Coty Inc

NYSE:COTY

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. My name is Candice and I will be your conference operator today. At this time, I would like to welcome everyone to Coty's Fiscal Fourth Quarter and 2018 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 21st. On the calls today are Camillo Pane, Chief Executive Officer; and Patrice de Talhouet, Executive Vice President, and Global Chief Financial Officer. Also joining the call is Christina Frank, who recently joined Coty as the Head of Investor Relations.

I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's press release and the reports filed with the SEC for the company list factors that could cause actual results to differ materially from those forward-looking statements.

All commentary on organic net revenue reflect the comparison of legacy Coty and the P&G Beauty business on a combined net revenue basis at constant currency and in current and prior year period, excluding the impact of acquisitions and divestitures 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'll now turn the call over to Mr. Pane.

[Camillo Pane, Chief Executive Officer]

Thank you, Candice, and welcome everybody to Coty's fiscal 2018 fourth quarter and full-year conference call. 2018 was a year of good progress for Coty as we stabilized the overall business and continued with our ambitious integration agenda. We have delivered our target of modest organic revenue growth and a very healthy improvement in the adjusted operating margin in the second half of the year. Nevertheless, much remains to be done, and I would like to use this call as an opportunity to not just review the results, but also remind you of our earnings model and the strategic framework that will guide us going forward.

The Luxury division fired on all cylinders in fiscal 2018 and had a great year with 6% like-for-like growth, driven by strength in all regions and travel retail. The division growth was fueled by the Gucci Bloom and Tiffany launches, strong performance by the Calvin Klein and philosophy brands, and excellent innovation and recent share gains with the launch of Chloe Nomade and Marc Jacob's Daisy Love. We're particularly excited about the growth in ALMEA, with terrific performances in China and Latin America.

As you know, we added Burberry to the Luxury portfolio this year and we are very pleased with the progress to date and confident about the brands' future. Less than nine months after the acquisition of the license, we are launching Burberry Her, a brand-new fragrance centered on the London vibe. We've also made significant progress in bringing the Burberry distribution in-house. And fiscal 2019 will be a year continuing to normalize customer inventories, while aiming a strong growth in emerging markets.

Fiscal 2018 was a solid year for the Professional Beauty division, with like-for-like growth of 1.7%, including very strong momentum in the ALMEA region and with key brands like Wella and OPI, despite the disruption in one of our North American warehouses. OPI growth was driven by very strong performance by GelColor, while Wella was fueled by the continued strength of our Color portfolio and by the WellaPlex launch.

In fiscal 2018, our Consumer Beauty revenues declined 4% on a like-for-like basis, an improvement from negative 10% in fiscal 2017. Consumer Beauty Europe and North America regions declined mid-to-high single digits against the backdrop of low single digit declines in the mass beauty category in these regions, aggressive competitive activity and supply chain disruption, due to the consolidation of the planning center at the end of Q4 2018.

The ALMEA region was stable, had stronger high-single digit to double-digit net revenue growth in most markets, was offset by decline in Brazil, due to our intervention on inventory pricing, as well as the recent trucker strike. Brazil continues to show share gains and is growing more than double the industry rate and this continues even in the second half of fiscal 2018 following our price increases. Overall, I remain unsatisfied with the current performance with the Consumer Beauty division and this will remain one of my key priorities.

Now let's turn to the future. As described in our press release, we’re now focused on enhancing operating profit growth by delivering the remaining cost synergies and returning the business to low-single digits like-for-like net revenue growth. This level of top line growth combined with our ongoing focus on reducing cost even after the synergies are fully delivered, underpins our medium-term target of achieving a high-teens adjusted operating margin over the next five years.

We believe that each of our divisions play a unique role in helping us to deliver this margin structure and profit growth. Specifically, we look for Luxury to sustain its above market top expansion, fueled by our strong innovation capabilities, geographic expansion, and ongoing development of our Prestige skincare and color cosmetics offerings.

In Professional Beauty, we look to accelerate our growth by maximizing the untapped potential of OPI and ghd, while capitalizing on Wella's market leading position. In Consumer Beauty, we aim to standardize the division top line and improve the bottom line and I will get into further detail shortly.

Against this backdrop, we view fiscal 2019 as an important step in the right direction to achieve our medium-term ambitions. For fiscal 2019, we're targeting well over 100 basis points of operating margin expansion, which combined with our target of flat to modest like-for-like net revenue growth would deliver mid-teens adjusted operating income growth and in fiscal 2019, adjusted EPS target of $0.74 to $0.78.

We believe key drivers to achieve these targets are the delivery of the announced cost synergies, continued strong growth in Luxury and Professional Beauty, and progress towards the stabilization of Consumer Beauty.

I will now outline the strategic framework that will drive our top line performance, and Patrice will discuss the synergies and profit in more details in his section. Our strategy to drive growth is focused on four distinct pillars, which are all equally relevant for all the three divisions. It includes focusing on brands which matter and have potential, on driving innovation in-store execution much harder, on digital transformation and on rapid expansion in the emerging ALMEA markets.

On the first point, we will continue to drive the potential longevity of our global iconic brands, such as COVERGIRL, Wella, Clairol, and Rimmel in Consumer Beauty, Wella Professionals in Professional Beauty, and Gucci, Calvin Klein, Burberry and Hugo Boss in Luxury.

In addition, we will focus on driving brands that we believe have high growth potential, including Bourjois, Younique in Consumer Beauty, OPI and ghd in Professional Beauty, and Chloe, Marc Jacobs Botegga Veneta and Tiffany in Luxury. We are pleased to say that the strength of these brands coupled with our disproportionate investment behind them has enabled this group to outperform and our target is to further enhance this outperformance.

We have improved and will continue to improve our innovation pipeline and made progress with our in-store execution strategy. Key examples are the partnership with third-parties to shorten our time to market on innovation, especially in countries like China, where localization is a key priority. And the launch of a highly select number of flagship brand stores for Bourjois, Philosophy, and Gucci Beauty where consumers can connect with our brand DNA and products.

Our recently improved the store execution of COVERGIRL in the U.S. is another example. Alongside our plans to rejuvenate our core business, we're equally focused on our digital transformation and I'm pleased to confirm that we're making great progress towards our goals.

In fiscal year 2018, e-commerce accounted for approximately 10% of our total net revenues, including Younique. Excluding Younique, which is an entirely e-commerce driven business, e-commerce net revenue grew more than 50% year-over-year. I'm very pleased that this change in focus has fueled strong e-commerce results, which are well ahead of the market across all three divisions.

We will continue to disproportionately invest in this growing channel, including further talent acquisition, data and product management systems, and in-house content creation capabilities, and expect e-commerce to make an increasing contribution to Coty's growth rate over time.

Finally, one of the most important areas for amplifying our growth potential is the work that we're doing to fuel momentum across all divisions in ALMEA. I already mentioned Brazil, so let me focus for a moment in China, which is a key area of opportunity for us. Our China presence is small today, but we have the right iconic brands for this market and our double-digit growth across all three divisions in fiscal 2018 reinforces our ability to win in China.

Fiscal 2018 gave us clear confidence in ALMEA's role in our earnings model and we believe going forward ALMEA will be an increasing growth contributor. Within the contest of this framework, let me talk about how we're going to achieve our medium-term objective of stabilizing Consumer Beauty. We recognize that Western Europe and North America will continue to be under pressure due to the declines in traditional mass retail channels.

Our target is to neutralize these headwinds by improving our share performance in this region, and most importantly, by driving aggressive growth from new channels, new markets and down the road to new businesses. Over the next few years, we believe rapidly expanding markets in ALMEA like China, Brazil, Middle East and Mexico, as well as growing channels like e-commerce and Younique will provide increasing and disproportionate growth contributions.

Expanding on improving our share performance in North America and Western Europe, we will continue to build on the brand relaunches of COVERGIRL and Clairol. COVERGIRL accounts for a low teens percentage of total Consumer Beauty sales, and we've seen underlying improvement in the brands net revenue and consumption trends. Our focus is on driving consumption productivity on shelves with our retailer partners, and we're making good progress on improving productivity through better innovation and optimize assortment.

However, we see risk to our shelf space in fiscal 2019, tied to both supply chain disruptions, as well as our historical performance. To affect these challenges, we're continuing to prioritize three key areas. First, our innovation pipeline which focuses on core franchises. Second, our digital first mindset, which has brought COVERGIRL into the top 10 color cosmetic brands in the US, in terms of earned media value.

[Technical Difficulty]

[Operator]

[Operator Instructions] Speakers, you may resume.

[Camillo Pane, Chief Executive Officer]

Apologies for the technical inconvenience. I'll resume from where I believe that we had lost the connection. So, I was talking about COVERGIRL. To offset these challenges, we're continuing to prioritize three key areas: first, our innovation pipeline which focus on core franchises; second, our digital first mindset, which has brought COVERGIRL into the top ten color cosmetic brands in the U.S. in terms of earned media value; and third, introducing new ways for consumers to interact with the brand, such as our plan Time Square flagship store.

Another key European North American brand is Clairol. Although the relaunch of the Nice'N'Easy helped to moderate the decline in consumer sellout in the U.S., we're seeing stronger improvements in the UK and the recently increase in household penetration for the first time in several years, gives us confidence, the stronger innovation execution would allow us to improve the trend. In ALMEA, our focus is on accelerating growth through the brands that we know resonate extremely well with consumers, including Wella, Max Factor and Bourjois.

Our Wella brand, which is largest hair color brand in the Consumer Beauty division, and has the majority of these revenues coming from ALEMEA, gain share in several countries, including Mexico and Turkey.

We believe that the potential of the overall retail hair color category in ALEMEA is substantial as consumers in many of this market's approach hair coloring as a social activity and we see significant opportunities for growth over the Wella brand in fiscal 2019 and beyond.

The joyful, Parisian positioning of Bourjois resonates well in regions such as the Middle East and we're in the very early days of introducing Bourjois in China, which allow us to push further into the masstige price segment.

On e-commerce, while still a small proportion of our Consumer Beauty business, it had delivered very good growth on the back of partnership in major retailers such as Amazon, Tmall and JD.com. While we still have a lot of work to do, we're actively adapting our product portfolio and processes to become a partner of choice in this rapidly growing channel.

Finally, Younique brings to Coty a differentiated and rapidly expanding business platform with a very attractive margin profile. In fiscal 2018, the business shows strong growth on a full-year basis. However, it's fair to say that Q4 2018 was a challenging one for Younique as we lapped one of Younique’s biggest ever active presented quarters in Q4 2017.

We’re now implementing announcement to the compensation program to further fuel presenter growth and loyalty, as well as strengthening our innovation pipeline. This coupled with new market expansion should enable sustainable strong net revenue growth and profit contribution as this platform is very well-positioned to capitalize on the trends of social selling with the partners of empowering women as entrepreneurs.

Now, let me turn back to the upcoming fiscal year. Given the supply chain constraint that I already mentioned, financial performance across quarters in fiscal 2019 will not be linear, with the peak of the impact of the supply chain constraints to come in Q1 2019 and a smaller tail in Q2 2019. This will have a significant impact on both top and bottom line, and together with the impact of our brand rationalization program is expected to drive the low teens decline in our Q1 adjusted operating income year-over-year. Our fiscal 2019 target takes the supply chain disruption into consideration.

I will now turn it over to Patrice, to speak about the fourth quarter and to elaborate on some of key financial priorities.

[Patrice de Talhouet]

Thank you, Camillo, and good morning everyone. I will start by providing a quick summary of our operating performance in Q4 2018 to round out the data Camillo has already provided for you. While we continue to strive for better topline results, we were pleased to end fiscal 2018 on a good note despite various internal and external headwinds. On the like-for-like basis, Q4 2018 revenues increased by 0.3%.

Camillo has already spoken about the supply chain disruption, but let me give a little more context to the scale of the supply chain changes we have implemented in the last 18 months. With the goal of simplifying our footprint and processes and delivering our committed synergies, we have shut down two factories, restructured a third factory, consolidated several supply chain planning locations into three planning hubs, consolidated six distribution centers and exited TSA agreements in over 30 countries. We have accomplished this unprecedented level of transformation in a record time and with virtually no disruption until the end of Q3 2018.

Nevertheless, during Q4 2018, the ramp up of one of our new planning hubs in the U.K. and the consolidation of one of our distribution centers in the U.S. was disrupted, impacting mostly the Consumer Beauty in Q4 2018 results, but also the Professional Beauty results in North America. We do expect that these business integration and related impacts will be largely over by the end of first half 2019 and our fiscal 2019 targets take the disruption into consideration.

Let me mention that, at the Coty, Inc. level, the Q4 2018 gross margin declined by 20 basis points, which was primarily driven by higher freight cost and the supply chain disruption. Without the supply chain issues, our gross margin would have slightly improved versus last year. Our A&CP investments, we made in the mid-20s percentage in the quarter, which is fairly consistent with the year-to-date trend.

The fourth quarter marked good progress in the reduction of our fixed costs base, although this is partially masked by FX translation impacts. In total, our Q4 adjusted operating income more than doubled year-over-year with 600 basis point of margin expansion to a margin of 10%. In total, we reported adjusted EPS of $0.14, bringing the EPS for the year to $0.69.

Let me now shift to the status of the integration. Last quarter, we told you about the program that represent an important final step in the Coty integration journey, the one order, one shipment, one invoice program. This will make Coty a fully integrated company, able to sell, ship, and invoice all of our brands in an integrated way for our customers. It will allow significant simplification in our go-to-market execution, increase our scalability potential, and with this final step, Coty will complete the most complex integration in the beauty industry.

In the context of our integration progress, we continue to expect cost synergies of $750 million and have achieved the first half of the synergies by fiscal 2018, including $225 million in fiscal 2018 alone. We expect to achieve a realization of the balance by the end of fiscal 2020.

Additionally, we achieved $470 million of our $500 million working capital benefit target through the end of fiscal 2018, largely driven by great progress with respect to tables. We continue to expect to incur one-off cost of approximately 1.3 billion, of which approximately 1.2 billion are expected to be cash.

As of fiscal 2018, we have accrued the $1.15 billion, with $860 million having been paid in cash, and the remaining $400 million still to come related to the P&G integration. One-time CapEx will remain in line with the original estimate of approximately $500 million, and as a fiscal 2018, we have incurred approximately $370 million of this $500 million.

I would now like to explain more about the new cost savings program that we're announcing today. This program, for which we will result a $250 million one-off charge over the next three years is being run independently from our P&G integration efforts and the previously communicated P&G integration cost program. And is meant to drive simplicity and generate flexibility in our P&L, to be able to fuel strategic investment such as those in the digital and e-commerce areas.

We expect to deliver up to $150 million of gross savings over the next three years as a result of this program with a significant portion reinvested in our digital transformation agenda. As a result of these investments, we would expect incremental net savings to be approximately $60 million over the next three years.

In Q4 2018, we had cash outflows of approximately $16 million in connection with this program and would expect the remaining cost to impact fiscal 2019 and fiscal 2020 cash flows. Against this backdrop, let me provide some color on our cash flow. In fiscal 2018, operating cash flow totaled $414 million, down from $758 million in fiscal 2017, which benefited from over $400 million related to the timing lag between one-time cost accruals and the associated cash outlay.

While best-in-class working capital remains a key objective, we were disappointed to see working capital of deterioration of approximately $100 million, driven by receivables and inventory, even as we have made strong progress on payables. Free cash flow ended the year at negative $33 million.

Now that the integration of the ex-P&G business is progressing towards its completion, we will be increasing our focus on cash generation and their regime. To that end, we have set a target of achieving a net debt adjusted EBITDA ratio of below 4 by the end of calendar year 2020. The target takes into account, any minor M&A activity we might consider.

Talking about M&A, let me take a moment to address our brand divestiture as mentioned on the last earnings call. Since announcing the P&G Beauty transaction, we have rationalized the total of 14 brands from the combined portfolio. This includes the sale of Playboy and Cerruti in recent months for total proceeds of $33 million. The sale of Cutex and JLo in the last two years for $40 million and the termination or expiration of 10 other brands, including CLC [ph], Celine Dion, Chopard, Esprit, GUESS, Halle Berry, Lady Gaga, Love 2 Love, Summer [ph] and Tim McGraw.

As I have previously mentioned, these disposals allow us to simplify the business and we expect these portfolio rationalization to have a mid-single digit annual impact on EPS, which is already reflected in our fiscal 2019 EPS target.

On the other hand, at the start of Q1 2019, we took the opportunity for the Luxury division to purchase the license right to our Escada fragrance brand for a total consideration of EUR35 million. This was a good business opportunity that allows us to develop the Escada brand through unconstrained innovation, creating support and additional distribution.

Let me now walk you through the most important drivers of our deleveraging plan. In fiscal 2019, deleveraging will principally occur through a combination of organic profit growth, as well as improvement of our networking capital. In 2020, we expect deleveraging to benefit from a significant decline in the cash impact from our one-off cost program.

Our balance sheet remains strong and we have approximately 3 billion of liquidity to cover all debt maturities in the short and medium-term. I'm pleased to report that in the beginning of August, we took advantage of good market condition to further solidify our balance sheet by extending the maturity of our interest rate swap portfolio such that we maintain a comfortable 50-50 ratio or fixed to floating debt over the next three years.

Looking forward, we would expect that ratio to improve as we reduce the notional value of our floating rate debt.

[Technical Difficulty]

[Operator]

[Operator Instructions] Speakers you may resume.

[Patrice de Talhouet]

Hey guys, sorry for the interruption. So, I was about to finish by saying, finally, I would like to share some thoughts regarding this morning's announcement that I assume you all have seen. After having been with Coty for five years, I feel incredibly proud of what has been achieved and the progress against our transformation agenda.

My time here has been a very intense and fulfilling professional journey. My commitment has been such that I have neglected critical topics in my personal life. Therefore, knowing that we are getting close to the completion of fully integrating the ex-P&G business, I now feel comfortable making the decision to resign from Coty.

I'm and will remain a very strong advocate of the Coty story. I'm confident that the strategy and team in place, we will ultimately lead the company to fulfil its mission. As a consequence, I will hold onto my Coty shares, will remain CFO until mid-September and will assist Camillo with an orderly transition thereafter.

[Camillo Pane, Chief Executive Officer]

Thank you, Patrice. As you all know, Patrice has been a tremendous contributor to Coty for nearly five years and a valuable partner to me for almost two years. He managed our finances during Coty's transformation from a newly public emerging contender in beauty to our current status as a nearly 10 billion global beauty powerhouse, including several complex M&A transactions.

With the integration that P&G Beauty acquisition largely complete, we now have the foundation to allow us to focus on the next stage of our journey. I thank Patrice for his valid service and personal commitment. As Group CFO, Patrice has been an important member of our leadership team and has been instrumental in helping Coty undertake the most ambitious integration in the beauty industry. I wish him well in his next chapter.

With Patrice's announcement today, we now plan to begin a full search for our next CFO. We will look to appoint a successor, as soon as reasonably possible and to ensure a smooth transition.

I'm pleased to announce Ayesha Zafar, Coty's Senior Vice President, Group Controller, will serve as the Interim Chief Financial Officer, effective September 15, 2018. Ayesha has been responsible accounting operations and financial reporting, including as Coty's Principal Accounting Officer for more than two years as she brings 30 years of financial experience across several multinational consumer goods and pharmaceutical companies, including The Hertz Corporation, Bristol-Myers Squibb, Campbell Soup Company, PepsiCo, and Colgate-Palmolive Company. I thank Ayesha in advance for stepping into this role.

Now back to Candice for Q&A.

[Operator]

Thank you. [Operator Instructions] And our first question comes from Lauren Lieberman of Barclays. Your line is now open.

[Lauren Lieberman, Barclays]

Great, thank you, good morning. I was hoping we could talk a little bit more about Brazil, because the commentary around in-market performance is really interesting and particularly contrasting the reported results. So, could you talk a little bit about the outlook for 2019. So – are the inventory drawdowns that needed to take place, is that done? Pricing in the right place and so on? Is 2019 a year where we will start to see what you're saying is very good in-market retail, in-market share performance have to come through overall? Thanks.

[Camillo Pane, Chief Executive Officer]

Thanks, Lauren. I'll be happy to expand on Brazil. As I mentioned also in the last call, we clearly had a price increase, which led to the stocking and to clearly protract the negotiation with our customers. I'm pleased to say that the negotiation with the customers are largely complete, so the price increase has been now accepted and we continue to see share gains in the market on most of our brands, actually all of our brands. If I look at the overall Coty performance in Brazil, we are growing more than double than the market and among the multinationals, we are the fastest growing multinational company there in Brazil for the last couple of quarters, for the first – sort of second half of fiscal 2018. This is also resulting, so the strength of our brand in terms of consumer pool and sellout is also resulting in some space gain, because clearly, we are also talking to our customers about readjusting our shelf space, now that we continue to see – we continue to see protracted gains in consumer sellout across a couple of groups.

[Operator]

Thank you. And our next question comes from Robert Ottenstein of Evercore. Your line is now open.

[Robert Ottenstein, Evercore]

Great, thank you very much. On July 3rd, there was an announcement of a fairly or at least seem to be a fairly significant reorganization of the consumer group, including changes in the leadership, talking about more focus on the key brands. I'm wondering if you could go into that in a little bit more detail, kind of explain, kind of, you know the thought behind those changes. And then also address the – what shelf space looks like going forward for consumer in the U.S. based on what you're seeing today? Thank you.

[Camillo Pane, Chief Executive Officer]

Thank you for the question Robert. So, we have announced a reorganization of the market structure within the Consumer Beauty division. So, now we have three CMOs, which have come on board or have been with the company already for a while, but have been brought up to report directly to Laurent, the President of Consumer Beauty. The intention is clearly to have a much stronger agility, so faster decision making and having the proximity of the three CMOs straight to the President. There is also higher consumers centricity, because the CMOs have split the portfolio in three more or less equal area from color cosmetic to hair color and body care and so on.

And then another change that we've made is that we have raised the position of the digital lead for the Consumer Beauty division, so that also this person will report directly to Laurent, given the importance of this rapidly growing channel and part of the business. So, all these changes have been done, clearly bringing onboard people with a great track record and with the objective of becoming more agile and continue to really making progress in this division.

Your second question was about I think shelf space. I mentioned in my remarks that we do see some headwinds in the shelf space in North America. This is driven by the supply chain constraints that we're having in the last couple of months, because as you could imagine, this has made the conversation with the retailers a bit more complex. And also, if you can imagine, it's all a matter of looking at the productivity of the shelves.

Now, what I said in my remarks, which is very positive is the fact that we are seeing productivity improvement in COVERGIRL and we will continue of course to work on this key measure of productivity. And as matter of fact, what we've done in the U.S., we also changed the incentive system for the salesforce by moving from gross sales, which really means volume to net revenues, which is clearly a KPI that is much more focused on productivity and much more in line with the KPIs that our retailer partners have.

[Robert Ottenstein, Evercore]

And just in terms of the shelf space, based on your conversations with the retailers, is the issue purely one-off supply or are there other concerns?

[Camillo Pane, Chief Executive Officer]

I think it's a mix. I think the suppliers clearly brought on the table a different type of conversation in the last couple of months, but I also want to repeat what Patrice said, which is that we strongly believe that the supply issues will be over, you know the majority at the end of Q1 and definitely at the end of first half of 2019. So, clearly there is a temporary issue which unfortunately we had due to the consolidation of the planning center, the warehouses that Patrice mentioned.

The point that I had made about productivity is more a productive point because clearly comes from many years – many years of the brands that indeed having the right level of investment. Now the situation is different. We are investing with the brand. We're having much stronger pipeline. We are seeing improvements in consumer sellout, as Patrice mentioned that we have improvement on both brands in net revenues and the sellout and we plan to continue to invest behind the brands to continue the strengths towards the stabilization.

Nevertheless, the decisions are made and we continue to work with the retailers to accept this one. But we're very confident also about the innovation pipeline that we're bringing in 2019, the second half of 2019 on both brands, and this is one of our objectives to offset the headwinds.

[Operator]

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

[Faiza Alwy, Deutsche Bank]

Hi, thanks, good morning. So, I wanted to pick-up Camillo on the investment in brands. So, it looks like the A&P spending in the year and in the quarter was below last year and below what you talked about historically, sort of around the 25% to 26% of sales. So, could you give us some color on the year-over-year decline in the quarter specifically. And also, as we think about your outlook for next year, so what are you embedding for marketing spending for fiscal 2019?

[Camillo Pane, Chief Executive Officer]

Thanks, Faiza. Look, in terms of the decline for 2018, it's fair to say that some of the new business that we've been now consolidated in for 2018, such as ghd naturally have a lower level of A&CP spend, which clearly reduces the ratio on a year-to-year basis. We're also – because we're doing all the brand relaunches, on COVERGIRL and Clairol, as you can imagine, we have to allocate more resources into in-store investments, and of course this type of investments don't flow into the A&CP line.

And the third point, I think it's our continuous effort to invest more on digital media, which is typically more cost effective than traditional media. We do have now over 30% of our media spending there is focused on digital and in some brands we're actually over 50%. So, these three trends clearly, I think explain, I would say fully, the decline that you've seen in the ratio in 2018.

Now, looking at the future, I think, based on these strategic plans that we have across brands and division, we would expect A&CP to generally remain in the mid-20s percentage, but I will not get really to, let's say, obsessed about this percentage, because there is always a room for increases or decreases, because we will continue to move money towards the digital media, and at the same time, we will consider higher investment to support. So, this sort of dynamic is something that we will manage on a quarterly and annual basis as we see fit.

[Operator]

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

[Joe Lachky, Wells Fargo Securities]

HI, thanks. I was hoping you could walk through the drivers of free cash flow in fiscal 2018 and why it came in so far below your expectations. And I guess, maybe there was an issue with receivables and inventories, hoping you could expand on that. And then looking forward on free cash flow, you specifically mentioned the timing of cash synergy costs and – so you're expecting ongoing pressure on free cash flow in the fiscal 2019 and what level of free cash do you expect in relation to your original guidance of roughly $900 million to $1 billion in fiscal 2019? Thanks.

[Patrice de Talhouet]

Thanks for the question. So, on the free cash flow in fiscal 2018, what you should really be remind is that, first, we have made very good progress in terms of payables, because now we had achieved some synergies of $470 million versus the $500 million target. So, on this one, we have exceeded our expectation. It's true that we were disappointed by a couple of areas, mainly on inventories, little bit related to our supply chain disruption.

Now, what other also impacted quite a bit in fiscal 2018 is the cash effect of the one-off that we have accrued last year, and there is a lag time between the accrual and the cash that has impacted 2018 and that will also impact 2019. And as a result of that, you should factor that into the equation into the [indiscernible] we will generate in 2019 and 2020. This being said, for the first time, we've cleared out a target of what we would like to achieve in the leverage to be a ratio of net debt-to-EBITDA to be below 4 [ph] by the end of the calendar 2020.

[Operator]

Thank you. And our next question comes from Steph Wissink of Jefferies. Your line is now open.

[Steph Wissink, Jefferies]

Hi, good morning everyone. We have a question just on the competitive dynamics. I think you among your peers have talked about intensifying competition and then maybe that forces you to lean a little bit more aggressively into your brand investment. Could you just give us a scope of kind of worldwide what you're seeing in terms of overall competition across channels and then across two different segments? Thank you.

[Operator]

[Operator Instructions] Speakers, you are now reconnected.

[Steph Wissink, Jefferies]

Camillo and Patrice, you have got stuck [indiscernible] I'm not sure if my line is still open, but our question was related to the competitive dynamics. I think you among your peers have cited competition across markets of the world. And I'm wondering if you can just talk a little bit more about what you're seeing in-market across particularly your Consumer and your Luxury segments with respect to the competitive dynamics? Thank you.

[Camillo Pane, Chief Executive Officer]

So, if I look – if is I start with Luxury Steph, I think the competition – the competitive intensity has not changed massively, it's very intense without any doubt. But I'm very pleased to say that we have been growing share across most countries around the world. The performance in Luxury is absolutely excellent and we're driving share not only with the new innovation, which I mentioned in my remarks, but also by growing share on our classic, on our classic pillars as we say in fragrances and this is really pleasing. On top of it, we have very high strong growth in China, in travel retail and clearly the rollout of philosophy in Asia and especially in China is also driving our performance.

When I look at Professional Beauty, of course remains clearly competitive and very intense. Here, what I would say is that we have a couple of dynamics which I believe are important for us. One is the uncapped potential of OPI and ghd. These are very complementary product to our go-to-market capabilities, which are very strong in the B2B in the service area.

And I think when you look at e-commerce, what is important is that we are also building our own B2B platform with the MyWellaStore, which would allow really to take orders directly online from our very fragmented customer base, and we should not forget also the ghd, we have our own B2C platform both ghd and OPI and they are growing very, very fast.

Going on Consumer Beauty, which is also part of your question. This is where we have seen an increase in competitive activity, which is clearly something that we are working through. We have increased our investments with – on COVERGIRL and Clairol. This is something very different from the past where these two brands didn't really receive enough attention.

The innovation pipeline is also stronger, and we are confident because we do have a strong innovation pipeline coming in 2019 and we're also very much encouraged by the promising results that we see on digital where COVERGIRL enter the top 10 in the color cosmetic brands for EMV and also, we saw other reports from word of mouth where COVERGIRL clearly is starting to get attraction in the conversation with consumers and beauty experts.

So, overall, we see intense and competitive, but we do have a lot of tools and we should not forget that within Consumer Beauty, we also want to neutralize these headwinds, by also making disproportionate growth and investments in ALMEA, e-commerce and Younique. These are three areas or three platforms where we have high level of confidence for the future for the reason that I explained before in my remarks.

[Operator]

Thank you. And our next question comes from Andrea Teixeira, JP Morgan. Your line is now open.

[Christina Brathwaite, JP Morgan]

Good morning It's Christina Brathwaite on for Andrea. I guess, first if I go back to the plan on shelf space, I just want to put a finer point on the question. Are you embedding that shelf space continues to contract in the back half of the year in that flat to up modest like-for-like sales growth guidance? And then second question, can you just talk about your commitment to dividend payment, just given kind of the contraction that you've seen in free cash flow and continuing to decline. Does that really make sense for this level of dividend going forward, do you think it is sustainable for your business?

[Camillo Pane, Chief Executive Officer]

I'll answer the first question, Christina, and then Patrice will answer the one on the dividends. Yes, the risk that we see on shelf space in U.S. is included in our targets for 2019. So that's the simple answer to that.

[Patrice de Talhouet]

Yes. And the second one will be as sweet and short, the dividends, we are going to maintain the dividends going forward. We don't have any plan to decrease it or to increase it, but we will keep it flat, probably in the foreseeable future.

[Operator]

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

[Mark Astrachan, Stifel]

Thanks. Hello everyone. So, I wanted to follow-up first on the free cash flow question. So, I guess, how should we think about free cash flow generation given obviously what happened in fiscal 2018 and I think roughly $340 million delta between accrued and paid costs through year-end fiscal 2018. So, should we expect another year of free cash flow approaching zero in fiscal 2019, should it improve even if not back to fiscal 2017 level. So, any sort of commentary you can give there? And then, just a broader question on EBIT margin target. So, you reiterated the high teens expectations, I guess, I don't get it. I mean, spend is going up for just about every one of your competitors out there. I think it's fair to say that certainly from a stock standpoint, most don't believe you can achieve it. So, why stick with it at this point, what gives you confidence you can do that without harming the brands of the business, particularly on the consumer side, it tends to be more actionable as it relates to the advertising and marketing spend. So, just sort of any commentary there would be helpful.

[Camillo Pane, Chief Executive Officer]

Sure, Mark. So, I will start with the free cash flow. So, on fiscal 2019, what you should expect is that, first, we are going to work on the two levers of the working capital that we did not explore to the full extent so far, which are the receivables and inventory. Second, we are going to start to tighten the CapEx because for the time being, we have spent quite a bit amount of CapEx to integrate the two businesses together. So that should come back up to a more normal level in 2019 and even more so in 2020.

And third, even more precisely on the one-off, what you should estimate is that we expect to have roughly a $400 million of cash for more in our restructuring program that will still impact fiscal 2019. And what you should see in 2020 is that as a result of that, you would have the full operating leverage with the working capital improvement, a significant impact to positively the free cash flow. So, I would say 2020 we will be back to normal and 2019 will still be negatively impacted by the $400 million cash outflow due to the restructuring program.

[Patrice de Talhouet]

So, the second part Mark of the question is clearly on the high teens, medium term target over the next five years. So, the focus is now clearly for us in enhancing the operating profit. So, we've got to deliver the cost synergies and return the business to the low-single digits, like-for-like net revenue growth. So, if you take this top line – this level of top line growth, and you combine it with the synergies, the new cost saving program and the ongoing focus on reducing cost, which will continue even after the synergies are delivered, I believe that we can – this basically underpins our medium-term target of achieving the high teens adjusted margin.

And when you look at the earnings model underneath, clearly, the first thing that we really look at is to sustain an above-market top line expansion on Luxury. We believe we can do that. We have a fantastic team with a great track record in the industry, but also track record within Coty. If you think of the, sort of growth and in-market results that we've achieved in the Luxury division over the last 1.5 year, plus we do have a strong pipeline, a lot of still room in geographic expansion and we have the Prestige skin color and the Prestige color cosmetic that we still have to develop and we are only at the beginning.

When I look in Luxury clearly, you can see has – is a high level of profitability, which will continue to really grow. Professional Beauty is also something that we aim to accelerate. I mentioned OPI and ghd, and clearly the strength on Wella color, but also there will be operating leverage because we will continue to invest more on digital educational tools and digital sales tool rather than – on our current high fixed cost base.

And then looking at Consumer Beauty, this is what I said before, our goal is, we recognize that Western Europe and North America will continue to be under pressure and we will work hard to neutralize these headwinds, and of course, trying to grow our share in these two regions, but we're very confident in the future in the new markets, in ALMEA, in e-commerce and Younique. And Younique has a much higher marginality or margin ratio versus everything else in Consumer Beauty. e-commerce is also proving to us to be a profitable channel and over time, once we build better supply capabilities for e-commerce, this will become even more profitable.

In ALMEA, I think at the beginning of course we were investing capabilities, but over time, we believe that the margin will start going up because we will cycle through all the investment capabilities and we will have operating leverage there as well. So, I think by explaining to you a bit of the earnings model again, hopefully I've answered your question of why we believe that over the next five years, we can achieve the high teens pretty much.

[Operator]

Thank you. And our next question comes from Jonathan Feeney of Consumer Edge Research. Your line is now open.

[Jonathan Feeney, Consumer Edge Research]

Good morning and thank you very much. I want to ask a bigger picture question Camillo, and when we go back to the PG integration, I'm trying to understand what's – how much of the – what's been lost as far as is this taking longer than we hoped, is permanent versus just changes in the marketplace, decline in the opportunity available to mass beauty companies, and how much of this is just deferred. And specifically, I mean, it seems like you have hit a lot of your integration targets, but just been negatively surprised by the evolution of the business. So, if you could just comment about when you think about the kind of targets you were thinking about two or three years ago, do we ever get to those at this point and if so, when? Thank you.

[Camillo Pane, Chief Executive Officer]

So, I think the first thing that I need to say is that a couple of quarters ago, I have already mentioned that the medium-term targets of high teens operating margin, and I did say that the original targets, which were discussed before the closing of the P&G transactions are not relevant anymore. They're not relevant anymore for a couple of reasons. One is, because we have inherited the smaller business, and the second one, because we have faced headwinds and challenges.

And the third one is because the organization was designed for a larger business, and clearly with a higher fixed cost base. Hence the restructuring – the cost saving program that I'm announcing today with the $250 million of one-off charges. So, I think this answers a bit of question on what is our medium-term outlook versus the original numbers that were discussed before the transactions.

In terms of your first question, which is, are these headwinds permanent or have we lost the piece of business or we wanted to recover, and a lot of this – the business has contracted. First, we inherited the smaller business, because when we took it was smaller, because it took so long. You might remember, it was 16 months between the day we announced in July 15, and the day we took over the business in October 16, and so the business became smaller during that time.

And then second, I think that the loss – the decline that we have in Consumer Beauty over the last 18 months, it's something that we have to deal with because the market condition have changed. This is an industry that is rapidly changing. So, our focus has to be on the future, has to be on continuing to improve our share and in productivity, as I mentioned, launching better products to really delight our consumers and invest behind our brands. But at the same time, we've got to make smart choices right. So ALMEA, Younique, e-commerce, these are the areas with high marginality that we need to invest, because there is a lot of growth opportunities there.

[Operator]

Thank you. And our next question comes from Olivia Tong of Bank of America. Your line is now open.

[Olivia Tong, Bank of America]

Great, thank you. Just on the COVERGIRL, a quick one, the supply chain disruptions you talked about, is that on the new stuff or clearing out old inventory, and at this point are you done getting the old inventory out on COVERGIRL. And then my bigger question is just around your view on low single-digit like-for-like growth and better understanding of your expectations and contribution by divisions, because I'm assuming that you think that Luxury and Professional continue to grow at a similar run rate in fiscal 2018. But I also -- I'm kind of a little confused in terms of your views on Consumer Beauty. Is your expectation that it continues to decline, but decline at a lesser pace or that it actually stabilizes to flat. Just given all the volatility in your growth in recent quarters, it would be helpful to just understand the view on the growth potential by category. Thank you.

[Operator]

[Operator Instructions] Speakers you're now reconnected.

[Camillo Pane, Chief Executive Officer]

Olivia this is Camillo. Sorry, again. I got all your questions. So, I'll reply to all your questions – you didn't cut off before. So, I got it. So, the first one is on COVERGIRL inventory. So, first of all, let me clarify something. The supply chain disruptions happened because as part of the transition, we're consolidating the full – we're optimizing the full supply and logistic footprint and one of the things we're doing, we're consolidating planning centers.

So, one of the planning centers that mainly do color cosmetics in the U.K. got distracted, which means the capacity was affected, then this is why we had this disruption, which as I said, will continue with heavier impact in Q1 2019. COVERGIRL was not impacted a lot by this. This was mostly on Rimmel and Max Factor and in other smaller brands. So, I just want to reassure you that the supplying disruption doesn't relate to COVERGIRL.

And to answer your second question, the inventory sell-through of the old stock, so the sell-through of the old stock of inventory of COVERGIRL is almost finished, it's going through, you know we are towards the end, because now all the new packaging – I would say, by December, end of calendar 2018, we should have all the new packaging for all SKUs on shelf.

Now, your other question is how – we have mentioned a target for 2019 of low single digits like-for-like in net revenue growth. So, let me tell you how this is composed a bit. So, as you rightly so said, we expect strong growth from Luxury and Professional Beauty. I did mention before, why we are confident about this division continue to deliver above market performance and therefore gaining share.

And regarding Consumer Beauty, our goal is to mark and have progress towards stabilization. So, yes, better performance at the minus 4% that we had in 2018, but not necessarily enough to stabilize the business already 2018. But the dynamic within this progress of this Consumer Beauty target is truly by also neutralizing the headwinds in North America and Europe by over proportionately investing in ALMEA, Younique and e-commerce.

The results that we saw in ALMEA, because if you exclude Brazil, ALMEA grew double-digits in Consumer Beauty and the results that we have in Younique and clearly the results in e-commerce that I mentioned today really give us confidence that these earnings model can work in bringing Consumer Beauty to make progress towards stabilization.

[Operator]

Thank you. And our next question comes from Linda Bolton Weiser of D.A. Davidson. Your line is now open.

[Linda Bolton Weiser, DA Davidson]

Thanks, Hi. So, when you originally bought your Brazilian business, my understanding was that it would help you to penetrate into Brazil with some of your other mass market brands. Is that still the plan long-term and has any progress been made at all in trying to use their positioning in Brazil to expand some of your other brands into that market? Thanks.

[Camillo Pane, Chief Executive Officer]

Thanks for the question Linda. Absolutely, I think Brazil remains one of our powerhouse within Consumer Beauty, and I mentioned before, to one of the earlier question from Lauren about the continuing market success, which gives us confidence for 2019 and beyond about Coty Brazil in Consumer Beauty.

Looking at our portfolio, I think it's important, you know 80% of our portfolio there is made by local brands and these brands are really brands which are loved by consumers and the good news is that there are always marked buys, because the acquisition is lower than the international brands, but there are also – we are now also investing in innovation and packaging in consumer connection by doing advertising.

So, we are actually treating and supporting our brands in a different way on how it was done – it was done before. Now, our plan to increase price would also help us to improve profitability in Brazil, which will allow us to continue with our plans.

Looking at the international brands, the two main brands really that we have there, one is Wella in hair retail, which clearly, we acquired from P&G, it's the number 2 brand there in hair color and in retail. And the second one is Adidas, and Adidas is actually is a brand that we've been developing for the last year, which was not [indiscernible] in Brazil before clearly the acquisition of the other markets company. And that is one of the answer to your question about how we're using some of our global brands in Brazil, using the footprint there. And of course, we will consider more in the future.

[Operator]

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Pane, for any closing remarks.

[Camillo Pane, Chief Executive Officer]

So, I would like to make a couple of closing remarks. So, first, I would like to thank Patrice one more time and wish him well in his next chapter. Second, I would like to reemphasize the importance of the earnings model that I've gone through today, which will underpin our medium-term target. We look for Luxury to sustain its above market top line expansion. Professional Beauty to accelerate growth by maximizing the untapped potential of OPI and ghd. And in Consumer Beauty to stabilize the division top line and improve the bottom line.

We recognize that Western Europe and North America will continue to be under pressure, due to declines in traditional mass retail channels, but our target is to neutralize these headwinds by improving our share performance in these regions and most importantly by driving aggressive growth rapidly in expanding markets, as well as grow in channels like e-commerce and Younique. We are incredibly energized and excited about the year ahead and I look forward to talking to you again in November. Thank you very much.

[Operator]

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