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Item 1. Business

2020-08-27 compared with 2019-08-28 · 72 added, 61 removed, 85 unchanged (61% of the section changed)

is one of the world’s largest beauty companies with a rich entrepreneurial heritage and an iconic portfolio of brands.

is one of the world’s largest beauty companies with a rich entrepreneurial heritage and an iconic portfolio of brands across fragrance, color cosmetics, hair color and styling, and skin and body care.

Founded in 1904, Coty has grown into a multi-segment beauty company with market leading positions in both North America and Europe.

Today, we are the global leader in fragrance, a strong number two in professional salon hair color & styling, and number three in color cosmetics.

Over the past several years, the transformational acquisition of The Proctor & Gamble Company’s beauty business (the “P&G Beauty Business”) and our other strategic transactions have strengthened and diversified our presence across the countries, product categories and channels in which we compete, building a strong beauty platform.

We completed the last steps of the complex integration of the P&G Beauty Business in 2019.

Under the direction of our new senior leadership, we undertook a broad review of our business to develop a strategic framework to position us for sustainable performance and long-term success, and in July 2019, we announced a turnaround plan (together with changes to our organizational structure and the co-location of most of our executive team and corporate functions in a centralized management headquarters in Amsterdam, the “Turnaround Plan”) designed to:

• Rediscover growth , by improving execution and fundamentals;

• Regain operational leadership , by reducing complexity and costs;

Build a culture of pride and performance , by creating a culture that balances discipline and creativity, while fostering team spirit and engagement.

As we implement this multi-year Turnaround Plan, we are focused on rejuvenating our core business, by focusing our investments in fewer brands and markets, increasing shelf productivity through improved assortment, improving mix management, and developing a stronger and margin-accretive innovation pipeline.

In order to fuel both increased investment in the business as well as improved profitability, we are working to lower our cost of goods sold through improved productivity in our existing manufacturing footprint, reducing product range complexity, and lowering fixed costs through a simplified organizational structure.

We are organized into three divisions, which are also our operating and reportable segments:

Consumer Beauty, Luxury and Professional Beauty.

Our organizational structure is product category focused, putting the consumer first, by specifically targeting how and where they shop and what and why they purchase.

Each division has end-to-end responsibility to optimize the consumers’ beauty experiences in their relevant categories and channels and to translate this into profitable growth.

Consumer Beauty is primarily focused on color cosmetics, retail hair coloring and styling products, body care and mass fragrances.

Luxury is primarily focused on prestige fragrances, premium skincare and premium cosmetics.

Professional Beauty is primarily focused on hair and nail care products for salon professionals.

For segment and geographic area financial information and information about our long-lived assets, see Note 4 , “ Segment Reporting ” in the notes to our Consolidated Financial Statements, and for information about recent acquisitions or dispositions of any material amount of assets, see Note 3 , “ Business Combinations ” in the notes to our Consolidated Financial Statements.

In connection with our Turnaround Plan, we expect to move from the current organizational structure to a structure based on regional commercial business units in Europe, Middle East & Africa (“EMEA”), Americas and Asia Pacific for the combined Luxury and Consumer Beauty businesses.

Such regional business units will be supported by central Luxury and Consumer Beauty marketing teams.

Professional Beauty is expected to remain a distinct business unit.

We anticipate that our operating and reporting segments would change upon completion of these reporting structure changes and the related changes in the financial information provided to our CEO, which is expected to occur in the third quarter of fiscal 2020.

The following chart reflects our iconic brand portfolio by segment:

Coty Consumer Beauty

Coty Professional Beauty

Alexander McQueen

Clairol Professional*

ghd (good hair day)*

Kadus Professional*

Bottega Veneta

Londa Professional*

Sassoon Professional

System Professional*

Wella Professionals*

Sally Hansen*

Stella McCartney

Tiffany & Co.

Through targeted strategic transactions, we have strengthened and diversified our presence across the countries, categories and channels in which we compete, building a strong beauty platform.

The recent King Kylie transaction and the pending transaction with Kim Kardashian West complement our existing portfolio.

As we continue to transform our Company, we are focused on the fragrance, color cosmetics and skin care categories, in both our prestige and mass beauty businesses.

Following a strategic review, we announced, on June 1, 2020, the entry into a definitive agreement with Rainbow UK Bidco Limited (“KKR Bidco”) (an affiliate of funds and/or separately managed accounts (“KKR Funds”) advised and/or managed by Kolberg Kravis Roberts & Co.

and its affiliates (“KKR”)), regarding a strategic transaction (the “Wella Transaction”) for the sale of Coty’s Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands (together, “Wella Business”).

Pursuant to a related separation agreement (the “Separation Agreement”), the Wella Business will be separated from Coty as a stand-alone, separately managed business, of which KKR Funds will own approximately 60% and Coty will own the remaining approximately 40% .

As part of the separation, through a separate transitional service agreement and related agreements to be entered into at closing of the sale (the “Wella TSA”), Coty will provide ongoing financial, distribution, operations and other services for the Wella Business, in certain cases for up to 24 months following the closing of the sale, subject to an extension for a period of up to three months for certain transition services.

In addition, KKR Rainbow Aggregator L.P.

(“KKR Aggregator”) (an affiliate of KKR Funds) has in a separate transaction invested an aggregate of $1 billion directly into Coty through the issuance of convertible preferred stock.

Assuming full conversion of these shares of convertible preferred stock and no other changes in capitalization, JABC would remain Coty’s largest shareholder, with approximately 50% ownership in the Company.

KKR Aggregator would be the second largest shareholder, with an approximate 17% stake.

The Wella Business is presented in our financial statements as discontinued operations.

Unless otherwise noted, the discussion in this Annual Report only focuses on results of continuing operations.

Building on the multi-year turnaround plan launched in July 2019 (the “Turnaround Plan”), we are implementing a comprehensive transformation agenda (the “Transformation Plan”) which aims to stabilize and gradually accelerate revenue growth, improve our profitability through gross margin growth and cost control, optimize our operating model for speed and agility, accelerate e-commerce and digital growth, and deleverage our balance sheet.

In 2020, we made organizational changes to reduce geographic fragmentation and costs.

In response to the COVID-19 pandemic, in May 2020, we expanded the Turnaround Plan to implement a 25% reduction of our cost base, which does not vary with revenues, by the end of fiscal 2023, including reprioritizing projects providing larger cost reduction benefits, organizational restructuring, an adaptation of our supply network and organization as well as a reduction of certain discretionary expenses.

We are continually reviewing ways to accelerate and amplify the transformation of the Company, including through the implementation of additional initiatives in connection with our T ransformation Plan.

All dollar amounts in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.

Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision makers (“CODM”) in deciding how to allocate resources and assess performance.

The Company has designated its Chief Executive Officer as the CODM.

In connection with our Turnaround Plan, the Company's CODM changed the reporting structure used to allocate resources from the previous category focused organizational structure that included three operating and reportable segments:

Luxury, Consumer Beauty and Professional Beauty, to a structure based on regional commercial business units.

These changes were implemented during the three months ended March 31, 2020.

For segment financial information and information about our long-lived assets, see Note 5— Segment Reporting in the notes to our Consolidated Financial Statements, and for information about recent acquisitions or dispositions, see Note 4—Business Combinations, Asset Acquisitions and Divestitures in the notes to our Consolidated Financial Statements.

The following chart reflects our iconic brand po rtfolio:

Mass Beauty Prestige Professional Beauty

Adidas Alexander McQueen Clairol Professional*, **

Beckham Burberry ghd (good hair day)*, **

Biocolor* Bottega Veneta Kadus Professional*, **

Bozzano* Calvin Klein Londa Professional*, **

Bourjois* Cavalli Nioxin*, **

Bruno Banani Chloe O P I*, **

Clairol*, ** Davidoff Sassoon Professional, **

CoverGirl* Escada* Sebastian*, **

Enrique Gucci System Professional*, **

Jovan* Hugo Boss Wella Professional*, **

Max Factor* Jil Sander WeDo Professional*, **

Monange* Kylie Jenner

Nautica Lacoste

Paixao* Lancaster*

Rimmel* Marc Jacobs

Risque* Miu Miu

Sally Hansen* Nikos

Stetson philosophy*

Wella*, ** Tiffany & Co.

007 James Bond

* Indicates an owned beauty brand.

We have a diverse portfolio of over 75 brands, some owned and some licensed, and we employ different models to create a distinct image and personality suited to each brand’s equity, distribution, product focus and consumer.

** Indicates brand included in Wella Transaction

We have a diverse portfolio of over 75 brands (including brands associated with the Wella Business which will be transferred to the standalone entity in the Wella Transaction), some owned and some licensed, and we employ different models to create a distinct image and personality suited to each brand’s equity, distribution, product focus and consumer.

For our licensed brands, we work with licensors to promote brand image.

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We utilize in-depth brand and market data analytics to develop branding, merchandising and marketing execution strategies to maximize the consumer experience and build a better business.

Starting in fiscal 2020, we expect to shift working media resources to a select number of brand/country combinations, which we believe represents a significant opportunity for revenue and gross margin improvement, and to implement a tactical, in-store strategy for the others.

We have begun to shift working media resources to a select number of brand/country combinations, which we believe represents a significant opportunity for revenue and gross margin improvement, and to implement a tactical, in-store strategy for the others.

Distribution Channels and Retail Sales

We market, sell and distribute our products in over 150 countries and territories, with dedicated local sales forces in most of our significant markets.

We have a balanced multi-channel distribution strategy which complements our product category focused divisions.

The Consumer Beauty division primarily sells products through hypermarkets, supermarkets, drug stores and pharmacies, mid-tier department stores, traditional food and drug retailers, and dedicated e-commerce retailers.

The Luxury division primarily sells products through prestige retailers, including perfumeries, department stores and e-retailers and duty-free shops, with travel retail sales channels accounting for 14% of the division’s net revenues.

We have a balanced multi-channel distribution strategy which complements our product categories.

Our mass beauty brands are primarily sold through hypermarkets, supermarkets, drug stores and pharmacies, mid-tier department stores, traditional food and drug retailers, and dedicated e-commerce retailers.

The prestige products are primarily sold through prestige retailers, including perfumeries, department stores, e-retailers, direct-to-consumer websites and duty-free shops.

The Professional Beauty division primarily sells products to nail and hair salons, nail and hair professionals and professionals’ stores, through both direct sales forces and e-commerce platforms.

Due to the impact of COVID-19, we have focused on expanding our e-commerce and direct-to-consumer channels.

We also sell our products through third-party distributors.

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however, certain retailers accounted for more than 10% of net revenues within certain geographic markets and segments.

In fiscal 2019, Wal-Mart, our top retailer, accounted for approximately 6% of our net revenues.

In fiscal 2020, Walmart, our top retailer, accounted for approximately 7% of total Coty Inc.

net revenues from continuing operations.

Innovation is a pillar of our business.

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This research and development is done both internally and through affiliations with various universities, technical centers, supply partners, industry associations and technical associations.

As of June 30, 2019 , we owned approximately 2,000 utility patents and patent applications globally and approximately 1,800 design patents.

A number of our products incorporate patented, patent-pending or proprietary technology.

In addition, several of our products and/or packaging for our products are covered by design rights protections.

Our principal research and development centers are located in the U.S.

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We do not perform, nor do we commission any third parties on our behalf to perform, testing of our products or ingredients on animals except where required by law.

We manufacture and package approximately 77% of our products, primarily in facilities located in the United States, Europe, Brazil, China, Russia, Mexico and Thailand.

During fiscal year 2020, we continued to manufacture and package approximately 80% of our products (including the Wella Business products), primarily in facilities located in the United States, various countries in Europe including Russia, Brazil, China, Mexico and Thailand.

We recognize the importance of our employees at our manufacturing facilities and have in place programs designed to ensure operating safety.

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To capitalize on innovation and other supply chain benefits, we continue to utilize a network of third-party manufacturers on a global basis who produce approximately 20% of our finished products.

As part of our ongoing Transformation Plan, we are exploring options to further optimize our supply chain operations.

The principal raw materials used in the manufacture of our products are primarily essential oils, alcohols and specialty chemicals.

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We believe that we currently have adequate sources of supply for all our products.

Following the acquisition of the P&G Beauty Business, we engaged in a transformation of our supply chain aimed at integrating and optimizing the combined organization.

With this footprint transformation now complete, we continue to focus on optimizing our supply chain processes in order to increase efficiency and reduce our order lead times.

We have experienced disruptions in our supply chain from time to time, including in connection with our past restructuring efforts, and we work to anticipate and respond to actual and potential disruptions.

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While we consider our patents and copyrights, and the protection thereof, to be important, no single patent or copyright, or group of related patents or copyrights, is material to the conduct of our business.

Products representing 41% of our fiscal 2019 net revenues are manufactured and marketed under exclusive license agreements granted to us for use on a worldwide and/or regional basis.

Products representing 59% of our fiscal 2020 net revenues from continuing operations are manufactured and marketed under exclusive license agreements granted to us for use on a worldwide and/or regional basis.

As of June 30, 2020, we maintained 27 brand licenses.

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Certain brand licenses provide for automatic extensions, so long as minimum annual royalty payments are made, while renewal of others is contingent upon attaining specified sales levels or upon agreement of the licensor.

We renewed two key brand licenses in fiscal 2019.

While many of our licenses are long term, licenses relating to certain of our brands are up for renewal in the next few years, including seven licenses up for renewal in 2020.

These seven licenses together generated approximately 1% of our consolidated net revenues in fiscal 2019.

Currently, t he average renewal term of the full licensed portfolio is approximately 8 years.

Five of our brand licenses are up for renewal during fiscal 2021, of which only four license renewals require licensor approval and together accounted for less than 2% of fiscal 2020 revenues from continuing operations.

Additionally, none of our top 9 licenses expire within the next five years, other than one with an automatic renewal that is not contingent upon licensor consent nor specified sales levels..

For additional risks associated with our licensing arrangements, see “Risk Factors—Our brand licenses may be terminated if specified conditions are not met, and we may not be able to renew expiring licenses on favorable terms or at all” and “Risk Factors—Our failure to protect our reputation, or the failure of our partners or brand licensors to protect their reputations, could have a material adverse effect on our brand images”.

As of June 30, 2019 , we had approximately 19,000 full-time employees in over 46 countries.

In addition, we employ a large number of seasonal contractors during our peak manufacturing and promotional season.

We expect our overall headcount to decrease as we continue our efforts to restructure and rationalize our business in connection with our Turnaround Plan.

As of June 30, 2020, we had approximately 18,260 full-time employees in over 46 countries, including approximately 5,900 employees of the Wella Business.

In addition, we typically employ a large number of seasonal contractors during our peak manufacturing and promotional season.

During fiscal year 2020, we adjusted our workforce through furlough or other reduction as we implemented our response to COVID-19.

We expect our overall headcount, as well as the use of seasonal contractors, to decrease as we continue our efforts to restructure and rationalize our business in connection with our Transformation Plan.

Our employees in the U.S.

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For more information, see “Risk Factors—Changes in laws, regulations and policies that affect our business or products could adversely affect our business, financial condition and results of operations.”

Our sales generally increase during our second fiscal quarter as a result of increased demand by retailers associated with the holiday season.

We also experience an increase in sales during our fourth fiscal quarter in our Professional Beauty segment as a result of stronger activity prior to the summer holiday season.

Working capital requirements, sales, and cash flows generally experience variability during the three to six months preceding the holiday period due in part to product innovations and new product launches and the size and timing of certain orders from our customers.

We generally experience peak inventory levels from July to October and peak receivable balances from September to December.

During the months of November, December and January of each year, cash is normally generated as customer payments for holiday season orders are received.

For more information, see “Risk Factors—Our business is subject to seasonal variability.”

The Company’s sales generally increase during the second fiscal quarter as a result of increased demand associated with the winter holiday season.

Financial performance, working capital requirements, sales, cash flows and borrowings generally experience variability during the three to six months preceding the holiday season.

Product innovations, new product launches and the size and timing of orders from the Company’s customers may also result in variability.

The Wella Business also generally experiences an increase in sales during its fourth fiscal quarter as a result of higher demand prior to the summer holiday season.

However, the mix of product sales can vary considerably as a result of changes in seasonal and geographic demand for particular types of products, as well as other macroeconomic, operating and logistics-related factors, as evidenced by the impact of the COVID-19 pandemic.

Availability of Reports

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business