Q4 2019 Earnings Call
At this time I would like to welcome everyone to Coty 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 I pad, Libya, Chief Executive Officer appear on the tragedy Chief Financial Officer.
I would like to remind you that many of the comments today may contain forward looking statements.
Please refer to <unk> earnings release, and the reports filed with the FCC, 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 a comparison of the business at constant currency in the current and prior year.
Excluding the impact of acquisitions and divestitures.
In addition, except where 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. Andrea.
Thank you Maria and welcome everybody to go to use his code 1019 full year and fourth quarter conference call.
Before I think PLD, all CFO , Dan into the divisional performance and financials.
Let me provide you with an update of where we are.
And what we have been focusing on is the first time, we spoke six months ago.
Well the only thing the value of supply chain disruptions that meaningfully impacted old patients who fail huh.
I'll see obviously, there's no back into high ninetys across all divisions.
They gaining control of cash or focused on cash flow and sitting or whatever financial policy with a sustained dividend.
To date, we can consider all that he's objectives have been achieved.
Our second priority has been to beat the medium term plan aimed at solving what we consider.
Oh, most pressing issues.
By this we mean the project a wheel for consumer beauty business.
Our gross margin gap, an overly complex organizational design and the coaches will fall to dependent upon pest and no genius, yes, it's good to keep must doing.
We have a large and did that all goes from WT business and now have concrete plans in each of our key countries to standardize all market shelves and improve our profitability for 50% of all business.
These plans have been legally legal whiskeys for children timed and somebody else already in action for instance in Q1, we all already accelerating all working media piffle I'd be expensive promotion and discount.
Oh salons, it'd been shaping resulting casinos and I can say confidently that they had been well received.
Well, we know deployed or the RV space do you suppose should go back to full consumables easy comp piece I do we expect the same findings the same resulting actions and the same margin upside go compete.
I feel you know Cody in early July we have identified substantial value at stake in <unk> and in <unk> gross I was whether its LG any and we shared with you.
[laughter] felt on the details of both potentially on the matter.
No well mobilizing Intel noted an external resources to unload keep 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 had beat the detail.
[laughter], we have been studied this leadership team, which we'd be leading a leaner and more line organization.
Its key feature will be a set of values reinforcing team alignment and quality before.
Colonel self Wuxi meeting between markets and the Companys leadership widespread competencies based on clear play books and a more cohesive culture. It is tainted by a move to a global headquarters in Amsterdam.
We are finalizing the talk to the yields are falling and I understand currently I'll organize it can control mission would be completed by the end of Q2, and we intend to start to move to our new HQ in the course of the self go after all this fiscal year.
[noise] these two tasks being either completed or in execution mode.
We will now be turning our attention to the next theme of all transformation.
Oh innovation portfolio.
We want to strengthen our pipeline through the lens of going to penetration of all bonds I'll answer the capacity to political small geographies and more consumer segments, and we want to leverage the sympathy.
Good she who is entering code of cosmetic claim along with the chip and at least on lots of began and that you will do we do professional hair care line.
Oh, Great example of just how did you.
No ability and so and oh ability to body vision creativity, I know passionately shipping.
As you can see well moving a base, but well not taking shortcuts.
I am very confident on that we don't own coty and increasing scope potential.
Well, we set up Coty on strong fundamentals, we have solid portfolio brands categories and markets, a competitive cost structure deep beauty expertise and a disaster and engaging culture, so that our business Bucknell shareholders and associates can enjoy your many years of lasting success. This is oh agenda, and we are all committed to it.
I will now let me walk you through the divisional performance and financial the fiscal 19, I know fiscal 20 outlook and then to get though we take your questions.
Thank you Ken and good <unk>. Good morning, everyone, everyone. Oh, so two foundries I'm on slide on slide a number never five or the fourth quarter and as a result, you came very much in line with the reserve expectations revenues at a minus 4% for the quarter were consistent.
Food your trends I'd be filling higher comps.
Yes, it can do for us that's true we had some loading in professional but which were offset by another strong performance in luxury.
Why did the same thing consumer on the inside your name.
The gross margin was 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 was was extremely important I think to these girls matching up for the fourth quarter active cost cutting and being said keep continuing to be said to keep on the AMCP.
Essentially on the Nonworking media after a pretty margin being helped by a strong 220 business going for the for the quarter I come back later on the group earnings and I will now turn to the to the divisions.
I stopped squeeze a look Sherman, which trends remain strong and here you have.
Some examples of the activities during the during the quarter, we renewed two licensees, Marc Jacobs Nikos, reflecting the confidence of these two housing cookie as a partner.
The average license residual life, although total portfolio is eight years and we are proud to be considered as it took when kip Richard by many of all partners.
Good morning.
Was strong once again after I can use garden, which has no in the top 10 of ultra luxury in key markets. The launch of lipstick and a very strong start as mentioned by care, particularly in Asia.
Burberry had a very good first from your within Coty with stronger sales uplift.
The launch of bus, but food Infinity, which you see at the top of the screen were successfully reinforcing its status of took five I couldn't franchise in the man luxury fragrance and last as we turn to a few ctwenty, we're making two exciting launches now with switching them, well and but they give any thought you lose unit coming.
Slide seven all this contributed to another from Crawford for luxury with mid single digit growth.
By geographies these clubs through travel retail and ONEOK to emerging markets grew particularly strong and the category on the other end continued growing in the U.S. I think that's important to have in mind. When you read everything you read about you as the fragrance category is going up.
Margins were strongly hooked up by operating leverage on the one hand, a little food by cost reduction.
And all together, a luxury being 40% of critique 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 remained weak we see that however, we had several initiatives which were taken during the quarter in the UK. The email one deluxe mascara half the brands gaining share and you see that on the left of the screen CND, Okay, Cleveland veterans speak towards a successful launch and in the U.S. Sally Hansen continued bringing innovation to the market. You got example here.
Showing significantly for the brand better resilience in the portfolio that than some other right.
Nonetheless, the person the persistence lots of shelf space in the Western Europe continued dragging on sales.
Which were down 11% in line with the year, Brazil was satisfaction again, we had good performance and price increases taken ahead of fiscal 20.
And in the case of consumer beauty of course, meaning from cost saving and NCP reduction, mostly in nonworking media path to delivering on proceeds with a 10.4% margin in Q4, which is not bad.
We're not turning to fiscal 20, we've studied plants across the divisions, including as Jim mentioned meaningful working media investment.
We expect to see some positive signals in this first half of fiscal 20.
In terms of show for Us, where we do not expect material incremental lessees anymore. Any 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 topline trends.
I'm turning to professional.
The division was impacted by Destocking, but the underlying trends remain positive ghd continues being the strong growth engine with double digit growth and successful innovation here you have the glide has brush Curtis into effect continue to do well and last a complete and modem arrange for a man was launched under the brand said man we've success and Pierre mentioned, just a few minutes ago. The launch of we do have as well.
Despite these positive trends 2019 was not a good year from the revenue standpoint, the eroding in the U.S. coming after a major supply chain disruption in each one.
Margins progress, though signing again the strength of the division being up by 70, the gross merging sorry being up by 70 bps for the year and year bridging from a margin adjusted operating margin being up 190, Bips to know 12 person.
And so beyond the temporary difficulties professional ease differently and that's it for Coty, we the number one brand in southern Colorado with better with a strong presence within dissidents precisely and two grants with which we believe I have a high potential ghd I mentioned already and OPI and we expect these strengths to deliver profitable growth.
Turning to slide 12 at the time and you assume the separate treaties at the time, we are passing with unique.
We need to look at the works, which has been a completion by coty in the past few years.
The percentage of the NCP being digital is no close to that of our peers and maybe most significant as evidenced on this slide is the growth of recon as business and the proportion of revenues if no represent 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 sentence.
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 all IP teams to continue progressing fast.
Area.
[noise] I know coming back to the result on profits, which has been the focus of the years, so starting with the fourth quarter. The gross margin in this quarter was strongly up in luxury you more than offsetting the declines a mania observed in consumer.
The adjusted operating income was strongly up at 12.2% for an estimate for that.
Two cents at 16.
Sense.
If I turn to the your 20 2019 was obviously impacted by supply chain issues, which pushed the gross margin down by 40 basis points as mentioned several time, a big work. The work are fixed for addiction, a fixed cost reduction and selectively reducing the NCC, primarily nonworking media have delivering an adjusted operating income at $992 million at constant FX, which is very much in the range of 950 to 1 billion, which we had indicated in February so we delivered a this commitment.
Oh machine was up as a result of 11% operating margin adjusted annual EPS was broadly stable. If you take into account the 4% negates the impact from the evolution of the currency.
The free cash through page 15, though.
Well, obviously, a key priority for the year as we aim 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. If we can true against a negative 13 last year. So that's the beginning of the study improvements the dividend amounted to $346 million out of which 63 for the last quarter, which reflected a 68 participation 58% participation to the Jeep and 34% a there for both the dividend paid in shares.
On an annualized basis. The two this would mean a $250 million our cash dividend payment and therefore.
After a steady addition of the debt from 2019 at $7.4 billion. We know expect in 2022 standard imaging and move towards the four times leverage by 2020.
Before I conclude a few comments on developments, which took place during the quarter.
First and foremost, we and GE and I'll turn it on turn on the first of July .
This was very important internally as it sets a roadmap 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.
As I told you.
At the same time, we also made public that we had agreed to with our banks and amendment to our credit agreements with a view to get the necessary flexibility to the implementation of our turnaround time no thing.
This morning, we announced that we're exiting unique and sitting on stake to the other existing shareholders. This is a clear signal of focus.
We have as said earlier gained a lot of digital engineering or use of corporation with both unique and we are convinced that the best way for us to focus on their respective businesses, which are very different.
In our case, we will therefore focus on creating value with our luxury consumer and professional beauty business.
Lastly, 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 of this reflects on you touched on plan as well as the revised expectations, we had four units.
I'm not going to send to.
Fiscal 20, then user.
And basically confirm or expectations of solid dynamic.
For this year.
After a year of decline over net revenues, we expect trends to improve and net revenues to be stable to slightly down year on year on a like for like vision.
These will be helped for a powered by increase in CP in business.
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.
Why Q1 will be moderately dawn as we ignite our programs with strong NCP investments.
We expect the growth of our preaching adjusted operating income to fuel a mid single digit growth over adjusted EPS.
And last we expect to capitalize on all 29, some progress he and keep improving our free cash flow in.
Cool thank you.
I will conclude in saying that the many activities happening everywhere cookie Nick.
Nicholas both energized and optimistic at the outset of leasing year and among these I want you to Sean decide the new campaign for Calvin Klein, which is kicking off exactly today and he shouldn't therefore on this page. Thank you for your attention and we both are now going to take your questions now.
Thank you the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number one on your telephone keypad.
If at any point in your question has been answered on you wish to remove yourself unless you press the pound key.
Our first question comes from the line essentially all way of Deutsche Bank.
Yes, hi, good morning, So I want to ask Mike. My first question was around you know 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 and the U.S. and the New York Times.
I think no.
So either the conversation.
It's been.
Oh, please I mean in general very positive because as I said earlier, what we presented in the common sense and it was focused on making all key SK use more available and improving their whole passionate performance as well as what it was a big driver of the conversation was our desire to retire onto hi advertising investments behind our core brands.
And I would say that basically speaking domain. The number one take out is that we anticipate.
Moderation of shelf space for direction going forward.
And of course, we have not completed all these conversation, but we do believe that these outcome. These conversations suggest the modulation shacey solution in the second part of 2020 Weiss of cools. The first part of 2020 will reflect the pictures decision, which has been managing this thing of 2090.
Okay, and then just a quick follow up just in light of your divestment of the unique 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 may not fit what the go forward strategy.
Yeah nothing to comment at this stage I mean, we are really we are really unique was a bit of a specific case as being a multi level marketing business is extremely different from the rest of the business. We are we have so the rest of all brand size essentially either a very very much in line with our luxury strategy consumers for the posters on strategy and therefore, we have nothing to add on that to where we were just focusing on turning around the entire portfolio.
I'd like to come back to you all your question on Phase basically speaking all fiscal year guidance.
Reflex.
Clearly improving trend in consumer beauty, so I am not going to say that youre going to see growth on consumer beauty, but youre going to see additional decline.
All right and I figured he is really important that we take studies and.
I think we will.
There is little doubt about that and when you talk about focus as I said earlier in previous calls our focus is investing mostly at scale behind our people and we have identified these 12 blinds will present, a significant proportion of our portfolio and we will contemplate our working media April and behind these lines.
Our next question comes from the line of Nik Modi of RBC.
Hi, Nick Yes, I can.
Hi, good morning, everyone.
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 did that include unique or not I just wanted to make sure I understood exactly for that announcement came out.
After at least I thought after the press release was released that's the first question.
And then the real that's an easy one.
Okay, Yeah, I can clean that very appealing and then you move to the second one.
Yes.
The unique operating income for last year was 16, one 6 million that often therefore.
When we say constant scope DTN X the 16 million that also bridging from.
Great. Thank you for that clarification, and then I guess the bigger question is you know one of the main things you discussed when when you met with the investment community was the Sq rationalization program that you were planning to implement and as we get to the September shelf. We start having these discussions just maybe you can give us some color and texture on how those discussions are going on that particular initiatives and and do you still feel good about not losing space and sales as a result.
Yes, we do feel good about that and our customers do feel good about that I think they they see ties.
They see it as really something which will help the shelf productivity and actually I think the conversation. The it will have their own agenda on Saturdays because it will improve all video city, so and we do.
We have factual data.
We stay most paid that actually when we talked when we take out loans hitting SK use the more volume gets gets concept to the highest rotating ones will actually improves.
The shed positivity and so again this is a process, which will be glad you're right. This is not a process that we are going to execute widely and a in a very aggressive I know. These this takes time we need to.
Do all kind of guy, we need to optimize them, we need to implement them and it is a continued its it will be a gradual process a little bit next I would say two years easily and no I'm not worried there for those shows placement doses out of that.
Great. Thank you very much.
Getting I think.
Our next question comes from the line or any answer share of JP Morgan.
Hi, Good morning, Thanks, Christina Brathwaite on for Andrew Thanks for taking my question I guess to put a finer point on the consumer beauty shop.
Please question previous management kind of alluded to the acquired brands, where there isn't a shelf space to clients were occurring with what they acquired brands had more shelf space and maybe their market share imply 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 that you're seeing.
Yeah, I think we have we also will be a whale whales, we ought to be I think we need to.
Well I hate to increase say space going forward and that will be related to video city and and I do honestly believed that with the decision that we'll make into focus subsidizing behind this poem lines too.
Maximize the distribution of fall highlighting SK you are we just did Oh, we will again I don't know I to increase shapes phase I think actually I did.
And then again as I said earlier I think the feedback from our customers at least for the 50% of the business that we have felt too.
He is positive.
Well, we just do that in the light of wholesale market, but feet again as I said confident on the matter.
Okay, Great and then I guess the move to the free cash flow expectations for for this year I'm, particularly relate to the working capital side of the business.
Okay receivables were down more than 20% again for Q. So I just want 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.
Okay.
Fitzgerald.
The evolution of the receivable was driven by two different initiatives. One is the use of the section program.
We started as soon as Q3.
And the other one is the reduction of the deal that you will be seeing significant amount of time.
Who would use which had been high at the beginning of 19.
Obviously, a the factoring is.
The program, we use and we keep using but there will be no. The extension of that the main factor is going to be the reduction of your menu, which we are going to continue.
And the focus going forward is going to be very much on the reduction of inventory. We believe we have significant potential a reduction of inventories from better managing the inefficiencies over supply chain, which is therefore not on the 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 a part of what we have done a 19 theres going to be reproduced that extended and inventories would take a bit of time and I expect we are going to renew his resume significant progress with the inventories starting from the following year.
Our next question comes from the line of Lauren Lieberman of Barclays.
Great. Thanks, Good morning, Hi.
And I want to know first if we could talk a little bit about price mix in consumer beauty I guess first what it sort of looks like this quarter and then we think about the full year why we should be expecting it to turn positive.
In fiscal 20 bank.
On price sorry can you repeat the last part of the question.
Yeah. It was done on price mix in consumer beauty, both performance in the quarter.
In fiscal 19, and then why we should be expecting it.
To turn positive in 20, because I would assume there.
Planned reduction in promotions.
It is a great aspiration site timeline to be able to do.
It really put that through is what I want to be able to understand a little bit better.
Yeah, I think that the population in promotion is happening now as we speak in many markets of course, some buckets are longer in order to execute all right I think in the price mix on full you want to be they also divested the third category, which I think.
Pulled up really influenced by the mix of geographies, so afraid that at IPH tubing underway lapping in the in the quarter before we had some some effect due to the boss either a weight into the portfolio of the quarter full third party. The driver of this Oh. This a mix effect, we do have a signal a substantial additional promotion already happening in some of our key markets and as a consequence, we do see adobe's business. The two cities have to we do we have data, which is very size and pools that the consumer beauty business is relatively price inelastic and as a consequence.
We see that as a clear opportunity to take patients who is our geo paliotti geotagging volume and we have been shy, although the euro to do that why sell competition have not and have by doing so being able to generate margin to invest which we were not able to do at the same time.
Yeah, if I can if I can add to that Lorraine.
So it's clear that.
The part of the focus of the of the turnaround plan is on the trade conditions resuming a liver of data with the trade, which she's more facilities, and therefore, improving improving news and being less Andrew pressure as we have been and part of that is above the.
The less shelf space, which we expect now largely behind us and part of that is about the condition simply the promotions. The fact that we are increasing meaningfully deliberately NCP. He is going to be one factor to support the grants and therefore to avoid having to use so much to say too much to promotions.
And the mix is simply send team we are starting as long as far as the as part of the Oh Opex program better Silicon U.S.K. use we want to push from the shelves because they have higher attrition, but also because they have their margins. So all that is going to happen. The question is the phase 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 moderate down even throughout the year. So that's the base. We expect of course consumer beauty is going to be a major contributor to that which we need to keep flexibility in the way delivers and to be able to adjust or actions to make it happen. We are very confident seen in this happening we just need to be extremely rude and flexible at managing the timing now what we are seeing so far is positive.
Okay. That's really helpful. I guess my follow up would be what you were seeing where you were already starting to adjust promotional levels.
What you are seeing the competition do you know is right commensurate kind of reduction in promotional activity, how how's that piece coming together and what are your expectations there.
I think honestly speaking low end, while deploying all studies.
And of course if.
We we have been is still likely yields are promoting so I think we might view we are.
Im going to join the back of the market. The average of the market and again as I said, we have made a 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 I expect we'll be language the rest of the market.
Our next question comes from Atlanta have you all Escalante of Evercore ISI.
Good morning, everyone. My question has to do with your.
Targeted gosh for 2020, and you mentioned that there is going to be a moderate improvement but.
18 screens go 19, do you have a one time benefit from the news.
We see almost factory.
And then my understanding was that you will be taking cash restructuring charges.
So I would like to know when do you start getting needs.
Bob I mean, youre, the only thing gosh restructuring charges.
I'm Bradley.
You are online in July about $600 million in cash Charlie Jos.
Could you give us a sense of how much I'm going to be in 2020, what type of type two diabetes.
[laughter] involved.
And why is he going to any station digest Kathleen and good.
Seems to be so we will be that needs to be changed again. Thank you.
Wow, that's a that's a Russian but that question.
So about the numbers. He has he does the improvement we are.
Talking about is inclusive of everything including the restructuring charges.
To remind you we had a fairly big amount of restructuring charges anyway 19.
And we'll be improving from that level, we expect next year to be in the region the $300 million between the completion of the previous plan at the beginning of the new one mainly the activation of the.
A change of a change of organization.
On the change of organization a thing down there is one.
There is one main sector as we have commencing during the.
During the turnaround plan.
We want to be.
Adjusting our structure to our size.
All size or structure was designed for size, which should have been growing significantly it has nuts.
Today, we have two heavy structure in new markets you see the factor of cost and this is a mixture of complexity. This is slowing down the pace of decision and this isn't that helpful. A disease regain creating complexity has worked in supply chain. So we feel extremely important to implement the turnaround plan to have a simpler structure in the market.
At the same time, we want to make sure that the connection between the markets and the.
And the management teams altogether these through either and we need as work to simplify the level of above the market above the market sorry organization.
So thats driving the change of organization, which is by the way agreeing to make a stronger the marketing functions, because we know as marketing units luxury and consumer beauty, which are dedicated and we'll be working on the brands.
And we have on the other end geographical execution teams went for America Asia Pacific and the other one.
In the Europe , Middle East and Africa, and we think thats going to help implementing that on their own much faster and much more efficiently. So it was that was that was extremely important.
Our next question comes from the line of Wendy Nicholson of Citi.
Hi, good morning.
On the luxury business correct me, if I'm wrong, but isn't that like 80% on fragrances first of all I know, it's got some skincare and philosophy, but I think it's mostly fragrances and grand.
Context, I'm surprised at the margin being so strong there.
You know its higher than most of the other peers that we know of in luxury fragrance and so I guess the question is 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 specific like.
So yes, we think there is a there is potential for improvement and in fact.
We think the Opex a programmer a widely many applies to consumer beauty also is going to generate some.
Improvement in a in luxury and therefore, we expect the margin of luxury to be.
To be growing up to a margin level for tier, which we think are in fact higher than where we have today.
Just want a word about the effects because they use these were assuming everybody knows opex in the program aiming reviewing in detail the level of execution of pricing positioning of the product.
Range in a in each of our brands and countries. So it will apply to actually trajectory as well no. One point why we expect improvement of the margins over time.
We have to be clear as well that the step up we have had this you're never going to be when you. We've we've had a specific major focus on profitability through through equity, including luxury he's been producing good sustainable performance, which we won't have the same step every year.
Fair enough. Okay. That's helpful. And then my second question is just on.
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 three and a half can you tell us what that would have been on excluding unique 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.
A tool that being.
Slightly better kind of.
Well I mean your team to give you a number but probably around 50 bips.
Okay perfect. That's helpful. Thank you so much national account.
Our next question comes your line of Steph Wissink of Jefferies.
Thanks, Good morning, everyone I have a follow up question on some prior questions just regarding the consumer Beauty Division I think it was two years ago actually on this call a very similar sentiments 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 skewed merchandising marketing and that would give you. Some latitude if the consumer pull through doesn't occur.
So the answer from the finance Guy, Yes, there is flexibility we have viewed sensibility just to remind that whenever a petition is to have the ability to delever and therefore within this context. We are building facility and we are at the same time.
Watching week after week, what's happening on consumer beauty in key markets and you know I was yesterday with the with the American market, where you said that with the American market and.
We're looking at so we're looking at that we had planned.
No no that's absolutely I mean, we have we have a clear intent we know what we know what works, but we don't always match the timing of things, but but I think strategically we know where we want to head and we pulled I saw way to answer it and we want we want to rebalance our non working media was 11 BDR. So the way to create Flexibilities also to walk through the line of the lease Producteev agenda. These 40 kiva.
The elemental for PNM form the from a media standpoint, we clearly want to make sure that we.
We generated the money that we want to continue to be to Atlanta, and but even on that one we have kept flexibility too, but yeah, I really I really want to make sure that we had the right balance of working media Nonworking media in this company, we have not been Dale we are publishing and we see that margin to pull the nice on the subject.
Thank you 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 when I'm trying to do a bridge that 14% to 16%.
Target relative to the desk, 12% blended margin today, what does the consumer beauty business need to deliver and a pro business need to deliver on a segment operating margin basis for you to achieve those those targets.
Oh thanks.
I mean the.
We don't expect the same level of margin from consumer beauty as we expect from the others.
Andrew we assume it's going to be.
Marine the 10 ish percent range, when we are targeting a mid to high teens for the other businesses.
But the fundamental element of the English in are going to be the say 90.
Gross margin uplift, who the many elements, we've been commenting or increasing their investment in S&P, including the simplification of the range, including the reduction of costs, including.
Yeah, Larry promos, and an increase investments, including adding a better focus on what exact product we want to do.
Ready from a fixed cost, which is going to be the same throughout the group and probably how your indicator of consumer beauty, because we had higher complexity than in the rest of the businesses.
And we just have a lower starting point and therefore.
The expectations Canada.
Hi, unless we find a way to accelerate which is you know.
As well as currency, we're looking we're looking at.
Yeah, and I think the way to contribute to statistically the balance continue to strengthen the profitability of the consumer beauty business strategically is to focus on the poems I'd have scale. They have high margin and they have clear distinctive assets ability to grow our ability to respond to investment and and I think thats. The way we are going to change the trajectory of the financials of the consumer beauty business by sending its mix two of our power brands, namely in that case Max sector will remain a Manhattan in Germany Codell girl in the U.S. clear. All these are very very nice blinds, which has a lot of potential a huge asset and the huge equity and by doing that and investing behind them will be shift the mix of opportunity.
And they also our highest margin items.
Our next question comes from the line of Olivia Tong of Bank of America.
Great. Thanks. Good morning, I was wondering if you could dive a little bit deeper into the AMCP specifically for fiscal 20 talk about the relative change that you see across either three divisions and geographies and then just.
In terms of the margins, you've obviously been pretty volatile in fiscal 19 gross margin you had two quarters.
Big declines two quarters with a slight improvement also a lot of dollars volatility and machinery as well. So could you talk about relative volatility in fiscal 20 compared to fiscal 19. Thank you.
Yeah on on NCP, we definitely a nice.
Stepping up a level and start closing the gap, we have with competition and including signed before we can do that.
We are working on that path.
We started as soon as Q1.
Having in mind that Q.
Last year was a pretty low level and therefore, the step up is going to be importance.
And then we expect the NCP over net revenues to be gradually growing throughout the year between Q1 Q2 Q3 Q4. So the step up is going to be bigger in Q1, but the level. So we step up to a level, which then he's going to be the base for a gradual increase throughout the year and as evidenced Oh.
In the in one of the previous questions. We obviously keep fixing the team the way we are in the way, we we allocate that in the way we use that.
It's very important as you can as you can imagine.
With respect to gross margin that's the beauty of the same we have a we have for reasons, which belong to the specific of the first quarter.
Luckily feature will be up against.
Larry Holmes.
And then we'd gradually accelerate throughout the year as we are deploying the Opex program. So the topline improvement as well as we are generating some improvement on the.
On the supply chain cost cuts friction. So from Q1 Q2 will be higher and we expect altogether improvement throughout the throughout the year, but Q1 is are you going to be an important start time because it shows a gross margin improvement is that through first the truth as well very very meaningful step up in terms of NCP, hence what I said about the fact that.
The increase of the average income would be skewed to advance the other three quarters of the year.
And then we'll see things progressing as we move into the rest of the quarters.
And again.
You can see the increase is completely focused on the working media. So does the d. increases absolutely disproportionate on working media total totally NCP budget.
Our next question comes from the line of Jackie of Wells Fargo Securities.
Hi, I wanted to do I get back to consumer beauty. So there was a pretty material flow down and like for like sales growth.
In Q4, you know 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 unique and how much was from the core business. Yeah. We won't give you the breakdown sorry for that.
Our unique indeed was an element of a and then at a different.
The second element of difference and we knew that it had so we had flagged it as soon as Q3 comes from the fact that we had high comps the sale that sure I'd been.
Very aggressively ahead of the the changes in supply chain, which took place afterwards and therefore, we are the high comps in Q4.
Unlike what we had in Q3 and Q3, so on all sides to be Frank we are not surprised a neuro afraid, but we have seen on consumer beauty, that's been pretty much what we expected and overall I am pretty pleased by the fact that the only.
Not fully occupancy determines which was a reduction of inventories in provision duty as Bina said by once again by luxury we don't talk often about luxury the performance. Once again has been very strong because every processor, that's only very strongly to even stronger than the when we expertise even this quarter before.
Yes, they are so.
I'll now size no negative surprise and on the countries and some for the TV again, a good performance of extreme.
Yeah, and I guess my follow up would be on luxury cars.
Was very strong in Q4 is.
I'm, hoping you can 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, let's stick in the quarter. So I was hoping you could provide an update on the rollout of Gucci make up and how you see that proceeding.
Thanks.
Well a good Gucci makeup is he is a great example of I use it in my in my introductory remarks, our infill Miglucci makeup is a great example of the type of innovation study that we need to build that coty, what it really is the channel to be honest with you or what is really the category.
At the end of the day.
Gucci was well identified by the team as a blind which has capacity to expand beyond just fragrances and hence the launch of goods, she lipstick and hence the side that we believe it is we can see it on who we see as a very very successful as they successfully launch we will continue to expand in 2020 . This a franchise or DC innovation and again as I said earlier, we will do more between doom whole wheat in it.
In in luxury, but where we do all we can publish another then we will do more of it in a in a in consumer beauty, we won't innovation, which had the ability to drive the penetration of all blend and expanding the footprint all behind a delight to tie the two new market to those fancy enough segment than just the one day have been born in China, and the <unk> and in that respect that would be to focus behind which will be the innovation pipeline.
And yeah, and maybe each continent on or to answer the first part of your second part of your question.
Luxuries, a you know, it's a portfolio, which has been built year after year.
We have been building confidence and trust with the fashion houses, we're pretty sizable business with them, we're working well with them in a very coordinated manner.
Leveraging both their confidence and our confidence which are complementary and that is getting.
Very strong performance as in the case of Gucci has indicates a very because every 18 months ago underperformance sponsors who you're has been very strong being the case of Hugo boss, a which is the number for I believe I cone fragrance in the mail business bus bottled so.
And this is reflected as well again I am sorry to repeat that but its important by the fact that these licensees are long term, that's industrial partnerships and that they are very solid and that leaves room. So it's a basically a successful win win with the with the houses and resulting from consistent in the investment.
And we don't believe by the way, that's we should not be able to do the same in India. Three divisions, any particular end consumer beauty, what we have to target for consumer beauty E. Optimizing finding decision and then being consistent consistent delivering innovation adjusting to the trend of the market of course, but being consistent in the way we'll be brands and this is very very much. The spirit of this management team disease with PURA is bringing us.
The level of detail the very good execution level, but at the same time consistency in our marketing strategies.
Our next question.
Comes from the line of Jonathan Feeney of consumer edge.
Good morning. Thank you you mentioned in your prepared remarks, a little bit about Oh, you emphasizing more digital spending maybe at the expense of traditional spending all 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 returns you're that increased level of spending AD in the U.S. and its possible well results could have been even worse without it so just trying to understand that.
Return analysis process, particularly around activation spending and consumer spending more broadly in the U.S.
Actually.
Jan I found out how digi is really to make sure that.
Our mental availability is very consistent all year long I mean, the thing that the change that we have introduced at Coty with this new management team. He is a change from what their strategy to Threep strategy and we are we want to be on there all the time why because while consumer losses to be reminded permanent he'll give sense for one our number one.
So we have a series of batteries of tests, which make sure that our advertising works I mean that the consumer will respond to eat and pre advertising post advertising too.
But the fundamental thing I would say that we are we are looking for is the ability of our advertising to drive one matrix, which is quite fundamental force stallions, Oh, sorry, and see in English I think is lighter I.E. The degree of distinctiveness of the blend how that comes out of the blend becomes a top of mind line, how the blend becomes a blind the 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 and a short terms give you an effect, but what matters. Most is consistency unpleasant on they are all year long for that our mix of digits of media shift by market because what we seek for his reach and depending the market you do upgrade typically in Anglo Saxon market like the U.S. So UK all you want to tie you would have a higher proportion of.
Digital devices.
Mainstream media why she knows our market like traditional European market, namely South European market, or Germany, or even imagined. So many emerging market multinationals emerging market you would have a defense badlands. Because then that gives you a which would be better and more accessible through traditional media. So I think I answered your question, but fundamentally we live two things we dive.
Hi designs.
President sale, we dive a science on one side and we live the level of the level of coverage of our consummated over time and our presence on their consistently.
Well take land the consistency of our advertising I mean, all brands have distinctive assets and we want to make sure that every time, we have a movie or where every time, we have an AD. It just basically speaking oh, he mines, the consumer or the distinctive acetyl decline.
We'll take our last question.
Our final question comes from the line of Mark <unk> of Stifel.
Thanks, and good morning, everybody.
Two questions one just clarification, so the guidance for Cisco.
20 for both.
Net revenue like for like stable to slightly lower and 5% to 10% adjusted operating income does that excluding.
Unique is if you don't own it and then it's 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 work today in terms of.
What coach presence isn't the market percent of sales.
Expectations on a longer term basis kind of what do you need to do to.
Now see it become more material over time. Thank you.
Okay. So on the first Oh. This question I think I'm pretty clear for the operating income.
And for the niche revenues that's on the same I mean, that's on the on a like for like businesses were stable to slightly down year on a year.
Yeah, you want to answer on China 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 this type of strategic position in the in this book in both the segment.
I think we are definitely lagging behind in in consumer beauty.
And what do we need to do when a market.
I'll be clear oil because I'm going to outweigh the 20 field of September and are willing to spend some time with the team in China to understand what is exactly or what is exactly all opportunity I know position, but yet we have a double digit growth in the Indian market. So well do we waited and but we can do better and I'm convinced I have a bit of any attrition that I would like to verify that intuition when I'm in the field and.
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 April in making sure that we can we don't change the dike the trajectory of our business, but we changed the scale of our business in China.
And and real colorful joined matching market like this one that we must be a pleasant, if we want to or as we want to have the strong global beauty business.
So we like the high level of it the litigation somehow I know, it's a beep.
I know to be strangers come in but the fact that it only represents today less than 5% over net revenues.
He is both a oh liabilities is this competition are these advantage vis vis this vision, but it's also an advantage because we clearly have.
A lot at stake or risk, which are larger and more importantly, we have a lot of potential. So now. The question is how do we address these potential we believe the current organization the portfolio we ever for his many many opportunities and that would be for us to push it but I think we can grow China, a in a very very meaningful manner, given where we stand as a starting point and given the strength of the small I mean of the strength of the business isn't positions, we have which are not enough in terms of numbers in size, but which are real and thinking about delayering. The organization. China is one of the market, which will report directly to the Executive Committee.
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 in your twenties, many things going on.
And I will will go back to business to to put into practice. This plan into a into a intervention basically making real so thank you and see you on the road bye bye.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.