc. - CFO [5]

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There are nothing to comment at this stage. I mean we are really -- Younique was a bit of a specific case as a being multilevel marketing business. It's extremely different from the rest of the business we have. So the rest of our brands are essentially either very -- very much in line with our Luxury strategy, Consumer strategy, Professional strategy and therefore, we have nothing to add on that. We are just focusing on turning around the entire portfolio.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [6]

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I'd like to come back to your earlier question, Faiza. Basically speaking, our fiscal year guidance reflects clearly improving trends in Consumer Beauty. So I'm not going to say that you're going to see growth from Consumer Beauty, but you're going to see a reduction of the decline, all right? And I think it is really important that we turn this and I think we will. I have very little doubt about that. And when we talk about focus, as I said earlier in previous call, our focus is investing mostly at scale behind our key brand. We have identified these 12 brands which represent a significant proportion of our portfolio, and we will concentrate our working media effort behind these lines.

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Operator [7]

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Our next question comes from the line of Nik Modi of RBC.

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Sunil Harshad Modi, RBC Capital Markets, LLC, Research Division - MD of Tobacco, Household Products and Beverages [8]

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So just -- I just wanted to clarify, when the guidance was given in the press release, you said, "At the current scope of the portfolio." I just want to -- does that include Younique or not? I just wanted to make sure I understood exactly because that announcement came out after -- at least I saw it after the press release was released. That's the first question. And then the real question is...

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [9]

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That's an easy one.

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Pierre-André Terisse, Coty Inc. - CFO [10]

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Well, definitely, I'm going to clean that very rapidly and then your move to the second one. The Younique operating income for last year was $16 million, $1-6 million. And therefore, when we say constant scope, it is ex the $16 million operating income.

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Sunil Harshad Modi, RBC Capital Markets, LLC, Research Division - MD of Tobacco, Household Products and Beverages [11]

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Great. And then I guess the bigger question is, one of the main things you discussed when you met with the investment community was the SKU rationalization program that you were planning to implement. And as we get to the September shelf resets and you're having these discussions, just maybe you can give us some color and texture on how those discussions are going around that particular initiative. And do you still feel good about not losing space and sales as a result?

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [12]

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Yes, we do feel good about that, and our customers do feel good about that. I think they see it as really something which will help the shelf productivity. And actually, I think the conversation that -- it will help the conversation on shelf space because it will improve our velocity. So -- and we do -- we have factual data which demonstrate that actually when we take out low-rotating SKUs, more volume gets transferred to the highest rotating one. So it actually improves the shelf productivity. And also, again this is a process which will be gradual. This is not a process that we are going to execute widely and in a very aggressive manner. This takes time. We need to do our planogram. We need to optimize them, we need to implement them, and it is continue -- it will be a gradual process over the next, I would say, 2 years easily. And no, I'm not worried therefore the shelf space losses out of that.

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Operator [13]

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Our next question from the line of Andrea Teixeira of JPMorgan.

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Christina Marie Brathwaite, JP Morgan Chase & Co, Research Division - Analyst [14]

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This is Christina Brathwaite on for Andrea. I guess to put a finer point on the Consumer Beauty shelf space question, previously management kind of alluded to the acquired brands -- part of the reason the shelf space declines were occurring was that the acquired brands had more shelf space than maybe their market share implied they should have. So I was just wondering if you think at this point, the market -- the shelf space is in line with the market share that you're seeing.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [15]

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Yes. I think we are probably where we ought to be. I think we need to earn our right to increase shelf space going forward, and that will be related to velocity. And I do honestly believe that with the decision that we are making to focus advertising behind these power brands to maximize the distribution of our high-rotating SKU that we just did, we will again earn our right to increase shelf space. I think, actually -- and again, as I said earlier, I think the feedback from our customers, at least for the 50% of the business that we have talked to, is positive. We will just do that in the rest of all the markets. But I'll say it again that I feel confident on the matter.

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Christina Marie Brathwaite, JP Morgan Chase & Co, Research Division - Analyst [16]

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Okay. Great. And again, I guess similar to the free cash flow expectations for this year, particularly related to the working capital side of the business, it looks like receivables were down more than 20% again in 4Q. So I just wanted to get an understanding of what the drivers are there, if that should continue through the first half of this year and how you're thinking about working capital.

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Pierre-André Terisse, Coty Inc. - CFO [17]

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Okay. So it's Pierre-André. The evolution of the receivable was driven by 2 different initiatives. One is the use of a factoring program which we started as soon as Q3, and the other one is the reduction of the leverage. We've been investing significant amount of time to reduce the leverage which have been high at the beginning of '19. Obviously, the factoring is the program we use, and we'll keep using, but there will be no big expansion of that. The main factor is going to be the reduction of revenue, which we are going to continue. And the focus going forward is going to be very much on the reduction of the inventory. We believe we have significant potential of reduction of the inventory through better managing the inefficiencies of our supply chain, which is therefore not only a potential of cost reduction but also the potential of freeing up cash, and that's going to be the next -- our next target. For 2020 specifically, I would expect some progress, but not major ones, given the fact that part of what we have done in 2019 is just going to be reproduced but not expanded. And the inventories will take a bit of time, and I expect we are going to reduce significant progress with the inventories starting from the following year.

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Operator [18]

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Our next question comes from the line of Lauren Lieberman of Barclays.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [19]

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I wanted to know first if we could talk a little bit about price/mix in Consumer Beauty. I guess, first, what it sort of looked like this quarter? And then when we think about the full year, why we should be expecting it to turn positive in fiscal '20?

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Pierre-André Terisse, Coty Inc. - CFO [20]

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On price -- sorry, can you repeat the last part of the question?

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [21]

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Yes. On price/mix in Consumer Beauty, both performance in the quarter and fiscal '19 and then why we should be expecting it to turn positive in '20. Because I would assume the planned reduction in promotions is a great aspiration, but time line to be able to do -- able to really put that through is what I want to be able to understand a little bit better.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [22]

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I think that the reduction in promotion is happening now as we speak in many markets. Of course, some markets are longer than others to execute, right? I think in the price/mix, also you want to be, there are some drivers of the third category, which I think probably influenced by the mix of geographies. So I think that's -- and I do remember well I think in the quarter 4, we had some effect due to the Brazil weight into the portfolio of the quarter 4. So that's probably the driver of this mix effect. We do have a substantial reduction of promotion already happening in some of our key markets. And as a consequence, we do see that our base business velocity is up too. We do -- we have data which verifies and proves that the Consumer Beauty business is relatively price inelastic. And as a consequence, we see that as a clear opportunity to take pricing without jeopardizing volume. And we have been shy over the years to do that, whilst our competition have not and have, by doing so, been able to generate margin to invest, which we were not able to do at the same time.

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Pierre-André Terisse, Coty Inc. - CFO [23]

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And if I can add to that, Lauren. So it's clear that part of the focus of the Turnaround Plan is on the trade conditions, resuming a level of dialogue with the trade, which is more positive and therefore improving use and being less under pressure as we have been. And part of that is about the loss of shelf space, which we expect now is largely behind us. And part of that is about the condition simply, the promotions. The fact that we are increasing meaningfully the level of A&CP is going to be one factor to support the brands and therefore to avoid having to use so much the promotions. And the mix is simply something we are starting as well as part of the OpEx program. Better selecting the SKUs, which we want to push on the shelves, because they have higher rotation, but also because they have better margin. So all that is going to happen. The question is the pace. And with respect to the pace, we've given an overall indication for full year '20, which is essentially our guidance, which says that we expect the growth of Coty overall to be stable to moderately down in -- throughout the year. So that's the pace we expect. Of course, Consumer Beauty is going to be a major contributor to that, but we need to keep flexibility in the way it delivers and to be able to adjust our actions to make it happen. We are very confident in this happening. We just need to be extremely good and flexible at managing the timing. Now what we are seeing so far is positive.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [24]

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Okay. That's really helpful. I guess my follow-up would be what you're seeing -- where you're already starting to adjust promotional levels, where you are -- what you're seeing the competition do? Is there a commensurate kind of reduction in promotional activity? How is that piece coming together and what are your expectations there?

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [25]

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I think honestly speaking, Lauren, while deploying our strategies and, of course if -- we have been historically over-promoting. So I think, in my view, we are going to join the pack of the market, the average of the market. And again, as I said, we have made the decision to be less dependent on promotion and more dependent upon advertising, more dependent upon brand building. And I would say that we will be reducing our percentage of business on deals and in a reasonable manner, and I expect we'll be in line with the rest of the market.

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Operator [26]

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Our next question comes from the line of Javier Escalante of Evercore ISI.

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Javier T. Escalante Manzo, Evercore ISI Institutional Equities, Research Division - Research Analyst [27]

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My question has to do with your targeted cash for 2020. You mentioned that there's going to be a moderate improvement. But in fiscal '19, you have a onetime benefit from these receivables factoring and then my understanding was you will be taking cash restructuring charges. So I would like to know whether this target includes -- are above and beyond the impact of these cash restructuring charges. Broadly, you outlined in July, about $600 million in cash charges. Could you give us a sense of how much are going to be in 2020? What type of activities are involved? Why is it that the organization that just have been put together seems to be so or will it be that needs to be changed again?

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Pierre-André Terisse, Coty Inc. - CFO [28]

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That's a [Russian puppet] question. So about the numbers, yes, it does. The improvements we are talking about is inclusive of everything, including the restructuring charges. To remind you, we have a fairly big amount of restructuring charges anyway in '19, and we'll be improving from that level. We expect next year to be in the region of $300 million. Between the completion of the previous plan and the beginning of the new one, mainly the activation of the change of organization.

On the change of organization, I think there are 2 -- there is one main factor as we have commented during the Turnaround Plan. We want to be adjusting our structure to our size. Our size -- our structure was designed for a size which should have been growing significantly. It has not. Today, we have too heavy structure in the market. This is a factor of cost and this is a factor of complexity. This is slowing down the pace of decision, and this is not helpful. This is, again, creating complexity as well in supply chain. So we feel extremely important to implement the Turnaround Plan to have a simpler structure in the market. And at the same time, we want to make sure that the connection between the market and the management teams all together is fluid, and we need as well to simplify the level of above the market through reorganization. So that's driving the change of organization, which is, by the way, going to make stronger the marketing functions because we now have marketing units, Luxury and Consumer Beauty, which are dedicated and we'll be working on the brands. And we'll have, on the other hand, geographical execution teams. One for America, Asia Pacific and the other one in Europe, Middle East and Africa. And we think that's going to help implementing the turnaround much faster and much more efficiently. So to us, that was extremely important.

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Operator [29]

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Our next question comes from the line of Wendy Nicholson of Citi.

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [30]

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The Luxury business, correct me if I'm wrong, but isn't that like 80% fragrances or so? I know it's got some skin care in philosophy, but I think it's mostly fragrances. And in that context, I'm surprised at the margin being so strong there. It's higher than most of the other peers that we know of in Luxury fragrance. And so I guess the question is, a, do you think it's sustainable? Or do you think there's actually improvement from the sort of 15% type operating margin level for that division specifically?

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Pierre-André Terisse, Coty Inc. - CFO [31]

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So yes, we think there is potential for improvement. And in fact, we think the OpEx program, while it mainly applies to Consumer Beauty, also is going to generate some improvement in Luxury. And therefore, we expect the margin of Luxury to be growing up to a margin level for peers, which we think are in fact higher than where we are today. Just one word about OpEx, because I use this assuming everybody knows. OpEx is the program aiming at reviewing in detail the level of execution of pricing, positioning of the product range in each of our brands and countries. So it will apply to Luxury as well. Now one point, while we expect improvement of the margins over time, we have to be clear as well that the step-up we have had this year is not going to be repeated. We've had a specific measured focus on productivity throughout Coty, including Luxury. It's been producing good, sustainable performance, but we won't have the same step every year.

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [32]

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Fair enough. Okay. That's helpful. And then my second question is just on Younique. Can you give us a sense -- I know it's been a challenge for a while now. But if I look at the overall company like-for-like sales last year of down 3.5%, can you tell us what that would have been excluding Younique for the whole year just so on a kind of pro forma basis we can get a sense for how much that dragged down your numbers.

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Pierre-André Terisse, Coty Inc. - CFO [33]

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It would have been slightly better, kind of -- well, I'm hesitating to give you a number, but probably around 50 bps.

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Operator [34]

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Our next question comes from the line of Steph Wissink of Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [35]

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I have a follow-up question on some prior questions just regarding the Consumer Beauty division. I think it was 2 years actually on this call, a very similar sentiment from management regarding some of your initiatives around marketing and marketing activation. So I'm curious about how much flexibility you have to react if the consumer pull-through doesn't translate. Is there any flexibility in those investments around shelf-use merchandising, marketing that would give you some latitude if the consumer pull-through doesn't occur?

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Pierre-André Terisse, Coty Inc. - CFO [36]

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So the answer from the finance guy is yes, there is flexibility. We have built flexibility. Just to remind that one of our obsessions is to have the ability to deliver and, therefore, within this context, we are building flexibility. And we are, at the same time, watching week after week what's happening on Consumer Beauty in key markets. And I was yesterday with the American market, where yesterday with the American market, and we're looking at that. We have plans. I don't know if Pierre...

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [37]

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Absolutely. I mean we have a clear intent. We know what works, but we don't always manage the timing of things, but I think strategically we know where we want to head and we progress our way towards it. And we want to rebalance our nonworking media with our working media, so the way to create flexibility is also to go through the line of the least positive agenda -- least positive element of our P&L from a media standpoint. We clearly want to make sure that we generate the money that we want to continue to build our brand. But even on that one, we have the flexibility too. But yes, I really want to make sure that we have the right balance of working media and nonworking media in this company. We have not been there. We are progressing, and we still have margin to progress on this subject.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [38]

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I have a second follow-up on Wendy's prior question on the Luxury beauty division, I'm wondering if you can walk through the same analysis for us on the Pro and the Consumer business. And what I'm trying to do is bridge that 14% to 16% target relative to the 12% blended margin today. What does the Consumer Beauty business need to deliver and the Pro business need to deliver on a segment operating margin basis for you to achieve those targets?

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Pierre-André Terisse, Coty Inc. - CFO [39]

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I mean we don't expect the same level of margin from Consumer Beauty as we expect on the others. Down the road, we assume it's going to be more in the 10-ish percentage when we are targeting mid- to high teens from the other businesses. But the fundamental elements of the equation are going to be the same, i.e., gross margin uplift through the many elements we've been commenting, including the reinvestment in A&CP, including the simplification of the range, including the reduction of costs, including the lower promos and increased investments, including having a better focus on what exact products we want to push, reduction of fixed costs, which is going to be the same throughout the group and probably higher in the case of Consumer Beauty because we had higher level of complexity than in the rest of the businesses. And we just have a lower starting point and therefore, the expectations cannot be as high, unless we find a way to accelerate, which is as well something we're looking at.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [40]

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Yes. And I think the way to contribute to strategically rebalance, continue to strengthen the profitability of the Consumer Beauty business, particularly is to focus on the core one, right? They have scale, they have high margin and they have clear distinctive assets, ability to grow, ability to respond to investment. And I think that's the way we are going to change the trajectory of the financials of the Consumer Beauty business by changing its mix throughout our power brands namely, in that case, Max Factor, Rimmel, MANHATTAN in Germany, COVERGIRL in the U.S., Clairol. These are very, very nice brands which have a lot of potential, huge assets and huge equity. And by doing that and investing behind them, we will shift the mix of our portfolio. And they're also our highest-margin items.

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Operator [41]

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Our next question comes from the line of Olivia Tong of Bank of America.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [42]

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I was wondering if you could dive a little bit deeper into the A&CP, specifically for fiscal '20, and talk about the relative change that you see across either the 3 divisions and geographies. And then just in terms of the margins, they've obviously been pretty volatile in fiscal '19, gross margin. You had 2 quarters with big declines, 2 quarters with slight improvement, also a lot of volatility in SG&A as well. So could you just talk about relative volatility in fiscal '20 compared to fiscal '19?

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Pierre-André Terisse, Coty Inc. - CFO [43]

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Yes. On A&CP, we definitely aim at stepping up our level and start closing the gap we have with competition. And it will take time before we can do that, but we are definitely on that path. We started as soon as Q1, having in mind that Q1 last year was a pretty low level. And therefore, the step-up is going to be important. And then we expect the A&CP over net revenues to be gradually growing throughout the year between Q1, Q2, Q3, Q4. So it's definitely going to be bigger in Q1, but the level -- so this step up to a level which then is going to be the base for the gradual increase throughout the year. And as evidenced or mentioned in one of the previous questions, we obviously keep flexibility in the way we allocate that and in the way we use that. It's very important, as you can imagine.

With respect to gross margin, that's a bit of the same. We have, for reasons which we [know of] to the specifics of the first quarter, lower comp feature will be up against these lower comps. And then we gradually accelerate throughout the year as we are deploying the OpEx program. So the top line improvement as well as we are generating some improvement on the supply chain cost reduction. So from Q1, Q2 will be higher, and we expect all together improvements throughout the year. But Q1 is going to be an important start, and it shows gross margin improvement -- this is actually first, but it shows as well a very, very meaningful step-up in terms of A&CP, hence, what I said about the fact that the increase of the operating income will be skewed towards the other 3 quarters of the year. And then we'll see things progressing as we move into the rest of the quarter.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [44]

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And again, Olivia, the A&CP increase is completely focused on working media. So the increase is absolutely disproportionate on working media than our total A&CP budget.

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Operator [45]

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Our next question comes from the line of Joe Lachky of Wells Fargo Securities.

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Joseph Bernard Lachky, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [46]

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I wanted to get back to Consumer Beauty. So there's a pretty material slowdown in like-for-like sales growth in Q4 when compared to the underlying growth in Q3. So I was hoping you could walk through the drivers of the sequential slowdown you saw in Q4. And I think it would be helpful if you could talk through how much of that slowdown was driven by Younique and how much was from the core business.

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Pierre-André Terisse, Coty Inc. - CFO [47]

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Yes. We won't give you the breakdown. Sorry for that. But Younique, indeed, was an element of difference. The second element of difference, and we knew that ahead, so we had flagged this last Q3, comes from the fact that we had high comps. The sale last year had been very aggressive ahead of the changes in supply chain which took place afterward and therefore, we had high comps in Q4, unlike what we had in Q3. So on our side, to be frank, we are not surprised nor afraid, but we are seeing on Consumer Beauty that's been pretty much as we expected. And overall, I am pretty pleased by the fact that the only non-fully anticipated element, which was the reduction of inventories in Professional Beauty, has been offset once again by Luxury. We don't talk often about Luxury. The performance once again has been very strong, it's the case every quarter. And it's not only very strong, but it's even stronger than the one we expected even the quarter before at the end of the year. So on our side, no negative surprise. And on the contrary, some positive with again a good performance in Luxury.

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Joseph Bernard Lachky, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [48]

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Yes. And I guess my follow-up would be on Luxury because it was very strong in Q4. I was hoping you could discuss what's driving the momentum there and if you think you can sustain that growth into fiscal '20. And then along those lines, you mentioned you relaunched Gucci lipstick in the quarter. So I was hoping you could provide an update on the rollout of Gucci makeup and how you see that proceeding.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [49]

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Well, Gucci makeup is a great example of -- I used it in my introductory remarks. For me, Gucci makeup is a great example of the type of innovation strategy that we need to build at Coty. Whatever is the channel, to be honest with you, or whatever is the category, at the end of the day, Gucci was well identified by the team as a brand which has capacity to expand beyond just fragrances. And hence, the launch of Gucci lipstick and hence the fact that we believe that we can see it, and we see it as a very, very successful launch. We will continue to expand in 2020 this franchise or this innovation. And again, as I said earlier, we will do more of it in Luxury, but we will do more of it in Professional and we will do more of it in Consumer Beauty. We want innovation, which have the ability to drive the penetration of our brand and expanding their footprint. Our brands have the right to travel to new markets, to other consumer segments than just the one they've been born in. And in that respect, that will be the focus behind which we will build our innovation pipeline.

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Pierre-André Terisse, Coty Inc. - CFO [50]

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And maybe to complement -- or to answer the first part of your -- second part of your question. Luxury, it's a portfolio which has been built year after year. We have been building confidence and trust with the fashion houses. We have pretty sizable business with them. We're working well with them in a very coordinating manner, leveraging both their confidence and our confidence, which are complementary and that is giving very strong performance as in the case of Gucci, as in the case of Burberry. We got Burberry 18 months ago and the performance for the fiscal year has been very strong, being the case of Hugo Boss, which is the #4, I believe, icon fragrance in the male business. So -- and this is reflected as well, again -- I'm sorry to repeat that but it's important -- by the fact that these licensees are long-term, that it's real partnership and that they are very solid on delivering.

So it's basically a successful win-win with the houses resulting from consistent investment. And we don't believe, by the way, that we should not be able to do the same in the other divisions, and in particular in Consumer Beauty. What we have to target for Consumer Beauty is optimizing, finding the solution and then being consistent; consistence delivering innovation, adjusting to the trend of the market, of course, but being consistent in the way we build brands. And this is very much the spirit of this management team. This is what Pierre is bringing us, the level of detail, the very good execution level but at the same time, consistency in our marketing strategies.

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Operator [51]

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Our next question comes from the line of Jonathan Feeney of Consumer Edge.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [52]

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You mentioned in your prepared remarks a little bit about emphasizing more digital spending, maybe at the expense of traditional spending. Although those weren't exactly your words, certainly there's been talk of rationalizing spending overall, particularly in U.S. Consumer Beauty. I'm wondering, could you tell us a little bit more about your process of figuring out where you're getting return and where you're not because it strikes me that as you reduce spending, we don't know what return -- it's hard to tell exactly what return that increased level of spending had in the U.S., and it's possible results could have been even worse without it. So just trying to understand that return analysis process, particularly around activation spending and your consumer spending more broadly in the U.S.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [53]

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Actually, Jonathan, our strategy is really to make sure that our mental availability is very consistent all year round. I mean they're seeing that the change that we have introduced at Coty with its new management team is a change from a birth strategy to a breed strategy, and we are -- we want to be on air all the time. Why? Because our consumers need to be reminded permanently of the strength of our brands. Our #1 -- so we have a series of battery of tests which make sure that our advertising works, I mean that the consumer will respond to it. And pre-advertising, post-advertising too. But the fundamental thing I would say that we are looking for is the ability of our advertising to drive one metric which is quite fundamental for us, salience -- or saliency in English, I think is the right term, i.e., the degree of distinctiveness of the brand, how the brand becomes a top-of-mind brand, how the brand becomes a brand that consumers never forget. And that's the fundamental measure for us of our performance over time.

And this is why we believe that actually, yes, advertising in the short term gives you an effect, but what matters most is consistency and presence on air all year round. For that, our mix of media shift by market because what we seek for is reach. And depending in the market, you do operate, typically, in the Anglo-Saxon market, like the U.S. or U.K. or even Australia, you would have a higher proportion of digital versus mainstream media. Whilst in other market like traditional European market, namely South European market or Germany or even emerging -- so many emerging market, more traditional emerging market, you will have a different balance because then, that is, your reach will be better and more accessible through traditional media.

So I think I answered your question. But fundamentally, we drive 2 things. We drive presence; we drive salience on one side and we drive the level of coverage of our consumers over time and our presence on air consistently. [With regards] the consistency of our advertising. I mean our brands have distinctive assets and we want to make sure that every time we have a movie or every time we have an ad, it's just basically speaking -- reminds the consumer of all the distinctive assets of the brand.

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Operator [54]

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Our final question comes from the line of Mark Astrachan of Stifel.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [55]

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Two questions. One, just a clarification. So the guidance for fiscal '20 for both net revenue, like-for-like, stable to slightly lower and 5% to 10% adjusted operating income, is that excluding Younique as if you don't own it? And then just more of a longer-term question. So China you called it out a couple of times in the press release. Obviously, we've seen pretty significant growth out of that market from other beauty peers.

Maybe give a bit of color on where you are today in terms of what Coty's presence is in the market, percent of sales, expectations on a longer-term basis, and kind of what do you need to do to see it become more material over time?

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Pierre-André Terisse, Coty Inc. - CFO [56]

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Okay. So on the first question, I think I'm very clear for the operating income and for the net revenues, that's on the same -- I mean, that's on a like-for-like basis as well stable to slightly down year-on-year. Pierre, do you want to answer on China?

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [57]

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On China, we clearly have a good business in Luxury and we have a good business in Professional Beauty. So that's a great example of the strength of our strategic position in both these segments. I think we are definitely lagging behind in Consumer Beauty. And what do we need to do? Well, Mark, I'll be clearer because I'm going there on the 23rd of the September, and we are going to spend some time with the team in China to understand what is exactly our opportunity and our position. But yet, we have double-digit growth in this market, so we are doing well. And -- but we can do better.

I'm convinced, I have a bit of an intuition, but I would like to verify that intuition when I'm in the field, and -- but broadly speaking, it is one of the mission-critical market. I want to reassure you on that. We are going to put a very, very decisive effort in making sure that we don't change the trajectory of our business, but we change the scale of our business in China. And there are couple of emerging markets like this one that we must be present if we want to -- or as we want to have a strong global beauty business.

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Pierre-André Terisse, Coty Inc. - CFO [58]

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So we'll have a high level of dedication somehow. I know it's a bit strange to comment, but the fact that it only represents today less than 5% of our net revenues is both a liability versus competition -- or a disadvantage versus competition but it's also an advantage because we clearly have a market stake or risks which are lower and, more importantly, we have a lot of potential. So now the question is how do we address this potential? We believe the current organization and the portfolio we have offers many, many opportunities and that will be for us to push it. But I think we can grow China in a very, very meaningful manner given where we stand as a starting point. And given the strength of the small -- I mean the strength of the business is in the positions we have, which are not enough in terms of numbers and size, but which are real.

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Pierre Laubies, Coty Inc. - CEO, Director & President of Consumer Beauty [59]

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And thinking about delayering the organization, China is one of the markets which will report directly to the Executive Committee.

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Pierre-André Terisse, Coty Inc. - CFO [60]

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Okay. Well, gentlemen and ladies, thank you very much for your attention. I just would like to say that we are both very excited starting this year '20. Many things going on. And now we'll go back to business to put into practice this plan and to basically make it real. So thank you and see you on the road. Bye-bye.

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Operator [61]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.