COTY
#Thank you, <UNK>, 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
<UNK> 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 <UNK>
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
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
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
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
So, regarding some of the launches or relaunches, I believe you have asked your question about Consumer Beauty, am I right?
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
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…
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.
20% of $750 million
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
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.
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
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
So, I would like to thank all of you for the attention and for the questions and I wish you a great day
