Kevin Monaco - Senior Vice President, Treasurer and Investor Relations Camillo Pane - Chief Executive Officer Patrice de Talhouët - Executive Vice President and Global Chief Financial Officer.

Dara Mohsenian - Morgan Stanley Faiza Alwy - Deutsche Bank Securities Joe Lachky - Wells Fargo Securities Stephanie Wissink - Jefferies Andrea Teixeira - JPMorgan Securities Mark Astrachan - Stifel, Nicolaus & Co. Jason Gere - KeyBanc Capital Markets Rosie Edwards - Berenberg.

Good morning, ladies and gentlemen. My name is Nichole, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Fiscal Fourth Quarter and 2017 Full Year Results Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded today, Tuesday, August 22. Thank you. I would now like to turn the call over to Kevin Monaco, Coty's Senior Vice President, Treasurer and Investor Relations. Mr. Monaco, please go ahead..

Good morning, and thank you for joining us. On today's call are Camillo Pane, Chief Executive Officer; and Patrice de Talhouët, Executive Vice President and Global Chief Financial Officer. I would like to remind you that many of our comments may contain forward-looking statements.

Please refer to our press release and reports filed with the SEC, where we list factors that could cause actual results to differ materially from these forward-looking statements.

All commentary on organic net revenues reflect the comparison of Legacy-Coty and the P&G Beauty business on a combined net revenue basis at constant currency in both the current and prior year periods excluding the impact of acquisitions, other than the acquisition of the P&G Beauty business.

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 Camillo..

Thank you, Kevin, and welcome, everybody, to Coty’s fiscal 2017 fourth quarter and full year conference call. Fiscal 2017 was a transformational year for Coty. First, we completed the incredibly complicated acquisition of the P&G Beauty Business, dealing with the complexities of both the carve-out the R&D structure.

Second, we fully reorganized into a product and customer focused organizational structure, centered on three vertically integrated divisions. Third, we reached significant milestones in our integration efforts, and fourth, we strengthened our portfolio through the additions of Younique, ghd, and the pending acquisition of the Burberry Beauty license.

I am particularly proud of the culture we are building within the new Coty where we embrace the diversity of consumer beauty, focus on destruction, - and welcome the challenge of an increasingly complex beauty industry.

Equally important, we believe the strategy we outlined earlier in the year which focuses on strengthening our global brands, shifting more resources to fuel the growth of the brands with higher growth potential, stabilizing the remaining brands, and continue to expand the geographic reach of our portfolio, is beginning to bear fruit as demonstrated by the improvement in the net revenue trends in the second half of the fiscal year.

So let’s begin with our performance at high level. In Q4, organic net revenues excluding acquisitions declined 3% in constant currency, which includes a 1% benefit as a result of pre-shipments to customers in advance of exiting the transitional service agreement with P&G for Europe which occurred on July 1.

Q4 reflect a much improved and very good growth in both Luxury and Professional Beauty, but continued weakness in Consumer Beauty, which is a key priority for us to address. Include the ghd and Younique acquisitions, our Q4 net revenues grew 5%.

Fiscal 2017 organic net revenues declined 5% with flat performance in Professional Beauty, a slight decline in Luxury and pressure in Consumer Beauty, including ghd, Younique and a full year of Hypermarcas Brands, net revenue in constant currency grew 1% versus the combined net revenue of the prior year.

From a profits perspective, our Q4 adjusted operating income reflected a materially higher level of investment in marketing to support the momentum in our business and to achieve flawless execution at retail for launches like Hugo Boss Tonic Gucci Bloom, Tiffany debut fragrance, CK Obsessed, as well as the COVERGIRL PDA campaign and the Clairol Colour Crave launch, all of which I will elaborate on later.

Profits was also impacted by higher combined fixed cost base which I am not happy about.

While some of the cost increase was a result of operating under a TSA with Procter & Gamble, where we had limited visibility and control over certain areas of fixed cost, our cost base is nowhere it should be and we are rapidly working to address this issue as part of our synergy program and organic efficiency initiatives.

Patrice will elaborate more on this point, and we will get back to you on this topic in the coming quarters with specific actions. For the year, our adjusting operating income grew 24% with a margin of approximately 10%.

Looking at revenue dynamics by division, momentum at the Luxury division continued to improve as we progress through the year from a mid single-digit decline in the first half to low single-digit growth in the second half. For the quarter, Luxury revenues increased organically by 5% while for the year, organic revenues declined a moderate 1%.

By brand, we have continued to see strong momentum across Hugo Boss, Gucci, Chloe and philosophy as well as several of our ultra premium fragrances such as Bottega Veneta, MIU MIU and Alexander McQueen. For Hugo Boss, we recently launched Boss Bottled Tonic and announced Chris Hemsworth at the new face with the brand.

The strength of the key Hugo Boss fragrance pillars have agreed with share gains for Hugo Boss across a number of key countries, including Germany, the UK, France and Italy. Our momentum and philosophy with stronger net revenue growth in both the quarter and the year has resulted in the brand continue to gain share in the U.S.

Philosophy e-commerce presence already strong in the U.S. should be bolstered by the recent opening of an online store on China Tmall website aimed on engaging young Chinese consumers.

If we look to maintain Luxury momentum into FY 2018, we are excited by the brand execution plans we have in place behind the inaugural Tiffany’s fragrance and the launches of Gucci Bloom and CK Obsessed that I mentioned earlier. While it’s still early days, all three launches are off to a good start with sell-through exceeding our expectations.

Professional Beauty organic net revenues grew a healthy 3% in Q4. I am pleased to report that in addition to the continued success of our salon hair brands, we have recently seen a significant improvement in OPI revenue trends.

In salon hair, Wella maintaining strong momentum behind this Contura collection, the Oil Reflections launch and recent launch of Wella Professional Fusion, while System Professional continue progressing on its global rollout.

In OPI, following several quarters of sales declines, Q4 net revenues were down modestly on a global basis, but resumed growth in North America. As we look to FY 2018, we expect farther improvements in the OPI trends driven in part by the launch of the OPI Gel ProHealth System which began to rollout on August 1.

OPI new gel can be removed 50% faster and without damage which means healthy looking nails after removal addressing key barrier to consumer gel use. Additionally, new Coty Gel Colors will come in shape match bottles to improve shopability.

We are very excited about the prospects for OPI new gel system targeting a fast-growing segment of the salon and nail category. Turning to Consumer Beauty, division organic net revenue declined 10% both in Q4 and for the year.

As context, the global consumer beauty industry began to decline moderately at the end of calendar 2016 in the category and countries which we compete. We can far turn the luck in the latest quarter to a low single-digit decline.

As we focus on returning the Consumer Beauty division to growth over time, we are working with a significant relaunch and restage of a number of our major brands to better connect them with the changing consumer. We are actively engaging with our traditional retailer customers to amplify the in-store shopping experience to drive category growth.

Additionally, we continue to focus on key specialty customers as well as driving our e-commerce footprint. Against this weak market backdrop, Coty Consumer Beauty net revenue have been farther pressured by the shelf space losses in the U.S. and Europe as discussed in the last earnings call.

Nevertheless, in the quarter, we are seeing strong performance in a number of our key emerging markets, such as Brazil, Mexico and the Middle East. In Brazil, the acquired Hypermarcas Brands are growing in the double-digits with our Brazil business overall outperforming the underlying market.

In Mexico, we have seen steady share gains in retail hair supported by improved in-store execution and stronger support plans. As for the Middle East and Africa, we saw double-digit net revenue growth in the quarter supported by market share gains across many of our brands.

Bourjois remains a highlight in the Consumer Beauty portfolio with solid growth in the quarter and full year and strengthened its position in a number of fast-growing markets. Finally, Adidas performance improved with brand growth in Q4 in key emerging markets such as China, Brazil.

Our solid Consumer Beauty brand initiative pipeline for the first half of 2018 includes Clairol Colour Crave line of hair make-up, and COVERGIRL Total Tease Mascara, both of which are now hitting the shelves.

And while the brand relaunch for COVERGIRL will not fully begin until winter 2018, our project PDA campaign offers a glimpse of the new COVERGIRL positioning centered on confidence and empowerment.

The campaign’s digital engagement results significantly exceeded our expectations with 6.4 million video views and 375 million impressions in the first two weeks from launch and somewhat lift in our new market performance for the brand.

Shifting to Digital, I would like to share some of the continuous successes we are having both on our Digital Communication and e-commerce expansion. As I discussed earlier, in Consumer Beauty, we saw strong digital engagement in connection with COVERGIRL PDA campaign, which in turn benefited the brand in market performance.

In Luxury, the Marc Jacobs Daisy Anniversary digital campaign reached 2.8 million young women with engagement rates in the mid-teens percentage in high target cost per view. The recent launch of MIU MIU L'eau Bleue via Digital-only campaign featured the Shoppable Instagram Story resulting in orders more than doubling on Sephora.com.

On the M&A front, the combined impact of the Hypermarcas Brands, ghd and Younique now represents a material addition to Coty’s results and I am pleased with the contribution of these businesses. Speaking about Younique, I am happy to report that it continues to outperform in both net revenues and recruitment of active presenters.

Also, we are prepared and looking forward to welcoming the Burberry license in October. The recent improvement in top-line trends is an early confirmation that our strategy to strengthen and grow our key brands, stabilize the remaining brands and expand our geographic footprint is beginning to yield results.

From a profit point of view, we still have work to do and it’s key priority for us. In summary, we are proud of the progress that we have made in 2017, a challenging transitional year, but one that we believe has set the stage for Coty to be a global leader and challenger in Beauty. I will now turn it over to Patrice..

Thank you, Camillo, and good morning, everyone. I like to begin by emphasizing that we see Coty’s transformation as a three-part journey. The first step is integration of the businesses, a step which I believe is well underway and on track with the successful exit of the TSAs in both North America and Europe.

While there is still more work to do on the full integration of the businesses, we are now focusing on Phase 2 which intakes the stabilization of our business, coupled with the realization of the synergies. The third step is top-line growth acceleration and we believe that our actions today position us well for success.

To reflect this on where we’ve been and where we are going, as you know, it has now been nearly a year since we closed the P&G transaction and reorganized into a new focused divisional structure combining talented executives from Coty, the P&G Beauty business and other leading companies.

Given the complexity of the Reverse Morris Trust carve-out merger with P&G, I am pleased with the progress as we have made to-date in creating a new global leader and challenger in Beauty. With that said, I will give a brief update on the progress that has been made in the first leg of our journey.

As of early July, we have successfully completed the first two parts of the three-stage exit from the transition service agreement with P&G. As you recall, North America was completed on May 1 and we successfully exited the Europe TSA on July 1 which together account for over 70% of our net revenues. We remain on track to exit in ALMEA in September.

Regarding the exit of the European TSA, I would like to provide you with a few numbers to help put the enormity of this endeavor into context. The process involved six factories, 16 distribution centers, roughly 1700 team members, 570 system designs, 60,000 testers and roughly 1,000 training sessions before go live on July 1.

We are happy to report that we are now manufacturing the combined portfolio without constraint on Coty’s systems. In addition, the entire order to cash cycle which includes order processing, fulfilling, shipping, invoicing, and accepting payment is now entirely controlled by Coty. Quite an achievement.

By controlling the entire order to cash process in Europe and the U.S., we will now have an opportunity to lower the underlying operating costs with ALMEA to Faro Sul.

As for the second phase of our journey, stabilization of the business and the realization of synergies, we have seen stabilization in top-line trends in the second half of the year and our synergies in line with the phasing we outlined several quarters ago.

As part of our synergy program, in Q4, we booked an additional $200 million in restructuring costs. In fiscal 2017, we recorded approximately $700 million one-time operating expense bringing the total recorded to-date to $850 million.

As for one-time capital expenditure, we spent $200 million in fiscal 2017 bringing the total spend to-date to approximately $250 million. And a quick comment on our portfolio rationalization.

As stated previously, in the spirit of focusing the organization on step-changing the revenue growth trajectory of the new Coty, we are planning to rationalize a coupon of our brand portfolio and we will consider the divestiture or discontinuation of brands that in total constitute 6% to 8% of the combined portfolio net revenues.

We are progressing with the process and are evaluating a number of alternatives and would expect to conclude the process during the course of the current fiscal year 2018. I would like now to discuss our Q4 and fiscal 2017 performance.

I am pleased to report that our Q4 net revenues of $2.2 billion grew 5% year-over-year on a combined company constant currency basis and declined 3% organically including a 1% benefit from the Europe TSA exits.

Fiscal 2017 revenues of $7.7 billion grew 1% on a combined company constant currency basis reflecting a 5% organic sales decline for the year offset by the sales contribution from the acquisition.

We are very pleased to see Coty’s underlying business trends beginning to show signs of stabilization as our revenues improved from a high single-digit decline in the first half of the year to a low single-digit decline in the second half.

Moving on down the P&L, in Q4, our adjusted gross margin expanded 420 basis points year-over-year to 62.1% compared to Legacy-Coty, while our fiscal 2017 adjusted gross margin increased 200 basis points to 62.4% benefiting from the higher margin P&G and Younique businesses and incremental improvement in our cost of goods sold.

Our Q4 adjusted operating income was $90.1 million with a margin of 4% with a year-over-year decline driven by a material increase in marketing spend as well as the higher fixed costs. In Q4, we took the opportunity to increase marketing investment to drive further revenue momentum particularly around key launches as Camillo discussed.

That said, it is important to note that while we increase our support in Q4, our full year marketing spend was around 25% of net revenues, consistent with the prior level for the combined company and in line with our commentary at the beginning of the year. The increase in fixed cost for the quarter is partially driven by a higher fixed cost base.

It is important to remember that operating under the TSAs with P&G during fiscal 2017 significantly limited our visibility into and control of our fixed costs.

The increase also impart reflects an acceleration in the changes we have previously communicated in our go to market structure in various emerging markets specifically, where we are converting existing distributors to Coty affiliates.

I want to assure you that fixed cost is an area on which we are extremely focused and we will come back to you with an update with more specifics in the coming quarters.

We remain committed to our previously communicated synergy phasing, but it is important to emphasize that due to the time it takes to realize the benefits of supply chain savings and SG&A reductions, fiscal 2018 synergies and other cost initiatives will be more heavily weighted to the second half of the year which will weight on our first half profitability.

Our full year fiscal 2017 adjusted operating income of $772.8 million grew 24% compared to Coty-Legacy in the prior year. The full year adjusted operating margin of 10.1% compared to the 11% pro forma adjusted operating margin for Coty and P&G Beauty combined in fiscal 2016 as disclosed in our January 8-K.

From a segment perspective now, in fiscal 2017, Luxury reported an adjusted operating margin of 11%, Consumer Beauty of 9.6% and Professional Beauty of 9.6%. Our adjusted diluted EPS for fiscal 2017 was $0.63. Now turning to our cash profile.

We had a great year and generated $758 million in operating cash flows despite the acquisition and restructuring cost incurred during fiscal 2017. I am also happy to report that we exited the year with negative adjusted working capital reflecting the substantial improvements we have made on the acquired P&G Beauty business.

Our balance sheet remains strong with $535 million cash and $6.7 billion in net debt and we paid another quarterly shareholder dividend. To wrap things up, I would just again like to emphasize that Coty’s journey towards growth is well underway.

Our financial flexibility, the strength of our new organizational structure and seasoned leadership team positions us well to become new global leader and challenger in beauty. Thank you. We will now open the call for questions..

[Operator Instructions] Our first question comes from the line of Dara Mohsenian of Morgan Stanley. Your line is now open..

Hi. Just around the SG&A and fixed cost issue in the quarter, clearly, it’s worst than previously expected. You entered some of the regions behind that.

Just how quickly can you solve that issue? What you saw was confidence in the longer term targets and synergy potential given the issue? And then can you just detail the range of solutions you are looking at and potential magnitude of solutions in terms of profit impact? Thanks..

So, Darren, thanks for the question. So, as you said, first we remained very committed on our overall synergy targets of $750 million and the phasing that we have outlined before. So there is no change on that. Second, what we have said is that, we are very committed about addressing this issue and come back in the coming quarters with answers.

I think, we will come back with the clear action plans. We are – it’s a key priority to us and the measures that we are going to take are already now starting to be decided and will yield some results in the course of the year. .

Okay.

And does it – is it sort of sequentially built throughout the year? Is it a pretty substantial fix versus what you realized in Q4? And just given the magnitude of the issue in Q4, I just want to get a sense of how it progresses sequentially throughout the upcoming fiscal year?.

No, I think what we have already pointed out is the fact that when it comes to synergies, the synergies is mainly weighted in the first on the second half of the year which will as a result of that impact the first half of year profitability. Now the measures that we are currently taking will yield some results sequentially in the coming quarters..

Okay. Thanks. I’ll get back in queue. Thanks..

Thank you. Our next question comes from the line of Faiza Alwy of Deutsche Bank. Your line is now open. .

Yes, hi, thank you.

So just to follow-up on the SG&A comment, could you try and just quantify for us, what the fixed cost impact were? I think you mentioned sort of some of the go to market, higher expenses in some markets and just – I am just having a difficult time conceptually trying to figure out what you are talking about as it relates to the TSA with P&G.

So if you could just expand on some of the commentary around that? Thanks..

So, first, I think it’s important to remind that, when we comment on the lower profitability in Q4, what we said is that it’s the result of two things. First, a material improvement – increase, sorry, in the specimen in order to support the few momentum that we have in very few brands. So that’s the first one.

The second one is indeed is a higher fixed cost base and as we said, this is first the reflection of our new divisional structure.

Second the fact that we had limited visibility with the TSA exit and now that we are wrapping things up and exiting the TSA in North America, in Europe and then in EMEA will have everything under our belt and we’ll be able to address these costs very rapidly. So once again, we will come back in the coming quarters with some specific answers.

We remain committed on our synergies of $750 million and on the phasing that we have outlined before..

Okay.

And then, just if I could follow-up on any comment on how you think organic growth will trend in fiscal 2018? I think I heard you say some improvement that if you could just expand a little bit on that?.

So, whenever I comment on specific guidance, we expect clearly to see momentum in the Luxury and Professional Beauty to continue and regarding Consumer Beauty, this is a more of a longer term as we discussed it’s a journey, and – but we are on the right path.

We are really working on the relaunch of several brands or most brands in Consumer Beauty, already discussed this in the past.

We are receiving very strong positive feedback from the retailer on all of the relaunches and so, we expect the overall momentum to continue for the two divisions, but we are not going to give you guidance for the overall company. .

Thank you. Our next question comes from the line of Joe Lachky of Wells Fargo Securities. Your line is now open. .

Thank you. So, I just wanted to get back to the organic sales outlook and I guess specifically, it took a lot of marketing support, obviously behind new innovation to show the stabilization in the top-line that you’ve seen.

Can you talk a little bit about what sort of reinvestment behind A&P do you think you will need going forward in 2018 to continue to improve on the top-line?.

We believe that we have the right level of investments behind our brands in our 2018 plan.

What you have seen in Q4 is clearly material increase in the investments because we have certain launches that we believe are very important for us and they are going to yield some results and this is why you’ve see material increase behind launches like Hugo Boss Tonic, but also the preparation of Gucci Bloom and the Tiffany new fragrances we just launched but also the launch of the CK Obsessed and a couple of launches or campaigns in Consumer Beauty like the COVERGIRL PDA campaign or the Clairol Colour Crave launch.

Early reaction on the GUCCI Bloom has been very favorable among consumers and retail partners. We had the prelaunch in house in the month of August and the results are actually very promising.

They are above our expectations and the same is for the Tiffany launch we just did in Bloomingdale again it’s exclusive in the month of August and the results are actually very promising.

They are above our expectations and the same is for the Tiffany launch which did in Bloomingdale, again it’s exclusive in the month of August and is also overachieving versus our expectations. .

These being said, it’s also important to note that when you look at our long-term trends, the level of marketing spend that we have is really in line with what we have communicated at the beginning of the year which is around 25%. So, it’s not like we are changing drastically here.

There was a seasonal effect in Q4, but the end of the day, when you look at the trend, we also see the 25% which is exactly what we said at the beginning of the year..

Okay. And then, maybe if you could talk about your long-term EPS target. The $1.53 you laid out by fiscal 2020 and obviously, you had some unforeseen struggles in fiscal 2017 and I would imagine you need to see some pretty material underlying improvement in the business.

But also if you could talk about how aggressive you plan on being – well, first about you reiterate that target and then also how aggressive you plan on being to reach it be it M&A or other balance sheet activities like that? Thanks..

So, first we remain committed on the $1.53, as we said already in the last calls. So this is not changing. What we also said is, this is a long-term journey. So, I don’t think we should do a conclusion out of one quarter. This is a long-term journey. We are very committed to the $1.53 by 2020 as you rightly pointed out.

We are not going to comment on the M&A and the way we are going to get there. As we said previously, there are many ways to get there and we can use some of our balance sheet to be able to get there, but we are not going to give you any angle on the way to get there..

Thank you. [Operator Instructions] Our next question comes from the line of Step Wissink of Jefferies. Your line is now open. .

Thanks, good morning everyone. Just a couple of follow-ups. The first on A&P on the Consumer segment. I am wondering if you can talk a little bit about the rate change that you expect to see in retail sales through some of the initiatives around both COVERGIRL and then some of your other color cosmetics brands.

And then, secondly, just with respect to follow-up on the target. I am curious if you can just help us understand what the underlying business runrate would need to be to achieve that target $1.53 in fiscal 2020? What kind of step-up would we need to see in 2018, 2019 and 2020 to get to that level, the underlying organic runrate? Thank you. .

So, regarding some of the launches or relaunches, I believe you have asked your question about Consumer Beauty, am I right?.

Yes, please..

Okay. So, the plan to relaunch COVERGIRL is in the second half of fiscal 2018 and this as we discussed last time includes new positioning, new creative, new packaging and new store appearance. And as I said, the retailer feedback on our plan has been very positive so far.

We’ve been working also with a new creative agency Droga5, which is one of the best agency in the world to build on an already strong brand equity. Recently, we have seen a research coming from the outside from an external market research company which highlighted that actually COVERGIRL is the number one cosmetic brand in the U.S.

with the most loyal consumer base, especially amongst millennial. So, clearly, when we see this, this was not done by us. This research gives us quite a lot of confidence about the relaunch that we are preparing.

And we have done a campaign called Project PDA, Public Display of Application which actually received a lot of positive feedback from consumers but also retailers.

And again, it’s all around empowerment of women and the ability of self-distraction because we encourage women to actually apply make-up in public, which is quite a strong stand that we have taken with COVERGIRL and we are fully behind this.

The new launch of COVERGIRL Total Tease Mascara has been a great success in Canada and is being now rollout in the U.S. but as I said, it’s going to be a gradual improvement over the performance because the fuller launch will have some four COVERGIRL in the second half of 2018.

When I look at some of the other brands, we are also working quite hard on the relaunch of Clairol and we have quite a big initiatives coming again in the second half of 2018. We need to remember that also that most of the U.S.

retailers today have their shelf reset in the second half of 2018 or beginning of calendar 2018 and so it’s important that all our plans will be all perfectly set and in tune with the trade windows that are prepared by the retailers.

But also quite confident on Clairol and in the mean time, while we prepare for the full launch with this big innovation, we have launched Color Crave which is the line-up of the hair make-up which again goes into the direction of transforming Clairol from a very functional brand into a beauty brand which is one of the key objectives that we have for the brand in the future.

Color Crave started quite well although we are part of the beginning, so it’s still early results.

And above and beyond these two brands, we are also working on other relaunches in Sally Hansen is another brand that we are working on it for 2018 and in the mean time, I can tell you that the launch of Color Therapy in Sally Hansen is already 5%, 6% of market share of the nail market, plus we are focusing again on developing collections for the Sally Hansen brand.

Again, in the attempt of ensuring that this category which is more of an impulse category gets fueled by new innovation and new ideas on a regular basis for our consumers and our retailers.

On your second part of your question about $1.53 by 2020, so we expect to achieve these through the use of different levers including one, the achievement of our targeted synergies and ongoing efficiency initiatives.

So on our targeted synergies, I’ll remind you that the phasing that we have was 20% this year, 50% in fiscal 2018, 80% in fiscal 2019 and then the full 100% by 2020.

So that gives you the hints on the phasing and of course, by the growth program and you see already that out of our three leg start we’ll have some growth momentum and of course, the strategic use of our balance sheet for M&A and you start to see that our recent acquisition Hypermarcas, ghd, Younique start to have a material impact on our growth profile which is in line with our overall synergy.

.

Thank you. Our next question comes from the line of Andrea Teixeira of JPMorgan. Your line is now open. .

Hi, good afternoon there, and good morning. I just wanted to clarify a little bit on the 750 - on the $750 million.

You just discussed some of the phasing and I wanted to find out is actually this phasing of the synergies, if you can put a bridge on those synergies and how much it would flow into the bottom-line? We should be thinking of flowing it more into the fiscal year 2020 given your investments in COVERGIRL and launches of that? Thank you..

The synergies are really net of any potential reinvestment et cetera. So what we mentioned is that we are going to generate the $750 million and as part of our investment thesis, this $750 million would come line in order to achieve the $1.53 of EPS. So, this is net of any reinvestment and the support that would need to fuel the growth momentum.

And so, once again….

And the cadence?.

The impact of the P&L the $750 million is 20% this year. Then you have 50% that will be achieved in fiscal 2018 impacting the P&L in fiscal 2018, 80% impacting the P&L in fiscal 2019 and then the full $750 million impacting the P&L in fiscal 2020. .

So, what you are saying, fiscal year 2017, we already had some impact of the synergies. Can you quantify? You said it was 18%, 20%..

20% of $750 million..

So the reason why we didn’t see is the TSA expenses and all everything else that was hard for us to see because what I wanted to figure out is like, what is the earnings power, so you just reiterated the $1.53, but as a cadence of the top-line what is behind the top-line that would get you to $1.53? Because that’s obviously – your $750 million depends on progression of top-line, right?.

Sure, sure, but we still – we start to see some growth momentum in two out of our three legs and this is going to continue to progress in the coming years, point one.

Point two, you also have a material impact of the acquisition that we have made, ghd, Hypermarcas and Younique which are growing quite substantially and as a result of that, we’ll weight even more on our growth profile going forward..

Thank you. Our next question comes from the line of Mark Astrachan of Stifel. Your line is now open..

Yes, thanks, and hi, everybody. I wanted to talk about the sales expectation. So appreciate not wanting to get into specifics from a guidance standpoint.

But I guess, maybe looking at it differently, what’s a realistic rate of growth for the business now as you think about it from a longer term standpoint? Or in a different way, what is the growth that you benchmark the orders against relative to the categories in which you are competing.

I think, Part had said on the roadshow year ago, call it, very low single-digit, is that’s still something that you are benchmarking yourself against today?.

Yes, I believe that’s the right benchmark because of the way the composition of our portfolio both from a brand point of view, channels point of view and markets point of view. So I confirm what Part said in the roadshow.

In terms of sales expectation, as we said, the primary program will not be a straight-line wavered over the last couple of quarters we have now reported gradual improvements in our underlying net revenue trends before we had high single-digit decline in the first half. Now are in low to mid-single-digits of decline in the second half.

We had two divisions which are confirming a strong positive momentum. And overall, what I can tell is that, we expect that strategic efforts that we are taking to continue to bear fruit in fiscal 2018. .

Okay, and then, shifting a bit to cost and free cash flow. So, fixed costs are what they are in guess in the period that just ended.

So, curious, how do you think about the total cost structure of this business today versus what you thought going in when you did the deal or even when the deal closed in October? And then, sort of related to that, you outperformed free cash flow outlook in fiscal 2017 relative to those going in expectations.

So, thoughts on fiscal 2018 including CapEx and what you are going to do with the cash in terms of debt pay down or M&A or sort of both, obviously there is a dividend as well. So anything there would be helpful..

Sure, on the cash, we never – it’s – we are going to generate cash in line with the progression of our EBIT and we are going to keep on working on the working capital. We still have some investment in terms of CapEx to do in the coming year to finish and to wrap up the integration. So there is still some one-off CapEx to be done.

These being said, as of outline – we are now having a negative working capital for the combined company which is quite an achievement. So, how we will return cash to the shareholders, depends a little bit. So, we will – it’s either of course by – via dividend or to further fuel the top-line with additional M&A. These will be discussed in due time.

Now in terms of cost structure, do you have any expectation? We, once again, what we said is that, we have designed a divisional structure which is a focused organization, which is probably slightly more expensive than the mutualized organization. But we have done that on purpose to be able to have more focus on the growth agenda.

So it’s a slightly more expensive structure than others. But, once again to have some more momentum on the top-line. So I think that’s what we can say today. .

Thank you. Our next question comes from the line of Jason Gere of KeyBanc Capital Markets. Your line is now open..

Thanks. Good morning. Just two questions. I guess, more or less follow-ups on previous questions.

But the first one, when you factor in some of the shelf space losses in 2018 that you’ll lap and then the contribution of acquisitions, do you think the momentum of Luxury and Professional can offset, I guess, the kind of weakness in Consumer Beauty in the first half of the year. So that’s the first question.

And then the second question is really just on the e-commerce. I know you are talking about bunch of these relaunches.

I just kind of curious about, I think one of your tenants is really kind of managing some of the in-store execution at your bigger retailers, but just the balance with the shift that we are seeing online, which segments are you seeing more of that growth coming into? Do you have the right capabilities in there to kind of manage this? So any perspective on those two questions will be great.

Thank you..

I will start with your second question. So, in terms of balance of e-commerce and work on retailers, what I can tell you is that, we are working quite hard on rebalancing our in-store execution. This is one of our key pillar of growth of our strategy.

And so, we are making choices of shifting money to investment at the stores and of course, we are working with our key partners retailers to improve the partnership to bring more value to them and of course to step up the Omni channel. And of course we are working on the relaunches of the brand which will hit the store in second half of 2018.

Now that said, e-commerce is a big priority for us and I have already mentioned an announced a new structure with a new head of e-commerce, a new structure which has higher accountability on that.

It’s important to say that our agency, Beamly which we acquired around one-and-a-half year ago, is now fully focused on helping us on the e-commerce efforts. And we are working with the key customers also on stepping up the e-tailing business. So the e-retailer business, which is clearly some, a channel that can react much fast as well our program is.

We are seeing good results there. And let’s also not forget that Younique, the business that we bought just recently in February is full e-commerce business, 100% B2C where we have over 250,000 brand ambassadors, presenters, who every day are out there selling cosmetics under the Younique brand via the web, via the social media.

So that’s – it’s a clear testament also to our new focus on e-commerce which is not done only through the acquisition of Younique, but also internally organically and the team is making big progress on this area. Now, your first question was about Luxury and Professional Beauty offsetting the Consumer Beauty pressure.

What I can tell you is that, of course, we expect the momentum on Luxury and Professional Beauty to continue in 2018 and on Consumer Beauty, what I can tell you is, that the shelf space that have impacted us in 2017 truly only now in a certain ways having an impact, because the shelf reset from the key retailers it does happen around the March, April of each year, let’s say.

So, we expect these headwinds on shelf space losses to actually lapse and continue until Q3 before 2018 when we start to lapse the current shelf space losses.

Now, what’s happening is really the moment we are working with the retailers and presenting all our plans to ensure that we don’t see any more impact, let’s say post the new resets that will happen at the beginning of calendar 2018 - in the second half of fiscal 2018 and I have strong confidence that we will not see any more impact because of the great conversation we are having with the retailers and the positive feedback on our plans.

.

Okay, great. Thank you..

Thank you. Our next question comes from the line of Rosie Edwards of Berenberg. Your line is now open. .

Yes, good morning. Just a couple of questions, firstly, if I use the prior EBIT margins of 11% as the starting point, and then add back synergies of $115 million, it implies those sort of drag on cost of over $200 million from weaker top-line and also the extra fixed cost you are talking about in the fourth quarter.

Is that $200 million, is that sort of a balance you see, you’ll be able to sort of plough back if you like? Or is that sort of earning shortfall? I mean, in terms of like the ploughing it back either through your rate efficiencies or through kind of M&A as you’ve kind of previously alluded to?.

So, I think you- when you in-staff 2016 with 11% blood margin of the combined business, you add back the synergies, the contribution of Younique and some of the acquisitions, what you also need to deduct is start the contraction of the business that we’ve seen which has been substantial and, yes, cost structure – a step-up in the cost structure, especially on the carve-out business to be able to handle business of twice the size.

So I think that’s the way you should see it. It’s not only due to the cost structure, it’s also due to the fact that we had a contraction of the business versus the fiscal 2016.

This being said, now, we have a synergy program and an ongoing productivity program in place, that we are actively working on and as we deliver synergies that will be able – that will be one of the elements that we will be able to deliver the $1.53 combined with one, use of the balance sheet to do M&A and second to return to go back to a growth momentum at one point in time.

.

Okay.

And then, just on Consumer Beauty, pricing on the U.S., I just wonder, do your relaunches, sort of include any channel shifts or expansion of distribution points, current feeling of the moment, the brands would be sort of more weighted to sort of modern trade as opposed to for example, specialty, multi and things like that?.

No doubt that our strategy has a channel mix and Specialty Beauty which you are alluding to, your mentioning is clearly a very important part of our channel mix.

So we are focusing on that quite a lot and the e-commerce, what I discussed before, so working with our partner retailers and working on the e-tailing business, the e-retailing business is also a big focus.

It’s no doubt that consumers are shifting and their behavior and it’s also important that we do deploy strategy that are also in line with this shifting consumer behavior. So, absolutely working with the brick and mortar retailers, specialty, beauty and e-commerce, truly the three key areas of focus for all the relaunches that I mentioned before. .

Okay. Thank you..

Thank you and I am showing no further questions. At this time, I’d like to hand the call back over to Camillo Pane for any closing remarks..

So, I would like to thank all of you for the attention and for the questions and I wish you a great day..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone have a great day..