All right, good morning everyone. I'm Dara Mohsenian, Morgan Stanley's household products, beverage, and food analyst, and I'd like to welcome Pierre-Andre Terisse, Coty's Chief Financial Officer here today. It's certainly been a transformational period for Coty. They've come out recently with a new strategic plan under a new management team, as well as announced a significant strategic partnership with Kylie and a divestiture. It's a great time to have them here, and we really appreciate you coming. Thanks for coming. I'll turn it over to you for an overview in the beginning, and then we'll get into Q& A. Thanks.
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Okay. I think, yeah, you have the presentation. Good morning, everyone, and thank you for joining for today's, today's presentation. My name is Pierre-Andre Terisse. I've been the CFO of Coty for a little less than a year now, so it's still recent. I must say it's been, it's been quite a journey in that time, but I'm even more excited for what lies ahead for Coty and their incredible portfolio of iconic, iconic brands. Coty is a company with a very strong asset base with iconic brands across key categories and channels and scale position in key beauty markets.
built over time with some legacy brands, Lancaster for instance, some licenses afterwards with Calvin Klein, some acquired brands like, Rimmel 20 years ago and COVERGIRL more recently. Today, as we have done in the past, Coty is a company which is transforming itself and trying to adapt in a very fast, changing environment. For this, for the past one year, we have built a roadmap in three different stages to transform the company.
We spent initially many months, from January to basically June or July 2019, in a detailed review of the business, trying to understand the way we could improve the performance first and foremost, and that's what we have called the turnaround plan, which we have shared with the investment community in July with a detailed four-year roadmap to return Coty to revenue growth, and maybe more importantly to improve and step up the level of execution, step up the profitability and the margin to 14-16% and start delivering, deleveraging the business. That was step one, the turnaround, which we thought was obviously very, very important and a priority but not sufficient.
We have therefore designed a second phase, which aimed at both refocusing the group and recovering financial flexibility, and that is the opening of a strategic review on part of the portfolio, which is the professional beauty division, the hair brands, which exist as well on the consumer side and the Brazil business. Again, the intention with this strategic review is to refocus the group and the efforts of the group, both financial and human, on things on which we think we can make a difference and recover financial flexibility. The phase III of the roadmap is to accelerate. With phase I, we fix the fundamentals and the profitability of our portfolio. With phase II, we give ourselves the ability to go faster and to be more focused, and to have more flexibility.
With phase III, we try to accelerate. It's been obviously about a recent announcement, which is a partnership with Kylie Jenner, which is going to be one element helping us to step change the growth profile of Coty, allowing us to expand our presence in both premium cosmetic and skincare, which are two categories where we are currently under indexed and where we are focused on growing. Maybe I can go into each of the elements of the change and transformation program a bit in more detail. I'll start with phase I, the turnaround, and maybe with the two elements of the portfolio which are going to remain post the strategic review.
Starting with luxury or luxury division, we are the global leader in fragrances, with iconic brands like HUGO BOSS , Calvin Klein, Gucci, Chloé, Marc Jacobs. We have three out of the top 10 global fragrance brands. We are, and I think that's very important to have that in mind, we are a best-in-class operator in this category. There are not so many. We are one of the few, having a global and worldwide coverage. That makes us, that makes Coty a licensee of first choice.
While our fragrance portfolio is primarily licensed, the long-term nature of these licenses assures a steady and predictable revenue stream, with the average remaining life for our entire portfolio being roughly eight years, all the big licenses being in excess of five years, and most of them being renewed before the expiry, among other reasons because, again, we are an operator of which is best-in-class. Our strong capabilities in fragrance have allowed us to deliver strong results. First of all, to grow in line or ahead of the underlying luxury fragrance market for the last two years. We estimate that the growth of these categories is about 3%. In conjunction with that, we have been steadily improving our operating margins, reaching 15.5% in fiscal 2019.
We believe, by the way, that there is room for further margin expansion, growth, and margin expansion in the business, even if we don't expect it's going to be as strong and steep as it has been for the past two years. That's a big part of our business, the luxury division. The second one I want to comment on is the consumer beauty division, with an overall measured mass beauty market which has been declining 1-2% in the last three years. A moderate decline which is in large part due to the growing penetration of indie brands, which are sold predominantly in channels which are not measured and therefore not part of this measured universe. Even in the measured markets where we play, the performance is not uniform.
As you can see on the chart, in the U.S. mass cosmetic market, which is only part of the world market, which has been declining low to mid-single- digits, there is a clear trend of premiumization with a higher price tier growing nicely and much less so as you go deeper into mass. The roadmap towards stabilizing our market share for the division rests on better execution on the one hand, which is the most important element, but it includes as well gradual premiumization as well as an increased support for our brands, and we have started increasing the support behind our brands as soon as in the first quarter of this year.
A key part in improving our performance in consumer beauty is prioritizing the brands and markets we want to focus and meaningfully increasing our investment behind that to allow us to advertise them at scale and sufficiently. As we shared before, we will triple the percentage of priority brand country combinations supporting at scale to 60% by fiscal 2023. Another level is restoring our competitive pricing architecture for our brands. In the last few years, our price position has eroded as a result of over-promoting and being timid to take price warranty. We were absolutely looking for top line for the sake of top line. Today, we are looking for profitable, top line, and we are being much more selective. Therefore, we are changing this now.
Over the course of fiscal 2020 and beyond, we will gradually restore or increase our pricing architecture in all of our key markets. Specifically around this pricing architecture, in the last month, we have implemented a list price increase in a key European country for [select] Max Factor, and Rimmel SKUs. Based on the initial sellout data coming in, it is encouraging to see on the top left of the screen that the double-digit list price increase on these SKUs and on the right as well has resulted in only a moderate deceleration in unit volume. In other words, the elasticity is the one we expected. It is favorable.
That confirms our data analysis coming in that beauty is a relatively price-inelastic category, giving us room to drive sales and gross margin expansion through a disciplined and pragmatic approach to pricing and promotion and a very careful execution, obviously, because you need to do it, to do it well. As we shared in our recent earnings calls, we have seen other green shoots in our sellout performance. As you can see on the slide, the combination of increased media support, strong performance of innovation, and better in-store execution has driven significantly improved trends for Rimmel in the U.K. and Sally Hansen in the U.S. We aim to replicate these improvements across all of our core consumer beauty brands over time. That is for the turnaround and consumer beauty.
Let me now shift to phase II of our roadmap, which is the refocusing of our portfolio. As I was telling in the introduction, we have decided to engage a strategic review of the professional beauty business associated hair brands, Wella and Clairol, as well as the Brazilian operations. You can see on the slide some of the iconic brands included in this scope. They include Wella, they include Clairol, as I said, they include ghd, OPI globally, but also extremely strong brands locally in Brazil being Monange, Risqué, Paixão as well, which is not on the chart. That is clearly a set of very attractive brands and a very attractive portfolio. The objective of the review, very simple. It's unlocking shareholder value, of course.
It sharpened our focus on our fragrance, color cosmetic, and skincare core businesses, and by doing so, reducing the complexity and increasing our level of impact with potential proceeds to deleverage Coty with a target pro forma leverage at three times. About the business, which is under review, a few elements. The scope covers $2.7 billion of annual revenue. This includes $1.8 billion for professional beauty, which is a market or a division that has continued to see steady growth and where there is an incredible amount of customer loyalty and repeat purchase. Yeah, a very steady performer of the group. It also includes $900 million of revenue across the retail hair brands and our Brazil operation. The operating margin profile of the business under review is similar to that of professional beauty, which reported fully allocated operating margin of roughly 12% last year.
However, in a scenario of a divestiture, the margin is likely to be higher as not all of the allocated overhead costs will transfer with the business. We already received strong interest from both strategic and financial buyers, and we're advancing with the review process, which we anticipate to complete by next summer. That's phase II, which is obviously a very important one of the transformation. Phase III now is accelerate. I'll start with the recently announced strategic partnership with Kylie Jenner, which is one component, not the only one, but one component of accelerating our growth and which sets the foundation for a global beauty business. The compelling part of the partnership is that we are each, Kylie and us, bringing complementary assets and capabilities which will allow this business to grow and strengthen in the coming years.
On the one side, Kylie brings her incredibly strong brand equity as both a person and a brand with unparalleled social media reach amongst Generation Z, consumer. This exposure to much younger consumers is something currently lacking in our portfolio, as, as all of you know, in the portfolio of our leading beauty, beauty brands. On the other side, we as Coty bring our extensive R&D, manufacturing, distribution, and selling capabilities, as well as our expertise in core beauty categories across cosmetic, skincare, but also, fragrances. Together, therefore, we expect that we are going to create a lot of value and that the transaction is going to be accretive to our top line growth meaningfully by more than one point, and that our, the return are going to exceed our cost of capital by year three and maybe earlier than that.
Let me provide a quick overview of the Kylie beauty business, as I have done for the divest for the business and the review, for the strategic review. Kylie beauty generated approximately $177 million of revenue over the last 12 months. That would represent over 40% growth, relative to calendar 2018. That's clearly a brand, and I don't need to mention that we've had which has a strong momentum. The elements underpinning the performance are the DTC website, the direct-to-consumer website, where quarterly sales have remained steady year to date. The strong performance of the Kylie brand at Ulta, which has allowed new and existing Kylie consumer, Kylie cosmetic consumer to try our products. Last, the launch of a Kylie skincare line in May 2019, so very, very recently, which is off to a great start.
Importantly, these brands have been very profitable with a level of EBITDA margin which exceeds 25%. That is the first element of the acceleration. In addition to this new partnership, we see significant opportunity to improve our growth profile by expanding our existing brands in existing and new categories. While we are number one in a $36 billion luxury fragrance market, our license agreements with the fashion houses allow us to expand the brands into cosmetic and skincare, and that is actually most of the time what they would like us to do. It is a great untapped opportunity given these two markets, skincare and color cosmetics, luxury, together represent $60 billion and are growing high single- digit. We have already begun this expansion with a relaunch of Gucci makeup several months ago, and that has been performing very well.
In skincare, we do already have a small but strong base that we believe we can build on provided we focus on it, and that's also the reason why we want to be focusing on part of the portfolio on top of Kylie, which, as I said, is in skincare. Lancaster, which you see on the left, started off as a premium European skincare brand before moving to sun care today, and it has gained strong momentum in China as a skincare brand, ranked as the number six brand in China Sephora, which is for the moment the only channel where it operates. We believe the legacy of the brand, we believe, its position in this particular channel in China, the quality of the recipe, the quality of the research makes it something which we can expand and, and expand faster.
Philosophy, which remains a predominantly U.S. brand, is the number six skincare brand in the U.S. Here again, we think we can leverage it. Together, the traction achieved by these brands clearly exemplifies our R&D capabilities in skincare, which presents another incredible opportunities for us going forward. We are going to increase our focus on those. In prestige cosmetic, the Gucci lipstick launch has done incredibly well. We aim to continue the momentum by expanding the line into additional dolls as well as adding new cosmetic categories. For the moment, we only have lipstick. Our Burberry makeup line, which is currently primarily in Asia and favorite retail, is also performing quite well and sets the base for further growth.
That is in three steps, the roadmap of transformation we have built in less than a year at Coty to transform the company, the turnaround of the existing brands, in particular in consumer beauty, the step up in the profitability with the streamlining of our costs, the reshaping of the portfolio to increase our focus and regain financial flexibility, and the redeployment to accelerate our growth profile through, newly, through new partnership like Kylie, but also through going to new categories with existing brands. That is a very clear agenda. It is not only an agenda for tomorrow, it is an agenda for today. The change of performance starts now, and we expect fiscal 2020 to already show progressive versus last year with the following guidance which we have set in July and which we have recently confirmed.
Like-for-like net revenues, stable to slightly down year on year versus a -3.5% last year. An adjusted OI, which is going to be, like-for-like, up by 5-10% with a strong ANCP reinvestment. An adjusted EPS, which we expect to be mid-single- digits, growing mid-single- digits year on year, and a free cash flow, which we expect to continue improving. That is really what I wanted to tell you about the transformation of Coty. I think we have a little bit of time for questions now. Thank you.
Okay. Great. Thank you very much. Maybe we will start around the Kylie partnership. You quantified that you expect returns to exceed your WACC by year three. By my math, that sort of gets you to high single-digit revenue growth on that business to low double-digit revenue growth, depending on your assumptions for investment, etc.
Does that sound reasonable in terms of a growth profile for that business looking out over the next few years or what's implied in that ROIC calc? Then secondly, what are the key growth drivers as you look at that business? Obviously, it's had a very strong growth profile on its own in the last few years. As you look out over the next few years, what are the key growth drivers, keeping in mind its historical growth plus the advantages that Coty can bring to the Kylie business?
Yeah. I mean, the great thing about this deal is that, I mean, obviously, it's combining strength, and therefore there is a strong, rational, to create value together. It's also that it really lies on three different levers. One of them is, of course, top- line.
We believe the combination of the power of our brand and the ability to expand into adjacent categories, with the combination of our distribution abilities, manufacturing abilities, everything we can bring to it, to the partnership, the knowledge of the skincare category, the knowledge of the cosmetic category, but also the knowledge of the fragrance category, the nail category, can allow the brand to expand category-wise, channel-wise, but also geography-wise. We believe the scope of expansion is very high. There is a lot of upside on the deal. Beyond that, it is important to understand that we also expect to bring efficiency, the efficiency of the network of Coty, the efficiency through our ability to research and manufacture products. I mean, know how to manufacture, how to distribute, how to sell products.
The structure of the deal is interesting as well because it's a 51/49 JV. The value creation comes from these three different levels. Therefore, it's not a deal which is entirely reliant on growth, but it's a deal which is balanced.
On the geographic aspect, what gives you comfort that this is a business that has significant potential internationally? Obviously, it's done very well in the U.S. over time, but it's really a U.S.-centric business. What gives you comfort there's international expansion opportunity for the Kylie business?
We have research, and we know that some countries are going to be an obvious possibility for development. This is true in Europe in particular. This is true in the U.K. This is true in Germany.
There are some countries for which we need a little bit more work to make sure that we can expand. Asia is obviously one of them. Before Asia, in important geographies for Coty, we know we can expand. We know because we've researched the brands and its ability to grow.
Okay.
Turning to the base Coty business, you've talked about looking to take more pricing, looking out over the next few years, and that being a more important piece of the go-forward plans. How important is that to hitting your algorithm that you've outlined of that longer-term outlook? You know, conceptually, it makes a ton of sense, right? You get pricing, you get gross margin expansion, you have room to reinvest behind the business as you've articulated. Oftentimes, these categories and brands are very competitive.
What gives you the confidence that there is room to take pricing as you look out over the next few years? And maybe also just talk about the process of how you take pricing and how you decide where to take pricing or not.
Okay. There are two elements of confidence, maybe three elements of confidence. The first is maybe anecdotal, but it is important, that our CEO has experienced many turnarounds and has already gone through that kind of experience many times. I acknowledge that beauty is a different category, but he has his experience in other categories. The two others, which are more important maybe, are that it is a balanced plan.
It is not like we say we are gonna go with the existing brands, we are going to take pricing, and we'll get more money, and we'll improve the margins, and we'll reinvest. I mean, that would be easy but incorrect. The way to do it is not that one. The way to do it is we need to cut costs. We need to revisit the costs, both at the cost level and at the overhead level. We need to make sure that we recover some margins which allow us to invest beyond ANCP. At the same time, we need to have a look at the execution for each of the SKUs. We need to support the right SKUs.
We need to be a bit more selective in terms of SKUs, i.e., not cut SKUs for the sake of it, but replace, I mean, strengthen the winning SKUs by giving them more space and giving less space to the ones which are bringing, primarily, complexity. Find a way to increase velocity so that we can pass pricing because you cannot pass pricing if you do not have a good reason for that. Renovate the SKUs, innovate, have a process of renovation, innovation which is aiming at pricing, which has not been the, which is very much the case in the, in the industry overall. I mean, whenever someone is launching a new product, usually they want an added value for the consumer, and this added value for the consumer has an effect on the price.
That's something we've not been for many reasons. We've not been really doing. Now we want to do that. It is really a combination of all that and making sure that it progressively gets into traction. It is not going to be one day before, one day after, but it is going to be cost-saving, supporting the brands, reworking the SKUs, and doing that step by step. That is what gives me confidence. It is an articulated plan. The second thing which gives me confidence is that it works. Objectively, when we look at what we are doing at the moment, in the U.K., it works. In Germany, it works. It works for Rimmel. It works for the U.S., for Sally Hansen. It does not work everywhere. This is true.
I mean, when you look at the performance of COVERGIRL, for instance, for the past few months in the U.S., it's been improving a bit but not that much. We have not found the solution. We have found the solution in some markets, not in all of them. Now, what I believe is that it's a matter of consistency and persistency. We are going to continue trying. There are some markets in which, for whatever reason, there will be increased competition, and it's not going to be immediately working. We have to be patient, and we have to be consistent. It will work the same way it has been working for Sally Hansen, the same way it works for Rimmel, the same way it works for Max Factor in the U.K.
Okay. Great. That's helpful. Thank you very much for being here, Pierre-Andre. I think we're out of time, so we'll head to the breakout room.
Thank you.
Thank you so much.
Thanks.