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Coty Inc. (NYSE:COTY)
Q4 2018 Earnings Conference Call
Aug. 21, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Candace and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's fiscal fourth quarter 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 FCC for the company list factors that could cause actual results to differ materially from those forward-looking statements.

All commentary on organic net revenue reflects the comparison of legacy Coty and the P&G Beauty business on a combined net revenue basis at constant currency and in current empire 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, Candace, 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 more organic revenue growth and a very healthy improvement in adjusted breaking margins 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, far than all cylinders in fiscal '18 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 Chronomat and Marc Jacobs Daisy Love.

We particularly excited about the growth in ALMEA with the recent performances in China and Latin America. As you know, we added Burberry to the last year portfolio this year and we're very pleased with the progress to date and confident about the brand's future. Less than nine months after the acquisition of the license, we're launching Burberry Her, a great new fragrance scented on the London vite. We've also made significant progress in bringing the Burberry distribution in-house. In fiscal 2018 will be a year of continuing to normalize customer inventories while gaining the strong growth in emerging markets.

Fiscal '18 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 gel color while Wella was fueled by the continued strength by our color portfolio and by developments launch. In fiscal '18, our consumer beauty revenues declined 4% on a like for like basis, an improvement from -10% in fiscal '17.

Consumer beauty Europe in North America regions declined mid to high single digits against the backdrop of low single-digit declines in the mass beauty calculating 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, has strong high single digit, two double-digit in revenue growth in most markets, was offset by decline in Brazil due to our intervention on inventory pricing as well as the recent strike. Brazil continues to shock share gains and is growing more than 1,000 this rate and this continues even in the second half of fiscal '18 fumbling 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 are now focused on enhancing operating profit growth by delivering the remaining cost synergies and returning the business to low single digits like for like in 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 tier target of achieving the high teens adjusted operating margin over the next five years. We believe that each of our divisions plays a unique role in helping us to deliver this margin structure and profit growth. Specifically, we look for luxury to sustain its above-market topline expansion fueled by our strong innovation capabilities, geographic expansion, and ongoing development of our prestige skincare and cosmetic offerings. In professional beauty, we look at 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 stabilize the division top lines and improve the bottom-line and I will get into further details shortly. Against this backdrop, we view fiscal '19 as an important step in the right direction to achieve our medium-term ambitions. For fiscal '19, we are targeting well over 100 basis points of operating margin expansion, which combined with our target of flat to modest like for like in revenue growth, would deliver mid-teens adjusted operating income growth and a fiscal '19 adjusted EPS target of $0.74 to $0.78. We believe key drivers to achieve these targets are the delivering of the announced post-synergies, continued strong growth in luxury and professional beauty, and progress toward the stabilization of consumer beauty.

I will now apply the strategic framework that would drive our topline performance and Patrice will discuss the synergies and profit in more details in each 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 market on our potential, on driving innovation the store execution much harder, on digital transformation, and on rapid expansion in the emerging ALMEA markets. On the first point, what we've continued to drive the potential longevity of our global iconic friends, 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 Unique in consumer beauty, OPI and GHD in professional beauty, and Chloe, Marc Jacobs, Bottega Veneta in luxury. We're 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 we continue to improve our innovation pipeline and make 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 specially branded stores for Bourjois, Philosophy, and Gucci Beauty where consumers can connect with our brand DNA and products.

Our recent improved in-store execution of Covergirl in the US 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 toward 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 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 on China, which is a key area 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 '18 reinforces our ability to win in China. Fiscal '18 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 context 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 declines in traditional mass research 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 in Younique, will provide increasing and disproportionate growth contributions. Expanding on improving our share performance in North America/Western Europe, we will continue to build on the brand relaunches of Covergirl and Clairol. Covergirl accounts for low teens percentage of total consumer beauty sales and we have seen underlying improvement in the brand's 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 optimized assortment. However, we share risk to our shelf space in fiscal '19 tied to both supply chain disruptions as well as our historical performance. To effect 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, broke Covergirl into the top 10 color cosmetic brands in the US in terms of earned median value.

Operator

Ladies and Gentlemen: please standby, your conference call will resume momentarily. Once again, thank you for your patience and please continue to standby.

Camillo Pane -- Chief Executive Officer

Our focus I son accelerating growth through the brands that we know rate extremely well with consumers, including Wella, Max Factor, and Bourjois. Our Wella brand, which is the largest hair color brand in the consumer beauty division and has the majority of its revenues coming from ALMEA, gained share

Operator

Ladies and Gentlemen: please standby, your conference call will resume momentarily. Once again, thank you for your patience and please continue to standby.

Camillo Pane -- Chief Executive Officer

Apologies for the technical inconvenience. I'll resume from what I believe where was lost the connection. I was talking about Covergirl. To effect these challenges, we have continued to prioritize three key areas. First, our innovation pipeline, which focuses on core franchises. Second, our digital-first mindset, which has broke Covergirl into the top 10 color cosmetic brands in the US in terms of earned median value. And third, introducing new ways for consumers to interact with the brand, such as our planned Times Square flagship store.

Another key European/North American brand is Clairol. Although the relaunch of Nice 'n Easy helped to moderate the decline in consumerist allows in the US, we have seen stronger improvement in the UK and the recent increase in-house 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 rating as extremely well with consumers, including Wella, Max Factor, and Bourjois. Our Wella brand, which is the largest hair color brand in the consumer beauty division and as the majority of its revenues coming from ALMEA, gained share in several countries, including Mexico and Turkey.

We believe that the potential of the overall retail hair color category in ALMEA is substantial as consumers in many of these markets approach hair coloring as a social activity and we see significant opportunities for growth over the Wella brand in fiscal '19 and beyond. The joyful Parisian position of Bourjois racing its well in regions across the Middle East and we are in the very early days of introducing Bourjois in China, which allow us to push harder into the domestic price segment. On e-commerce, we still is more proportion of our consumer beauty business. It has delivered very good growth on the back of partnership in major e-retailers such as Amazon, Tmall, and jv.com.

While we still have a lot of work to do, we are 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 '18, the business shows strong growth on a full-year basis. However, it's fair to say that Q4 '18 was a challenging one for Younique as we lost one of Younique's biggest ever active presenter quarters in Q4 '17. We're now implementing announcement to the compensation program to further fuel present growth in loyalty as well 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 trend of social telling with the purpose of empowering women as entrepreneurs.

Now let me turn back to the outcome in fiscal year. Given the supply chain constraint that I already mentioned, financial performance across quarters in fiscal '19 will not be linear with the peak of the impact after the supply chain constraints to come in Q1 '19 and as more detail in Q2 '19. This will significantly impact both top and bottom line and together with the impact of our brand restoration program is expected to drive the low teens decline in our Q1 adjusted operating income year-over-year. Our fiscal '19 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 key financial priorities.

Patrice de Talhouet -- Executive Vice President and Global Chief Financial Officer

Thank you, Camillo, and good morning, everyone. I will start by providing a quick summary of our operating performance in Q4 '18 to round out the state I tell you I already provide for you. Why we continue to slide for a better supply results we were pleased to end fiscal '18 on a good note despite various internal and external headwinds. On a like for like basis, Q4 '18 revenue was 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 a goal of simplifying our footprint and processes and better bring our committed synergies, we have shut down two factories, restructured a third factory, consolidated several supply chain planning location into three planning hubs, consolidated discretion samples, and make vested TSA agreements in over 30 countries. We have accomplished an unprecedented level of transformation in record time and with virtually no disruption until the end of Q3 '18.

Nevertheless, during Q4 '18, the wrap up of one of our new planning hubs in the UK and the consolidation of one of our distribution centers in the US was disrupted impacting more fees of consumer beauty in Q4 '18 results but also the professional beauty results in North America. We do expect that this business integration related impact will be largely over by the end of first half 2019 and our fiscal '19 target take the disruption into consideration. Let me mention that at the Coty Inc. level, the Q4 '18 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 growth margin would have slightly improved versus last year. Our NTP investments remained in the mid-20s percentage in the quarter, which is fairly consistent with our year-to-date trend. The fourth quarter marked growth progress in the reduction of our fiscal 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 points 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 would represent an important finer step in the Coty integration journey. The one order, one shipment, one invoice program. This will make Coty a fully integrated company ever to sell, ship, and invoice all of our brands in an integrated way for our customers. It will allow significant simplification in our growth to market execution, increase productivity to 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 earnings of $750 million and have achieved the first half of this in June by fiscal '18 including $225 million in fiscal '18 alone. We expect to achieve a realization of the balance by the end of fiscal '20. Additionally, we achieved $417 million of our $500 million working tax to benefit target through the end of fiscal '18 largely driven by great progress with respect to payables. We continue to expect to incur one-off costs of approximately $1.3 billion of which approximately 1.2 billion I expect to be cash. As of fiscal '18, 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 of fiscal '18, we have insured opportunity of $370 million of this $500 million.

I will now like to explain more about the new considering program that we are announcing today. This program for which we will reserve a $250 million one-off charge over the next three years, is being run independently from our P&G integration efforts and the previously committed P&G integration cost program. And we plan to drive simplicity and generate flexibility in option LO to be able to view strategy investment such as those in the digital and Eco materials. 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 will expect incremental net savings to be up to $60 million over the next three years. In Q4 '18, we had cash outflows of approximately $16 million in connection with this program and we expect the remaining cost to impact fiscal '19 and fiscal '20 cash flows. Against this backdrop, let me provide some color on our cash flow. In fiscal '18, our '18 cash flow totaled $414 million down from $758 million in fiscal '17, which benefited from over $400 million related to the Italian lab between one-time cost accruals and the esoteric cash outlet.

While best in class working capital remains a key objective, we were disappointed to see working capital curation of about $100 million driven by receivables and inventory even as we have made strong progress on payables. Pre-cash flow ended the year at -$33 million. Now that the integration of the ex-P&G business is progressing toward its completion, we will be increasing our focus on cash generation and debt leveraging.

To that end, we have set a target of achieving a net debt adjusted EBITDA ratio of below four by the end of calendar year 2020. This target takes into account any minor and any 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. Seasonality of the P&G Beauty transaction we have rationalized a total of 14 bands from the combined portfolio. This includes the sale of Playboy and shares in recent months for total proceeds of $33 million. The sale of Cutex NGO in the last two years for $40 million and the termination or expiration of ten other brands including Cerruti, Celine Dion, Chopard, Esprit, Guess, Halle Berry, Lady Gaga, Love2Love, Summer, and Tim McGraw.

As I have previously mentioned, this disposal allows us to simplify the business and we expect this authorization to have a mid-single digit and early impact on EPS, which is already reflected in our fiscal '19 EPS target. On the other hand, at the start of Q1 '19, we took the opposite target for the luxury division to purchase the license right to our Escala fragrance brand for total consideration of Euro 35 million. This was a good business opportunity that allows us to develop the Escala brand through unconstrained innovation, creative support, and additional distribution.

Let me now walk you through the most important drivers of our leveraging plan. In fiscal '19, the leveraging we principally accrual through a combination of organic procedurals as well as improvement of our net working capital. In 2020, we expect the leveraging to benefit from a significant decline in the cash impact from our one-off cost total revenue. Our balance sheet remains strong and we have approximately 3 billion of liquidity to cover all the maturities in the short and medium term.

I am 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 remain then across the 50-50 ratio of fixed to floating debt over the next three years. Looking forward, we would expect that ratio to improve as we redo the notion of value of our floating rate debt.

Operator

Ladies and Gentlemen: please standby, your conference call will resume momentarily. Once again, thank you for your patience and please continue to standby.

Patrice de Talhouet -- Executive Vice President and Global Chief Financial Officer

Hey guys, sorry for the interruption. I was about to finish my thing. 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 am and will remain, a very strong advocate of the Coty story. I am confident that the strategy and team in place will ultimately lead the company to fulfill its mission. As a consequence, I will hold onto my Coty shares, will remain here until mid-September, and will assist Camillo with an overly 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 of the 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 valued 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 15th, 2018. Ayesha has been responsible for accounting operation and financial reporting including as Coty's principal accounting officer for more than two years. She brings 30 years of financial experience across several multi-national 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 Candace for Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen on the phone lines, if you'd like to ask a question at this time, please press * and then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. Once again, to ask a question at this time, please press *1. And our first question comes from Lauren Lieberman of Barclays. Your line is now open.

Lauren Lieberman -- Barclays -- Analyst

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. Could you talk a little bit about the outlook for '19? Are they inventory drawdowns that needed to take place? Is that done? Pricing in the right place and so on? Is '19 a year where we'll start to see what you're saying is very good in market retail and market trip performance start to come through in the 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 really protracted the negotiation with our customers. I'm pleased to say that the acquisition with the customers are largely complete so the price increase is being now in 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 our Coty performance in Brazil, we are growing more than double than the market and among the multi-nation outlets; we are the fastest growing multi-national company there in Brazil for the last couple quarters, so the second half of fiscal '18. This is also resulting because of the strength of our brand in terms of consumer pool and sell out. It's 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 protracted gains in consumer sell out across the capitals.

Operator

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

Robert Ottenstein -- Evercore -- Analyst

Great, thank you very much. On July 3rd there was an announcement of a fairly -- or at least seemed 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 the thought behind those changes and then also address what shelf space looks like going forward for consumer in the US based on what you're seeing today? Thank you.

Camillo Pane -- Chief Executive Officer

Thank you for the question, Robert. We have announced a reorganization of the market restructure 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 are being brought up to report directly to Laurent, the president of consumer beauty. The intention is clearly to have much stronger agility, so faster decision-making and having the proximity of the three CMOs straight to the president. There is also higher consumer centricity because the CMOs have split the portfolio in three more or less equal area from color cosmetics to hair color and body care and so on.

And then another change that we have made is that we have raised the position of the digital lead for the consumer beauty division so that also disperse who would directly report to Laurent given the importance of this rapidly growing channel and part of the business. So all these changes have been done, bringing onboard people with a great track record and with the objective of becoming more agile and continue to really make 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 are having in the last couple of months because as you could imagine, this has made the conversation with retailers a bit more complex.

And also as you can imagine, it's all a matter of looking at the productivity of the shelf. Now, what I said in my remarks, which is very cost-effective, we're seeing productivity improvement in Covergirl and we continue of course to work on this key measure of productivity. And as a matter of fact, what we've done in the US, we also changed in the intensive system for the sales force by moving from gross sales, which clearly 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 repair department has had.

Robert Ottenstein -- Evercore -- Analyst

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

Camillo Pane -- Chief Executive Officer

I think it's a mix -- I think that the supply is clearly brought on the table I different type of conversation 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 the majority at the end of Q1 and definitely at the end of first half of 2019. So clearly, that is a temporary issue, which unfortunately we had due to the consolidation of the plan incentive that Patrice mentioned.

The point that I make about productivity is more a protected point because we enhance from many years to many years of the brands that didn't have the right level of investment. Now the situation is different. We are investing in the brand. We have a much stronger pipeline. We're seeing improvements in the consumer sell out. I did mention that we have improved on both brands in the regulars and the sell-out.

And we plan to continue to invest behind the brands to continue these trends toward the stabilization. Never question the seasons are made and we continue to work with 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 '19 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 -- Analyst

Thanks, good morning. So I wanted to pick up, Camillo, on the investment and 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, sort of what are you embedding for marketing spending for fiscal '19?

Camillo Pane -- Chief Executive Officer

Thanks, Faiza. Look, the intention of the decline for '18 is fair to say that some of the new business that we've been now consolidated for 2018, such as GHD, naturally have a lower level of ATP spend, which clearly reduces the ratio on a year-to-year basis. We're also because we're doing all the brand relaunches, some Covergirl, and Clairol if you could imagine we have to allocate more resources to restore investments. And of course, these type of investments don't flow into the ATP line. And the third point, I think it's our continuous effort to invest more in digital media, which is typically more cost effective than traditional media. We do have now over 30% of our media spending that is focused on digital and in some brands who are actually over 50%.

So this difference I think clearly explains 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 NTP to generally remain in the mid-20s percentage. But I will not get really too obsessed about this percentage because there is always a room for increases or decreases because we will continue to move toward the digital media. And at the same time, we will consider high RI 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 -- Analyst

Hi, thanks. I was hoping you could walk through the drivers of free cash flow in fiscal '18 and why it came in so far below your expectations. I guess maybe there was an issue of receivables in inventories, hoping you can expand on that. And then looking forward on free cash lease, specifically mention the timing of cash synergy costs, and so are you expecting ongoing pressure on free cash flow into fiscal '19 and what level of free cash do you expect in relation to your original guidance of roughly $900 million to $1 billion in fiscal '19? Thanks.

Patrice de Talhouet -- Executive Vice President and Global Chief Financial Officer

Thanks for the question. So on the free cash flow in fiscal '18, what you should really be reminded of is first we have made very good progress in terms of payables because now we have achieved some synergies of $470 million investment of the $500 million target. So on this one, we have exceeded our expectation. It is true that we were disappointed by a couple of areas, mainly on inventories, a little bit related to our supply chain disruption.

Now what has also impacted quite a bit fiscal '18 is the cash effect of the one-off that we have accrued last year. And there's a lag time between the accrual and the cash that has impact '18 and that we also impact '19. And as a result of that, you should factor that into the equation into the best action of what we will generate in '19 and '20. This being said, for the first time we have clearly laid out a target of what we'd like to achieve and we achieve to be a ratio net debt to be a B04 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 -- Analyst

Hi, good morning everyone. I have a question just on the competitive dynamic. I think you, among your peers, have talked about intensifying competition. I don't know, maybe that forces you to lean a little bit more aggressively into your brand investments. If you could just give us a scope of kind of worldwide what you're seeing in terms of overall competition across channels and then across your different segments? Thank you.

Operator

Ladies and Gentlemen: please standby, your conference call will resume momentarily. Once again, thank you for your patience and please continue to standby.

Steph Wissink -- Jefferies -- Analyst

Camillo and Patrice, you've got Steph Wissink here, 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 luxury segments with respect to the competitive dynamic.

Camillo Pane -- Chief Executive Officer

So if I start with luxury, Steph, I think the competition and the competitive intensity has not changed massively. It's very intense without a doubt. But I'm very pleased to say that we've been growing share across most countries around the world. The performance in luxuries is absolutely excellent and we're driving shares not only with the innovation of which I mentioned in my remarks but also by growing share on our classics, our classic pillars as we're saying in prognosis. This is really pleasing. On top of it, we have a 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 untapped potential of OPI and GHD. These are very complementary products 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're also building our own B2B platform with the My Wella store, 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 D2C platform, on both GHD and OPI. And they are growing very, very fast.

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; we have 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 promise and results that we see on digital where Covergirl enter the top 10 in color cosmetic brands for ENV.

And also, we saw another reports on word of mouth where Covergirl is clearly starting to get traction in the conversation with consumers and beauty experts. Overall, we seem intense and competitive, but we do have a lot of tools. We should not forget that within consumer beauty, we also want to neutralize these headwinds by also making this proportionate growth in investments in ALMEA 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.

Andrea Teixeira -- JP Morgan -- Analyst

Good morning, it's Christina Brathwaite on for Andrea. I guess, first to circle back to the plan on shelf ways. 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 upslide to up model like to like sales guidance? A 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 decline? Does it really make sense for this level of dividends going forward? Do you think it's 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 the US is included in our targets for 2019. So that's the simple answer to that.

Patrice de Talhouet -- Executive Vice President and Global Chief Financial Officer

Yeah, and on the second one would 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 increase it but we will keep it flat probably in the foreseeable future.

Operator

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

Mark Astrachan -- Stifel -- Analyst

Thanks, hello everyone. I wanted to follow up first on the free cash flow question. I guess -- how should we think about free cash flow generation, given obviously what happened in fiscal '18 and I think roughly $340 million delta between accrued and paid costs through year-end fiscal '18. So should we expect another year of free cash flow approaching zero in fiscal '19? Should it improve even if not back to fiscal '17 level? Any sort of commentary you can give there. Just a broader question on EBIT margin targets. You reiterated high teens expectations.

I guess I don't get it. 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 stocks 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 that tend to be more actionable as it relates to the advertising and marketing spend. So just sort of any commentary there would be helpful.

Patrice de Talhouet -- Executive Vice President and Global Chief Financial Officer

Sure, Mark, so I will start with the free cash flow. So on fiscal '19, 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 in inventory. Second, we're gonna start to tighten the capex because, for the time being, we have a spend quite a bit amount of CapEx to integrate the two businesses together. So that should come back at the more normal level in '19 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 on our restructuring program that will still impact fiscal '19. And what you should see in 2020 is that as a result of that you will have the full operating leverage with the working capital improvement, significant impact positively the free cash flow. So I would say '20, we'll be back to normal and '19 we'll still be negatively impacted by the $400 million cash outflow due to the restructuring program.

Camillo Pane -- Chief Executive Officer

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 announcing the operating profit. So we've got to deliver to cost synergies and return the business to the low single digits like for like in revenue growth. So if you take 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 we continue even after the synergies are delivered, I believe that 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, track record in the industry but also track record within Coty. If you think of the solid growth and in-market results that we have achieved in the luxury division over the last one and a half years, plus we do have strong pipeline and a lot of room in geographic expansion, and we have the prestige skin color and prestige color cosmetic that we still have the development and we're only at the beginning.

And luxury, clearly, you can see has a high level of profitability, which we'll continue to really grow. Professional beauty's 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 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.

And ALMEA, I think at the beginning, of course, we got investing capabilities, but over time we believe that the margin will stop going up because we will cycle through all the investment capabilities and we will have our breaking 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.

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 -- Analyst

Good morning and thank you very much. I wanted to ask a bigger picture question, Camillo. When we go back to the PG integration, I'm trying to understand how much of what's been lost as far as this taking longer than we hoped is permanent versus just changes in the marketplace, decline in the opportunities available in mass beauty companies, and how much of this is just deferred?

Specifically, it seems like you hit a lot of your integration targets but just been negatively surprised by the evolution of the business. 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, that a couple of quarters ago I've already mentioned the medium-term targets of high teens of breaking 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 the 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 for that one-off charges. I think this answer is a better 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 went into recovery. A lot of this -- the business has contracted. First, we narrated the smaller business because when we took it, it was smaller because it took so long if I remember it was 16 months between the day of the announcement on July 15th and the day we took over the business in October 16th. So the business became smaller during that time and then second, I think that the loss and the decline that we have in consumer beauty over the last 18 months is something that we have to deal with because the market conditions have changed.

This is an industry that has rapidly changed. So our focus has to be on the future, has to be on continuing to improve our share and in productivities I mentioned, launching better products to really be like 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 -- Analyst

Great, thank you. Just on 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 old inventory on Covergirl? And then my bigger question is just around your view on low single digit like for like growth and better understanding your contribution by division. I'm assuming that you think that luxury and professional continue to grow at a similar run rate to fiscal '18 but I also am 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 on the growth potential by category.

Operator

Ladies and Gentlemen: please standby, your conference call will resume momentarily. Once again, thank you for your patience and please continue to standby.

Camillo Pane -- Chief Executive Officer

Olivia, this is Camillo, sorry again. I got all your question. The first one is on Covergirl inventory; so, first of all, let me clarify something. The supply chain disruptions happened because as you know, as part of the transition, we're consolidating the full -- we're optimizing the full supply and logistics footprint. And one of the things that we're doing, we're consolidating planning centers. So one of the planning centers, the many do color cosmetics in the UK, got distracted which means the capacity was affected. This is why we had this disruption, which as I said, we continue with the heavier impact in Q1 2019. Covergirl was not impacted a lot by this. This was mostly on agreement on Max Factor and other smaller brands.

So I just want to reassure you that the supply 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 -- we're toward the end. Because now all the new packaging -- I would say by December, end of calendar '18 we should have all the new packaging for all SKUs on shelf.

Now, your other question is how we have mentioned the target for 2019 of low single digits like for like net revenue growth. So let me tell you how this is composed a bit. As you rightly so said, we expect strong growth from luxury and professional beauty. I did mention before why we are confident about this two division continue to deliver above market performance in the for gaining share. And regarding consumer beauty, our goal is to mark and have a progress toward stabilization.

So yes, better performance than the -4% that we had in 2018 but not necessarily enough to stabilize the business already 2018. But the dynamic within this progress or this consumer beauty target is truly by also neutralizing the headwinds in North America/Europe by over proportionately invest 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 a confidence that these earnings model can work and bring consumer beauty to make progress toward 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 -- D.A. Davidson -- Analyst

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 that 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 questions from Lauren about the continued de-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 mark buys because the acquisition is lower than the international brands. But we're now also investing in innovation in packaging, in consumer connection by doing advertising, so we are actually treating and supporting our brands in a different way than how it was done before. Now, our plan to increase price will also help us to improve profitability in Brazil, which would allow us to continue with our trends. Looking at the international brands, the two main brands really that we have there, one is Wella in hair, which clearly we acquired from P&G. it's a #2 brand there in hair color in Grito.

And the second one is Adidas. And Adidas actually is a brand that we've been developing for the last year, which was not really present in Brazil before clearly the acquisition of the upper markets company. And that is one of the answers to your question about us using some of our global brands in Brazil, using the footprint there. And of course, we would 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. 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 topline expansion, professional beauty to accelerate growth by maximizing the untapped potential of OPI and GHD, and in consumer, beauty to stabilize the division topline and improve the bottom-line.

We recognize the Western Europe and North America which continues to be under pressure due to declines in traditional mass 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 growing China's lucky commerce Younique. We are 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.

Duration: 67 minutes

Call participants:

Camillo Pane -- Chief Executive Officer

Patrice de Talhouet -- Executive Vice President and Global Chief Financial Officer

Lauren Lieberman -- Barclays -- Analyst

Robert Ottenstein -- Evercore -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Joe Lachky -- Wells Fargo Securities -- Analyst

Steph Wissink -- Jefferies -- Analyst

Andrea Teixeira -- JP Morgan -- Analyst

Mark Astrachan -- Stifel -- Analyst

Jonathan Feeney -- Consumer Edge Research -- Analyst

Olivia Tong -- Bank of America -- Analyst

Linda Bolton Weiser -- D.A. Davidson -- Analyst

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