Good morning, ladies and gentlemen. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Fiscal Fourth Quarter and Full Year 2019 Results Conference Call. As a reminder, this conference call is being recorded today, August 28, 2019.

On today's call are Pierre Laubies, Chief Executive Officer; and Pierre-Andre Terisse, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements.

Please refer to Coty's earnings release and the reports filed with the SEC, where the Company lists factors that could cause actual results to differ materially from these forward-looking statements.

All commentary on like-for-like and net revenue reflect the comparison of the business at constant currency in the current and prior year period, excluding the impact of acquisitions and divestitures.

In addition, except where noted, the discussion of our financial results and our expectations reflects 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'll now turn the call over to Mr.

Laubies..

Thank you, Maria. And welcome everybody to Coty's fiscal 2019 full year and fourth quarter conference call. Before letting Pierre-Andre, our CFO, dive into the divisional performance and financials, let me provide you with an update of where we are at and what we have been focusing on since the first time we spoke six months ago.

Our first priority at the time had been to stabilize the business operationally. This included resolving the various supply chain disruptions that meaningfully impacted our operations in the first half. Our service levels are now back in their high 90s across all divisions.

Regaining control of profit and cash flow, and setting a relevant financial policy with a sustained dividend. Today, we can consider that these objectives have been achieved. Our second priority has been to build a medium-term plan aimed at solving what we consider are our most pressing issues.

By this we mean, the trajectory of our consumer beauty business, our gross margin gap and overly complex organizational design and a culture far too dependent upon personal genius versus quality of mastery.

We analyzed in detail our consumer beauty business and now have concrete plans in each of our key countries to stabilize our market shares and improve our profitability for 50% of our business. These plans have been rigorously structured and timed, and some parts are already in action.

For instance, in Q1, we are already accelerating our working media fiscal at the expense of promotion and discounts. Our plans have been shared with our key customers and I can say confidently that they have been well received.

We will now deploy at a rapid pace these supports to the rest of our consumer beauty countries and we expect the same findings, the same resulting actions and the same margin upside per country. As shared in our call in early July, we have identified substantial value uptake in our direct and indirect costs as well as G&A.

And we shared with you the details of our strategy on the matter. Now, we are mobilizing internal and external resources to unlock it. This is mission critical to us as it will give us the margin that we need to invest in brand building, while at the same time improving our profitability.

Finally, we have built a leadership team, which will be leading a leaner and more aligned organization.

It's key feature will be a set of values reinforcing team alignment and collective effort, closer proximity between markets and the Company's leadership, widespread competencies based on clear playbooks, and a more cohesive culture illustrated by a move to a global headquarter in Amsterdam.

We are finalizing the top two layers of our organization currently. Our organization transformation will be completed by the end of Q2 and we intend to start to move to our new HQ in the course of the third quarter of this fiscal year.

These two tasks being either completed or in execution mode, we will now be turning our attention to the next theme of our transformation - our innovation portfolio. We want to strengthen our pipeline through the lens of growing the penetration of our brands.

Our brands have the capability to target across more geographies and more consumer segments and we want to leverage this opportunity.

Gucci, through its entry in color cosmetics; Clairol, with good touch-up and the recent launch of vegan and natural weDo/ Professional hair care line are great example of this strategy and of our ability to marry vision, creativity and operational discipline. As you can see, we are moving at pace, but we're not taking shortcuts.

I am very confident that we will turn on Coty and increase its growth potential.

We will set up Coty on strong fundamentals with solid portfolio of brands, categories and markets, a competitive cost structure, deep beauty expertise and a diverse and engaging culture, so that our business partner, shareholders and associates can enjoy many years of lasting success. This is our agenda. And we are all committed to it.

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

Thank you, Pierre and good morning, everyone. To start with, I am on Slide number 5. The fourth quarter, and as a result full year, came very much in line with our expectations. Revenues at minus 4% for the quarter were consistent with the full-year trend and mainly from higher comps.

Specifically, for the quarter, we had some deloading in Professional, but which were offset by another strong performance in Luxury, while at the same time Consumer on its side remained weak.

The gross margin 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 up was extremely important.

Adding to these gross margin here for the fourth quarter, active cost cutting and being selective - continuing to be selective on the A&CP, essentially on the non-working media, helped operating margin, being up by a strong 220 basis points for the quarter. I'll come back later on the Group earnings, and I will now turn to the divisions.

I'll start with Luxury, which trends remain strong and here you have some example of the activities during the quarter. We renewed two licenses, Marc Jacobs and Lacoste, reflecting the confidence of these two houses in Coty as a partner.

The average license residual life of our total portfolio is eight years and we are proud to be considered as a top quality operator by many of our partners.

Gucci was strong once again after Alchemist Garden, which is now in the top 10 of ultra-luxury in key markets, the launch of lipstick had a very strong start, as mentioned by Pierre, particularly in Asia. Burberry had a very good first full year within Coty, with strong sales uplift.

The launch of Boss Bottled Infinite, which you see at the top of the screen was successful, reinforcing its status as top 5 icon franchise in the male luxury fragrance. And last, as we turn to fiscal '20, we are making two exciting launches now with Gucci Memoire and Bottega Veneta Illusione coming.

Slide 7, all this contributed to another strong quarter for Luxury, with mid single-digit growth. By geographies, we saw through Travel Retail and ALMEA to emerging markets, grew particularly strong and the category on the other hand continued growing in U.S.

I think that's important to have in mind when you read - everything you read about the U.S., the fragrance category is going up.

Margins were strongly up helped by operating leverage on the one hand, but also by cost reduction and altogether Luxury being 40% of Coty's, keeps being a strong and consistent growth and profit engine for the Group and it's very important for us, of course. Turning to Consumer Beauty, it remains weak, we see that.

However, we had several initiatives which were taken during the quarter. In the U.K., the Rimmel Wonder'luxe mascara helped the brand gain share. You see that on the left of the screen. Still in the U.K., Clairol Natural Instincts was a successful launch and in the U.S., Sally Hansen continued bringing innovation to the market.

You have example here showing significantly for the brand better resilience in the portfolio than some other brands. Nonetheless, the persistent loss of shelf space in the U.S. and in Europe continued dragging on sales, which were down 11%, in line with the year.

Brazil was satisfaction again, with a good performance and price increases taken ahead of fiscal '20. And in the case of Consumer Beauty, of course, meaningful cost saving and A&CP reduction, mostly in non-working media helped delivering on profit, with a 10.4% margin in Q4, which is not bad.

We are not turning to fiscal '20, with steady plans across the divisions, including, as Pierre mentioned, meaningful working media investments. We expect to see some positive signals in this first half of fiscal '20 in terms of shares first, where we do not expect material incremental losses anymore, and in some cases, we see some upward potential.

And in terms of consumer as well with the effect of improved execution and increased visibility and we expect these positives to gradually improve Consumer Beauty top line trends. I'm turning to Professional, the division was impacted by destocking, but the underlying trends remain positive.

ghd continues being a strong growth engine with double-digit growth and successful innovations. Here you have the Glide hotbrush, credit [indiscernible] continued to do well. And last, a complete and modern range for men was launched under the brand SEB MAN segment with success and Pierre mentioned just a few minutes ago, the launch of weDo/ as well.

Despite these positive trends, 2019 was not a good year from the revenue standpoint. The deloading in the U.S.

coming after a major supply chain disruptions in H1, margins progressed though, signing again the strength of the division, being up by 70 - the gross margin - sorry being up by 70 bps for the year and the operating income margin, adjusted operating income margin being up 190 bps to now 12%.

And so beyond the temporary difficulties, Professional is definitely an asset for Coty, with the number one brand in salon color with Wella, with better with a strong presence within the salons precisely, and two brands which we believe have high potential, ghd, I mentioned already, and OPI, and we expect this strength to deliver profitable growth for us.

Turning to Slide 12, at the time - and you have seen the separate release, at the time, we are passing with Younique.

And if you look at the work, which has been accomplished by Coty in the past few years, the percentage of A&CP being digital is now close to that of our peers, and maybe more significant as evidenced from this slide is the growth of our e-commerce business and the proportion of our revenues it now represents; 10% in Luxury, which is ahead of the fragrance category range, low-teens in Professional where we have been progressing in particular with the relationship with the salons, and Consumer is catching up rapidly, in particular, in the U.S.

and in Asia. And as we move forward, we'll reorganize to better leverage our resources in the divisional teams as well as our IT teams to continue progressing fast moving area. And now coming back to the results and profits, which has been the focus of the year, so starting with the fourth quarter.

The gross margin in this quarter was strongly up in Luxury, more than offsetting the decline mainly observed in Consumer. The adjusted operating income was strongly up at 12.2% for an EPS which was up $0.02 at $0.16. If I turn to the year, 2019 was obviously impacted by supply chain issues, which pushed the gross margin down by 40 basis points.

As mentioned several times, a big work of fixed reduction - of fixed cost reduction and selectively reducing the A&CP, primarily non-working media, helped delivering an adjusted operating income at $990 million at constant FX, which is very much in the range of $950 million to $1 billion, which we had indicated in February, so we delivered this commitment.

Op margin was up, as a result, to 11%, the operating margin adjusted. Annual EPS was broadly stable, if you take into account the 4% negative impact from the evolution of the currency. The free cash flow, Page 15, was obviously a key priority for the year as we aimed at deleveraging our balance sheet.

After a negative start of the year on supply chain issues, we delivered for the entire fiscal '19, $200 million of free cash flow against negative $30 million last year. So that's the beginning of a steady improvement.

The dividend amounted to $346 million, out of which $63 for the last quarter, which reflected 68% participation through the DRIP and 34%, therefore, of the dividend paid in shares.

On an annualized basis, it will - this will mean a $250 million of cash dividend payment, and therefore, after the stabilization of the debt in 2019 at $7.4 billion, we now expect in 2020 to start deleveraging and move towards the 4 times leverage by 2023. Before I conclude, a few comments on developments which took place during the quarter.

First and foremost, we unveiled our Turnaround Plan on July 1. 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 our actions and we are now in the process of implementing it as Pierre has told you.

At the same time, we also made public that we had agreed with our banks an amendment to our credit agreements with a view to get the necessary flexibility to the implementation of our Turnaround Plan. This is now in place. This morning, we announced that we're exiting Younique and selling our stake to the other existing shareholders.

This is a clear signal of focus. We have, as said earlier, gained a lot of digital knowledge during our years of cooperation, but both Younique and we are convinced that the best way forward is to focus on our respective businesses, which are very different.

In our case, we will therefore focus on creating value with our Luxury, Consumer and Professional Beauty business. Last, and as anticipated, early July, we took an additional impairment of $2.9 billion in Q4 for a total for the year of $3.9 billion. This reflects our new Turnaround Plan as well as the revised expectations we had for Younique.

I'm now going to turn to fiscal '20, the new year, and basically confirm our expectations of solid dynamic for this year. After a year of decline of our net revenues, we expect trends to improve and net revenues to be stable to slightly down year-on-year on a like-for-like basis. These will be helped for a part by increased A&CP investments.

Taking into account such investments, we expect our adjusted operating income to grow 5% to 10% year-on-year at constant scope and currency. Such growth will come across the second, third and fourth quarters, while Q1 will be moderately down as we ignite our programs with strong A&CP investments.

We expect the growth of our adjusted operating income to fuel a mid single-digit growth of our adjusted EPS. And last, we expect to capitalize on our 2019 progresses and keep improving our free cash flow in this fiscal '20 year.

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

Thank you for your attention and we both Pierre and I am going to take your questions now..

[Operator Instructions] Our first question comes from the line of Faiza Alwy of Deutsche Bank..

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

in the near term?.

The conversation has been, roughly, I mean in general very positive, because as I said earlier, what we presented made common sense and was focused on making our key SKUs more available and improving their operational performance, as well as what was a big driver of the conversation was our desire to return to high advertising investments behind our core brands.

And I would say that basically speaking, the main - the number one take-out is that we anticipate a moderation of shelf space reduction going forward.

And of course, we have not completed all this conversation, but we do believe that this outcome of this conversation suggests a moderation in shelf space reduction in the second part of 2020, whilst of course, the first part of 2020 will reflect the previous decision, which has been made in the spring of 2019..

And then just a quick follow-up, just in light of your divestment of the Younique stake and your comments around focus.

I was just curious how you're thinking about the rest of the portfolio? Are there other brands or businesses that you think may not - may not fit with your go-forward strategy?.

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

I'd like to come back to your earlier question, Faiza, basically speaking, our fiscal year guidance reflects clearly improving trend in Consumer Beauty.

So I'm not going to say that you're going to see growth from Consumer Beauty, but you are going to see a reduction of the decline, all right? And I think it is really important that we term these and I think we will, I really have no doubt about that.

And when we talk about focus, as I said earlier in previous call, our focus is investing mostly at scale behind our key brand. We have identified these 12 brands, which represent a significant proportion of our portfolio, and we will concentrate our working media effort and behind these lines..

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

So just - I just wanted to clarify, when the guidance was given in the press release, you said at the current scope of the portfolio. I just want to - does that include Younique or not? I just wanted to make sure I understood exactly because that announcement came out after - I saw it after the press release was released.

That's the first question and then the real --.

That's an easy one..

Well, definitely. I'm going to clean that very rapidly and then you move to the second one..

Yes..

The Younique operating income for last year was 16 - one six - $16 million, and therefore, when we say constant scope, it is ex-these $16 million operating income..

Great, thank you for that clarification.

And then I guess the bigger question is one of the main things you discussed when you met with the investment community was the SKU rationalization program that you were planning to implement and as we get to the September shelf resets and you're having these discussions, just maybe you can give us some color and texture on how those discussions are going around that particular initiatives, 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 see it - they see it as really something which will help the shelf productivity, and actually, I think the conversation - it will help the conversion on shelf stage because it will improve our velocity.

So, and we do, we have factual data - we still must say that actually when we do it - when we take out lower trading SKUs, more volume gets concentrated to the highest rotating one.

So actually improves the shelf productivity and also again this is a process, which will be gradual, right? This is not a process that we are going to execute widely and in a very aggressive manner.

This takes time, we need to do our - time again we need to optimize them, we need to implement them, and it is continue - it will be a gradual process over the next, I would say two years easily and no, I'm not worried therefore the shelf space losses out of that..

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

This is Christina Brathwaite on for Andrea. Thanks for taking my question.

I guess - to put a finer point on the Consumer Beauty shelf space question, previous management kind of alluded to the acquired brands were the reason the shelf space declines were occurring with the 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 you're seeing?.

Yes, I think we are, - where we ought to be. I think we need to earn our right to increase shelf space going forward and that will be related to velocity and I do honestly believe that with the decision that we are making to focus advertising behind these 12 brands to maximize the distribution of all high rotating SKU or we just did.

We will again earn our right to increase shelf space. I think actually - and again, as I said earlier, I think the feedback from our customers, at least for the 50% of the business that we have still too is positive. We will just do that in the likes of all our markets, but I feel, again, as I said, confident on the matter..

And then I guess in regards to the free cash flow expectations for this year, particularly related to the working capital side of the business, it looks like receivables were down more than 20% again in 4Q.

So I just wanted to get an understanding of what the drivers are there, if that should continue through the first half of this year and how you're thinking about working capital?.

So it's kind of the - the evolution of receivable was driven by two different initiatives. One is the use of factoring program we started as soon as Q3. And the other one is reduction of the overdues, we have been investing significant amount of time to reduce the overdues, which had been high at the beginning of '19.

Obviously, the factoring is a program we use and we'll keep using, but there would be no big extension of that. The main factor is going to be the reduction of the overdue, which we are going to continue, and the focus going forward is going to be very much on the reduction of the inventory.

We believe we have significant potential of reduction of inventories through better managing the inefficiencies of our supply chain, which is therefore not only the potential of course for different growth, also potential of freeing up of 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's part of what we are doing in 2019 is just going to be reproduced, but not extended and inventories will take a bit of time and I expect we are going to renew significant progress with the inventories starting from the following year..

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

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

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

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

Yes, I think that the reduction in promotion is happening now as we speak in many markets. Of course, some markets are longer than to execute, right? I think in the price mix, so you want to be - there are some drivers of the third category, which I think probably influenced by the mix of geographies.

So I think that had still been underway, I think in - in the quarter 4, we had some, some effect due to the Brazil wave into the portfolio of the quarter four third party, the driver this mix effect. We do have a substantial reduction of promotion already happening in some of our key markets.

And as a consequence, we do see that our base business velocity is up too, we do - we have data which verifies and proves that the Consumer Beauty business is relatively price inelastic.

And as a consequence, we see that as a clear opportunity to take pricing with our jeopardizing volume and we have been shy over the years to do that whilst our 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..

If I can add to that, Lauren, so it's clear that's part of the focus of the turnaround plan is on the trade conditions, resuming level of dialog with the trade, which is more positive and therefore improving dues and being less under pressure as we have been and part of that is about the loss of shelf space, which we expect now is largely behind us.

And part of that, you've got the conditions simply the promotions, the fact that we are increasing meaningfully delivered A&CP is going to be one factor to support the brands and therefore to avoid that into use so much to promotions and the mix is simply something we are starting, as well as part of the start of year OpEx program, better selecting the SKUs, we want to push on the shelf because they have higher attrition, but also because they have better margins.

So all that is going to our churn. The question is the pace and with respect to the pace, we've given an overall indication for full year 2020, which is essentially our guidance, which says that we expect the growth of Coty overall to be stable to exceeds down in throughout the year.

So that's the pace we expect of course, consumer beauty is going to be a major contributor to that. But we need to keep flexibility in the way it delivers and to be able to adjust our actions to make it happen. We’re very confident in this happening. We just need to be extremely good and flexible at managing the timing.

Now what we are seeing so far is positive..

I guess my follow-up would be, what you’re seeing, where you are already starting to adjust promotional levels. And where you are - what you are seeing the competition do, is that commensurate kind of reduction and promotional activity.

How is that piece coming together and what are your expectations there?.

I think honestly speaking while deploying our strategies and of course, if we have been historically over promoting.

So I think in my view, we are going to join the pack of the market, the average of the market and again as I said, we have made 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 expect we'll be in line with the rest of the market..

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

My question has to do with your target for 2020. You mentioned that there is going to be a moderate improvement, in fiscal 2019 you have a one-time benefit from the receivables factory. And then my understanding was that you will be taking cash restructuring charges.

So I would like to know whether this target includes are above and beyond the impact of these cash restructuring charges broadly in line in July about $600 million in cash charges.

Could you give us a sense of how much are going to be in 2020? What type of activities are involved? And why you see that the organization that just has been put together seems to be so or will be that needs to be changed again? Thank you..

Well, that's, that's perfect question. So I got the numbers.

Yes, it does, the improvements we are talking about is inclusive of seeing, including the restructuring charges to remind you, we had fairly big amount of restructuring charges anyway in 2019 and will be improving from that level, we expect next year to be in the region of $300 million between the completion of the previous plan and the beginning of the new one mainly the activation of the change of organization.

On the change of organization, I think down to there is one - there is one manufacturer as we have commented during the turnaround plan, we want to be adjusting our structure to our size, our size, our structure was designed for a size we’re true that have been growing significantly, it has.

Today we have two heavy structure in the market, this is the factor of cost and this is a factor of complexity, this is slowing down the pace of decision and this is not helpful. This is again creating complexity as well in supply chain. So we feel extremely important, it's we implemented turnaround plan to have a simpler structure in the markets.

And at the same time, we want to make sure that the connection between the markets and the management teams altogether is fluid and we need as well to simplify the level of above the market - above the market through organization.

So that's driving the change of organization, which is by the way going to make stronger the marketing functions because we know our marketing units Luxury and Consumer Beauty which are dedicated and we'll be working on the brands and we will have on the other hand, geographical execution teams one for America, Asia-Pacific and the other one in the Europe and Middle East and Africa.

And we think that's going to help implementing the turnaround much faster and much more efficiently. So to us that was extremely important..

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

The Luxury business, correct me if I'm wrong, but isn't that like 80% on fragrances or so, I know it's got some skincare and philosophy. But I think it's mostly fragrances. And in that context, I'm surprised at the margin being so strong there, it's higher than most of the other peers that we know of in Luxury fragrance.

And so I guess the question is, do you think it's sustainable or do you think there is actually improvement from the sort of 15% type operating margin level for that division specifically?.

So yes, we think there is potential for improvement. And in fact, we think the OpEx program, while it mainly applies to Consumer Beauty also is going to generate some improvement in Luxury and therefore, we expect the margin of Luxury to be growing up to margin level for that which we think in fact higher than where we are today.

Just one word about OpEx because I usually refer assuming everybody knows OpEx is the program aiming at reviewing in details the level of execution of pricing, positioning of the product range in each of our brands and countries. So it will apply to Luxury as well now.

One point, while we expect improvement of the margins over time, we have to be clear as well that the step-up we have had this year is not going to be referred. We've had a specific major focus on profitability this year throughout Coty including Luxury, it's been producing good sustainable performance. But we won't have the same step-up here..

Fair enough. Okay, that's helpful. And then my second question is just on Younique. Can you give us a sense - I know it's been a challenge for a while now. But if I look at the overall company like-for-like sales last year of down 3.5.

Can you tell us what that would have been on excluding Younique for the whole year just so on a kind of pro forma basis, we can get a sense for how much of that drag down your numbers?.

Improvements being slightly better kind of - well, I mean getting to give you a number but probably around 60 bps..

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

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 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 use merchandising, marketing, and that would give you some latitude if the consumer pull through doesn't occur?.

So the answer from the finance guy is yes, there is flexibility. We have seen flexibility just to remind that going of our obsession to have the ability to deliver and therefore we didn't give context, we are building flexibility and we are at the same time watching week after week, what is happening on Consumer Beauty in key markets.

And I was yesterday with the American market, where yesterday with the American markets and we're looking at that, we have plans..

That’s absolutely, I mean we have a clear intent. We know what works, but we don't always manage the timing of things. But I think strategically we know where we want to head and we report always to target and we want to rebalance our non-working media with our working media.

So the way to create flexibility is also to go through the line of the least positive agenda, least positive element of our P&L from a media standpoint, we clearly want to make sure that we generate the money that we want to continue to build our brand and but even on that one, we have good flexibility too, but yes I really want to make sure that we have the right balance of working media and non-working media in this company, we have not been there.

We are progressing and we still have margin to progress on this subject..

Second follow-up on Wendy’s prior question on the Luxury Beauty division. I'm wondering if you can walk through the same analysis for us on the Pro and the consumer business. And what I'm trying to do a bridge that 14% to 16% target relative to this 12% blended margin today.

What does the consumer beauty business need to deliver and the Pro business need to deliver on a segment operating margin basis for you to achieve those targets?.

I mean the - we don't expect the same level of margin from Consumer Beauty as we expect from the others down the road. We assume it's going to be more in the 10ish percentage, when we are targeting mid to high teens from the other businesses. But the fundamental element of the evolution are going to be the same, i.e.

gross margin uplift through the many elements we've been commenting including the investment in S&P including the simplification of the range, including the reduction of cost, including the lower promos and increased investments.

Including I think very surplus on what exact product we want to push well as in the fixed cost, which is going to be the same throughout the Group and probably higher in the case of Consumer Beauty because we had higher years of complexity than in the rest of the businesses.

And we just have lower starting point and therefore the expectations cannot be as high, unless we find a way to accelerate which is - as well as something we're looking, at..

Yes, and I think the way to contribute to strategically rebalance continue to strengthen the profitability of the Consumer Beauty business such as you need to focus on the product lines - they have scale, they have high margin.

And they have clear distinctive assets, ability to grow, ability to respond to investment and I think that's the way we are going to change the trajectory of the financials of the Consumer Beauty business by changing its mix. To our product brands, namely in that case, Max Factor, Rimmel [indiscernible] in Germany, CoverGirl in the U.S. Clairol.

These are very, very nice brands, which have a lot of potential, huge assets and huge equity and by doing that and investing behind them will be shift the mix of our portfolio and it also our highest margin items..

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

I was wondering if you could dive a little bit deeper into the A&CP specifically for fiscal 2020 and talk about the relative change that you see across either the three divisions and geographies.

And then just in terms of the margins they have obviously been pretty volatile in fiscal 2019 gross margin you had two quarters with big declines, two quarters with slight improvement also a lot of volatility in SG&A as well. So could you just talk about relative volatility in fiscal 2020 compared to fiscal 2019? Thank you..

Yes on A&CP, we definitely aim at stepping up our level and start closing the gap we have with competition and including [indiscernible] we can do that, we are definitely on that path. We started as soon as Q1 having in mind that Q1 and that's true, we’re pretty low level and therefore the step up is going to be important.

And then we expect the A&CP over net revenues to be gradually growing throughout the year between Q1, Q2, Q3, Q4. So the step up is going to be bigger in Q1 with the level so we step up to a level, which then is going to be the base for a gradual increase throughout - for the year.

And as evidenced or include in one of the previous questions, we obviously keep flexibility in the way we - allocate that and in the way we use that it's very important as you can imagine. With respect to gross margin that's a bit of the same.

We have four reasons which belong to the specific of the first quarter lower comps feature will be up against this lower comps and then will 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, supply chain cost reduction.

So from Q1, Q2 will be higher and we expect altogether improvement throughout the year but Q1 is going to be an important part and it shows gross margin improvement actually first but it shows as well a very, very meaningful step-up in terms of A&CP.

Hence what I said about the fact that the increase of the operating income with this Q2 of 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 Olivia, the A&CP increase is completely focused on the working media. So the increase is absolutely disproportionate on working media - on the total A&CP budget..

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

I wanted to get back to Consumer Beauty. So there was a pretty material slowdown in like-for-like sales growth in Q4 when compared to the underlying growth in Q3. So I was hoping you could walk through - the drivers of the sequential slowdown that 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?.

Yes, we won't give you the breakdown sorry for that, but Younique indeed was an element of difference. The second element of difference and we knew that we had so we had flagged it as soon as Q3 comes from the fact that we had high comps. The sale that you're has been very aggressive ahead of the changes in supply chain, which took place afterward.

And therefore, we had a high cost in Q4 unlike what we had in Q3. So on our side, to be frank, we are not surprised nor afraid, but we have seen on Consumer Beauty has been pretty much what we expected.

And overall, I am pretty pleased by the fact that the only non-fully [indiscernible] element which was the reduction of inventories in Professional Beauty has been offset by once again by Luxury.

We don't talk much about Luxury the performance once again has been very strong, it’s because every processor and it certainly very strong really even stronger than we expected even a quarter before the end of the year. So on outside no negative surprise and on the contrary some positive, again a good performance of business..

Yes and I guess my follow-up would be on Luxury because it was very strong in Q4, I was hoping you could discuss what's driving the momentum there and if you think you can sustain that growth in the fiscal 2020. And then along those lines you actually relaunched Gucci lipstick 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, good Gucci make-up is a great example - I use it in my introductory remark. For me Gucci make-up is a great example of the type of innovation strategy that we need to build at Coty whatever is the channel to realize with you or whatever in the category.

At the end of the day Gucci was well identified by the team as a brand which has capacity to expand beyond just fragrances. And hence the launch of Gucci lipstick and hence decided we believe we can see it, we see it as a very, very successful, as a very successful launch. We will continue to expand in 2020 this franchise or this innovation.

And again as I said earlier, we will do more of it, we do more of it in Luxury, but we will do more in professional and we will do more in Consumer Beauty. We want innovation, which has the ability to drive the penetration of our brand and expanding the footprint.

Our brand has the right to travel to new market to other consumer segments, then just the one they have been born in. And in that respect that will be the focus behind which we will be to our innovation pipeline..

Yes and maybe to continue to answer the first part - of your second part of your question. Luxury is - it's a portfolio, which has been built year after year. We have been building confidence and trust with the fashion houses.

We have pretty sizable business with them, we are working well with them in a very coordinated manner leveraging both their confidence and our confidence, which are complementary and that is giving very strong performance as in the case of Gucci.

As in the case of Burberry we got rid of [indiscernible] year has been very strong being the case of Hugo Boss, which is the number four, I believe icon fragrance in the male business but I thought.

So, and this is reflected as well again, I'm sorry to repeat that but it’s important the fact that these licensees are long-term, that is free of partnerships and that they are very solid and delivering. So it's basically a successful win-win with the houses resulting from consistent investment.

And we don't believe by the way that we should not be able to do the same in the other divisions, and in particular in Consumer Beauty.

But we have to target for Consumer Beauty is optimizing finding the solution and then being consistent, consistence delivering innovation, adjusting to the trend of the market, of course, but being consistent in the way we will deal brands. And this is very, very much the spirit of this management team.

This is what Pierre is bringing us the level of detail, the very good execution level, but at the same time, consistency in our marketing strategies..

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

You mentioned in your prepared remarks a little bit about emphasizing more digital spending maybe at the expense of traditional spending or those weren't exactly your words. Certainly there's been talk of rationalizing spending overall particularly in U.S. Consumer Beauty.

I'm wondering could you tell us a little bit more about your process of figuring out where you're getting return and where you're not. Because it strikes me that, as you reduce spending, we don't know what return, it's hard to tell exactly what return is that increase level of spending had in the U.S.

and it's possible that results could have been even worse without it.

So just trying to understand that return analysis process, particularly around activation spending and your consumer spending more broadly in the U.S?.

Actually, Jonathan our strategy is really to make sure that our mental availability is very consistent all year around and saying that the channels that we have introduced at Coty with this new management team, is a change from a best strategy to three strategy.

And we are, we want to be on air all the time, why because of our consumers need to be reminded permanently listen for awhile. Our number one, so we have a series of battery of tests which make sure that our advertising works.

I mean that the consumer will respond to it and pre-advertising post advertising to, but the fundamental thing I would say that we are looking for is the ability of our advertising to drive one metrics, which is quite fundamental for us salience, salience in English I think is item, i.e.

the degree of distinctiveness of the brand how the brand becomes top of mind brand, how the brand becomes the brand that consumers never forget and that's the fundamental measure of course of our performance over time.

And this is why we believe that actually yes advertising in the short-term gives you an effect, but what matters most is consistency and presence on all year around. For that our mix of media shift by markets, because what we seek for is reach and depending the market you do operate typically in Anglo section market in the U.S. or U.K.

or even Australia you would have a high proportion of digital versus mainstream media, whilst in other market like traditional European market, namely South European market or Germany or even some emerging market more place in emerging market, should be there with different balance because then in that case you reach would be better and more assessable through traditional media.

So I think I answered your question, but fundamentally we drive two things we drive presence we drive salience on one side and we drive the level of coverage of our consumers over time and our presence on them consistently.

And the consistency of our advertising I mean our brands have distinctive assets and we want to make sure activity time we'll have a movie or every time we have an ad, it just basically speaking - reminds the consumer of the distinctive asset of the brand. We will take the last question..

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

Two questions, one just a clarification so the guidance for fiscal 2020 for both net revenue like-for-like stable to slightly lower and 5% to 10% adjusted operating income, is that excluding Younique as if you don't own it.

And then just more of a longer-term question so China you called it out a couple of times in the press release obviously, we've seen pretty significant growth out of that market from other beauty peers.

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

So on the first question, I think I'm very clear for the operating income and for the net revenues that's on the same, I mean that's on a like-for-like basis as well stable to likely down year-on-year.

Pierre 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 great example of the strength of our strategic position in - both the segment. I think we are definitely lagging behind in Consumer Beauty. And what we need to do well Mark, I'll be clearer because I'm going there on the 23th of September.

And we are going to spend some time with the team in China to understand what is exactly or what is exactly our opportunity and position. But yet we have a double-digit growth in this market so we are doing well. And but we can do better and I'm convinced, I have a bit of an intuition, but I would like to verify that intuition, when I am in the field.

And but broadly speaking, it is one of the mission critical market I want to reassure you on that. We are going to put a very, very decisive effort in making sure that we change - we don't change - the trajectory of our business, but we change the scale of our business in China.

And I know there are a couple of those are emerging market like this one that we must be present if we want to or as we want to have a strong global beauty business..

So we’ll have a high level of dedication, somehow I know it's a bit strange to comment, but the fact that it only represents today less than 5% of our net revenues is both a liability versus competition or a disadvantage versus competition.

But it’s also an advantage because we clearly have amounted stake or risk which are lower and more importantly, we have a lot of potential. So now the question is how do we address this potential, we believe the current organization the portfolio we have of course many, many opportunities and that would be for us to push it.

But I think we can grow China in a very, very meaningful manner, given where we stand as a starting point. And given the strength of the small I mean, of the strength of the business and positions we have which are not enough in terms of numbers and size, but which are real..

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

Okay, gentlemen and ladies. Thank you very much for your attention. I just would like to say that we are both very excited starting this year 2020. There are many things going on and now we’ll go back to business to put into practice this plan and to basically make it real. So thank you and see you on the road. Bye-bye..

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