Kevin Monaco - Treasurer, Senior Vice President & Head-Investor Relations Bart Becht - Chairman & Interim Chief Executive Officer Patrice de Talhouët - Executive Vice President & Chief Financial Officer.

Dara W. Mohsenian - Morgan Stanley & Co. LLC Stephanie Schiller Wissink - Piper Jaffray & Co (Broker) William Schmitz - Deutsche Bank Securities, Inc. Olivia Tong - Bank of America - Merrill Lynch Jason M. Gere - KeyBanc Capital Markets, Inc. John A. Faucher - JPMorgan Securities LLC Joe B. Lachky - Wells Fargo Securities LLC Wendy C.

Nicholson - Citigroup Global Markets, Inc. (Broker) Lauren Rae Lieberman - Barclays Capital, Inc. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc. Javier Escalante - Consumer Edge Research LLC Linda B. Weiser - B. Riley & Co. LLC.

Good morning, ladies and gentlemen. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Conference Call, discussing Third Quarter Fiscal 2016 Financial Results and providing an update on its anticipated P&G Beauty Brands transaction.

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, May 3. Thank you. I will now turn the call over to Kevin Monaco, Coty's Senior Vice President, Treasurer and Investor Relations. Mr.

Monaco, please go ahead..

Good morning, and thank you for joining us. On today's call are Bart Becht, Chairman and Interim CEO; and Patrice de Talhouët, Executive Vice President and Chief Financial Officer. I would like to take a moment to discuss the format of this morning's call.

For the first 30 minutes, we will provide a short overview of the quarter and year-to-date financial results, and we will open the call for some questions on these financial results.

We will then spend the next 60 minutes to provide an in depth update on the P&G Beauty Brands transaction, followed by questions and answers only on the P&G Beauty Brands transaction. Please reserve all questions on the merger transaction and the long-term financial outlook for the Q&A, following the transaction update.

To the extent we don't get through all the questions in the 90 minutes allotted, we'd be happy to take additional questions following the call. I would like to remind you that many of our comments may contain forward-looking statements.

Please refer to our press release, our investor deck, and reports filed with the SEC where you will find factors that could cause actual results to differ materially from these forward-looking statements. All discussions of net revenues are on a like-for-like basis.

In addition, except where noted, the discussion of our financial results and our expectations do not reflect certain non-recurring and other one-time charges. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release. I will now turn the call over to Bart..

Thank you, Kevin. This morning, we'll provide you with a brief overview of Q3 and year-to-date results, as well as a detailed update on the P&G Beauty Brands transaction. Our efforts to create a healthy platform for Coty to become a strong global leader and challenger in beauty remains on track.

Q3 revenues, which declined minus 1% on a like-for-like basis, were consistent with our expectations for muted like-for-like trends through the end of the fiscal year as we gradually rationalize non-strategic product lines and businesses.

Power Brands on the other hand continue to outperform the overall business, both for the quarter and year-to-date. While Q3 adjusted operating profit was down due to one-off items, including the negative impact on the Brazilian Beauty Business as a result of the change in commercial terms to conform with Coty standards.

Our year-to-date adjusted operating profit was flat with solid 7% growth at constant currency. For the full fiscal 2016, we continue to expect like-for-like revenue performance relatively consistent with the year-to-date trends.

We anticipate high-single digit growth in adjusted operating income at constant rates for the full year, offset by negative FX impact with the adjusted operating income in-line with the prior year at actual rates. These results and outlook are consistent with our strategy to build a healthier and better business despite subdued revenue growth.

In summary, we believe we are well on track to build a healthy platform for Coty to become a global leader and challenger in the beauty industry, and provide the right basis to drive profitable growth and deliver shareholder value over time. I will now hand over the call to Patrice..

Thank you, Bart, and good morning, everyone. Total Q3 net revenues declined 1% like-for-like with an improvement in the Fragrance segment's revenue trends, compared to the first half, and moderate Color Cosmetics segment growth in-spite of the decline in the U.S. retained end markets.

Fiscal year-to-date, the adjusted gross margin increased a very strong 110 basis points to 61.2%, reflecting our continuous efforts in driving supply-chain efficiencies.

We keep on building a better business even in the face of soft top-line trends with stable adjusted operating income fiscal year-to-date with a stronger 7% increase at constant currency. The year-to-date adjusted operating margin grew 40 basis points.

Our year-to-date adjusted diluted EPS was $1.08, compared to $0.91 in the prior year, in part reflecting the benefit from a favorable tax settlement of $113.3 million this year, compared to a $32.5 million settlement in the prior year period.

Turning to the capital structure, we took the opportunity to raise an incremental €465 million in term loans and use the proceeds to partially repay borrowings under our revolving credit facility that were drawn to fund the acquisition of the Brazilian Beauty Business.

Our strong balance sheet and cash flow generation allowed us to continue to advance on our strategic and financial objectives. Fiscal year-to-date, we generated $445.3 million in operating cash flow and $330 million in free cash flow, with free cash flow up over $100 million versus the prior year.

During the quarter, we did not repurchase any share and expect to remain opportunistic with our existing $500 million share repurchase authorization. This concludes our discussion of our Q3 and fiscal year-to-date results.

Bart and I will now take couple of questions on the results, after which we will provide you with a comprehensive update on the P&G Beauty Brands transaction..

Our first question comes from Dara Mohsenian with Morgan Stanley. Your line is open..

Hey, guys, looking at the top-line in the quarter, the Americas result was pretty weak, at down 8%. But the international results generally looked pretty strong across the board.

So I was just hoping you could give us some detail on if that international strength can continue going forward? And also any issues in America you think cause results to get better going forward?.

Yeah. I would say both the European as well as the emerging market business basically has done a bit better, basically in the quarter which is encouraging. Like you said the U.S.

remains for the time being the soft spot, clearly in part driven by the fact that last year, we had a very successful basically you know innovation, which was called Sally Hansen Miracle Gel, which we're now lapping, so which clearly is part basically of the softness.

So we're looking forward basically to correct that at some point in time but I would say, you put your finger on it is the U.S., basically is the area where we still have room for improvement..

Okay. And then in terms of A&P, can you give us an update on what you're spending levels were year-over-year in the quarter? And as you look going forward, obviously you're generating very significant cost savings.

Are you assuming that more of that gets reinvested back behind the business to drive the top-line acceleration? And how should we think about spending back behind the business as you look out over the next couple of years on the heritage Coty business?.

Yeah. We have continued to focus on reducing our non-strategic spend within the advertising and consumer promotional budget. We've seen substantial increases in media delivery this year, which still needs to turn – basically into substantial increase in revenue growth, but we have seen basically shift.

So, I would say there is not a need basically is to start spending back the increased profit back into the business, because let's call it the working media and the strategic spend behind the business has substantially increased already over the last nine months and we will continue on this trend going forward.

So, we are seeing a reallocation from non-strategic into strategic spend, overall spend levels are more than competitive..

Our next question comes from Stephanie Wissink with Piper Jaffray. Your line is open..

Thank you. Good morning, everyone. Patrice, I just wanted to follow-up on your comments that the U.S. Color business was down. I believe you said the Color business overall was down. If you could just talk a little bit about the market for nail care, and more broadly, across Color, that would be very helpful. Thank you..

Well, the nail care market is down at the moment and clearly, we are market leader in the nail care category overall globally as well as in the U.S. So that really has impacted the business no question about that. So it's not so much a share issue, it's much more lapsing of the key innovation which drove market growth last year.

So we are getting ready basically for future innovations, clearly, in order to drive the growth in the market. So that is probably the number one driver basically of the U.S. for the time being..

Thank you..

Our next question comes from William Schmitz with Deutsche Bank. Your line is open..

Hey, guys, good morning. I'm just trying to figure out how much of the stuff this quarter was kind of a kitchen sink cleanup. So can you just talk about the Hypermarcas sales number? Because it was like $30 million below our estimate.

And then the true-up on incentive comp – are you guys all caught up to the year? So that would be like an absence of the negative in the next quarter? And then I have an unrelated follow-up, if I can..

Sorry, can you repeat the last part..

Just the true-up on the incentive comp? Is it trued up this quarter? So will it be an absence of a negative in the fourth quarter?.

All right, I will deal with the first question. So on Hypermarcas, there was a change in commercial policy following the acquisition. Just to give you some perspective, Hypermarcas has very long basically payment terms for its customers. In addition provided substantial discounts at month-end and quarter-end in order to make the numbers.

We have corrected for that and put the customers much more on a Coty type policy. So what does that mean? That clearly means that the payment days or the receivable days for customers are coming down substantially, and also basically the month and quarter end discounts have been largely eliminated.

The result of that is a substantial reduction of trade inventories in Brazil. They were well over 100 days in the trade and they've been practically cut in half. So, clearly that has an impact on the revenues. Just to reassure you, the consumption growth in Brazil remains very good.

It remains ahead of the market, it remains basically in the double-digit range. So, it is not an issue basically of sell-out. It's a temporary issue of sell-in because of the adjustment of commercial terms. I think you should expect that as basically we go forward, this gradually basically goes back to a normal level.

We've said this business was roughly $250 million in size with a margin accretive performance and we are sticking with that. There's really nothing basically on an underlying basis which creates any concerns. I will now basically hand over to Patrice, who can answer the comp question..

Yeah. So Bill on the stock comp question, this is really due to prior features for certain executive that have left the business. So that's really what it is. So this is nothing to do with the true up of this quarter..

Okay, great. And then I'd just like a follow-up. You don't really talk about your digital and e-commerce strategies. And I know you bought that small media company in New York, digital media company.

So how much re-investment do you have to do in that business? And how far behind – if you guys think you are behind? Do you think you are, and how long will it take to kind of bridge that gap?.

So, there's a substantial increase in digital media happening as we speak and I would say, we are going to see another step change basically next year. I don't think we are that far behind to be honest with you and with the general consumer goods industry.

I think everybody around the industry is basically getting adjusted to the fact that consumers increasingly consume digital media rather than television or print media. It clearly differs very much by market.

For instance clearly, if you take the established markets like U.S., UK and some other European countries, you see very high consumption clearly if you go through emerging markets, you see much less consumption. So, there is a substantial increase in digital happening as we speak.

So, I would say the gap is going to be closed in the next 12 months to 18 months..

Our next question comes from Olivia Tong with Bank of America Merrill Lynch. Your line is open..

Great, thanks. I was wondering if you could talk a little bit about operating margin by product segment? Clearly a very big divergence in terms of the trend line across Fragrance, Cosmetics and Skin Care.

But particularly on Fragrance, can you talk about the run rate that you expect going forward, given the big increase in A&P this quarter?.

So, yeah, I really would encourage you not to look at quarterly results basically on categories for a very simple reason is you're going to see substantial swing simply because of the initiatives which are launched in the market. So, you're going to see certain A&P phasing happening there.

You need to really look at category profitability on an annual basis not on a quarterly basis. Otherwise, every quarter we'll have a discussion, because a certain initiative gets launched that the operating margin comes down.

And clearly in this quarter, there was a substantial investment behind CK2 happening on Calvin Klein which clearly is depressing the operating margin. So, I really think you need to take a look at it on an annual basis.

You know the Fragrance business, as you've seen historically, has been a very profitable business for Coty, and it will remain a profitable business going forward..

Got it.

And then maybe if I could follow up on Color, is there a big difference in terms of margins between Color Cosmetics versus – like, face cosmetics versus nail care?.

No. Not really..

No..

No..

Okay, thank you..

Our next question comes from Jason Gere with KeyBanc. Your line is open..

Okay, thanks. Just two quick questions. One, just wanted to go back to the nail category. I was wondering if you can talk maybe a little bit about the different channels out there? Because I know the specialty channel is kind of making some higher investments in this category.

So I was just wondering if you could talk maybe divergence of sales by this versus other retail or salon? That's the first question..

So, we have – clearly, we've two very different nail businesses and they overlap in one channel, which is called Ulta, so where you'll see both brands. So, clearly, OPI is predominantly a salon business but you do see it show up in Ulta, which is definitely is a client which is developing very fast.

Sally Hansen, clearly, is a mass market brand, but also shows up in Ulta. So there are basically certain channels where there is overlap. I'm not sure I answered your question but that channel is – clearly is developing relatively fast..

I guess what I was trying to figure out is that if you saw more of a slowdown in maybe some more of the mass channels versus specialty, versus maybe the last quarter or the last two quarters? I'm just trying to see within – I know the whole category obviously is lapping against Miracle Gel.

But I was just kind of – just in general, I just wanted to see if you're seeing continued faster growth in specialty, where there's a lot more investment behind the category, as opposed to mass, where it doesn't feel as much. So I was just wondering if you could just maybe expound a little bit more on just the differentiation. That's what I meant.

Sorry for the confusion..

No, I would not – no, I would say the development of the nail category is pretty much basically across the board. Now having said that within that certain channels basically performed better than others.

So I highlighted one, clearly which is Ulta, but other than that, there is we are simply lapsing a very successful period for the category and for Sally Hansen behind Miracle Gel..

Our next question comes from John Faucher with JPMorgan. Your line is open..

Thanks, good morning. You guys have been pretty adamant in terms of talking about really improving structurally the long-term margins in the industry. And when you talk about the stuff that is going on in hypermarkets, et cetera, that you're looking to fix, you can see how there is opportunity there.

But I guess it also highlights that the industry has a lot of bad margin practices that are going on there.

How do you guys get your margins up? I mean, do you worry about what the industry does in response, in terms of sort of potentially going to the lowest common denominator? Do you need the industry to move with you, or can you move independently here? Thanks..

So, no, I really don't believe that the industry needs to move with us. And the reason why I'm saying that is because I believe that our investment levels are very much competitive with the industry. So that means that the margin improvement that we are realizing is independent from the investment levels that we have in the business.

And, therefore, there is a possibility to structurally improve Coty's margins ahead of the industry..

Great, thanks..

Our next question.

I think, we'll take one more question and then we shift over to the next presentation, so....

Our next question comes from Joe Lachky with Wells Fargo. Your line is open..

Hi, thanks. One quick one, and then a larger one. On stock repurchase, a little bit surprised that there wasn't any this quarter, given the announcement last quarter.

And can you talk about the board's willingness to repurchase stock here before the Procter transaction? And then the second question, just going back to the advertising and promotion boost that you guys have made, I'm just a little bit surprised that we haven't seen a better response on the top-line, I guess.

Is it more consumers not responding to the increased media spending, or does it just take some time to flow through? Thanks..

So on your first question, so what we said is that we wanted to remain opportunistic, and so the board gave us an authorization to repurchase up to $500 million, but we will remain very opportunistic. So I have no other comment to make at this stage..

So, in investment in A&P, we've seen very good response in some pockets, on some brands in some geographies and not so good in others. And so you're absolutely right. So, for instance, Rimmel has done very well, Marc Jacobs has done very well, Sally Hansen outside of the U.S. has done very well, Miu Miu has responded very, very well.

At the same time, we've also seen on some other brands like Calvin Klein where the response has been much more muted. So it is not a simple picture as it doesn't work at all or it works completely. It is very much in pockets.

You also have seen that Europe and the emerging markets are doing better than North America, so also by geography it has differed quite a bit. So, but you're absolutely right that we are focusing harder and harder on return on investment in A&P to make sure that we're getting a better top-line reaction..

So I suggest we stop at there and that we move to the presentation on the impact of the P&G merger, because I'm sure you will have quite a few questions on the subjects and I want to make sure that you – that we answer your questions. If there's any further questions on the quarter, we'd be more than happy to take those after the call is over..

Presentation:.

So in terms of the update on the transaction, we are really going to cover three subjects; first, we are going to confirm the strategic rationale of the transaction.

We're going to provide an update on the transaction and the progress we have made around this on a year-to-date basis, and finally we're going to provide an update on the financial benefits of the merger with the P&G Specialty business. So, next page please.

So, first, before I give the strategic rationale one more time, let me first highlight you know what Coty's ambition is in beauty, is to really to transform Coty over time into a new global leader and challenger in the beauty industry, clearly with – or for the ultimate benefit of shareholders.

Now, in that respect, the P&G merger, clearly, is a very good step in that direction. We are creating with the merger a $9 billion leader and challenger in beauty, becoming the number three after L'Oréal and Estée Lauder in the industry.

Not only do we create a much more of a skill player in beauty, we're also creating the worldwide number one in Fragrance. Can I have the next slide please? As you can see basically from the slide, which is now on the screen. So you can see that we are becoming well ahead basically of L'Oréal in terms of market position.

In terms of Color Cosmetics, we are becoming the number three overall most likely the number two basically mass Color Cosmetics with a number of very good brands as we'll show you in a minute. Finally, we are adding the worldwide number two in hair salon. Clearly this is a new category you know for Coty.

In terms of the portfolio, we are getting a very nicely balanced portfolio. In terms of between categories as well as distribution channels, so just to take you very quickly through that.

Coty Consumer Beauty will be 41% of the total business, would roughly $3.8 billion, very much focused on the mass channel and on three categories which are Color Cosmetics, Hair Retailing which is Hair Coloring and Styling as well as Body Care. Coty Luxury very much focused on the prestige channel and focused on Fragrance and Skin.

And Coty Professional very much focused on the salon channel focused on hair as well as nail care. So a very balanced portfolio, both in terms of categories and distribution channels, and most importantly with the very strong portfolio of brands. You can see Coty Luxury, there you'll have the top three brands will be Calvin Klein, Gucci and Hugo Boss.

And Consumer Beauty the size of the brands is more evenly balanced. You see some very strong brands like CoverGirl, Rimmel, Max Factor, Sally Hansen et cetera. And then ultimately, in Coty Professional Beauty, you see two main brands which are anchoring the business, which are Wella and OPI.

Not only do we get a very strong portfolio, we're also increasing the critical mass across basically our top markets and importantly, we're increasing critical mass in several of the emerging markets. So, Brazil, clearly that's a very big increase and you know, but that was off a very small base in Brazil.

So clearly this number doesn't even include Hypermarcas, Brazil will become a very big market for Coty. Russia was a decent sized market becomes a much bigger business for us. China also becomes a much bigger business for us.

So not only are we getting a substantial increase in scale in the established markets, but we also increased the scale in a number of the emerging markets. So, overall that gives us a very nice basically portfolio with strong brands and skill benefits in our geographies. If you can, please some previous slide, please. Thank you.

So it also provides a very good opportunity to accelerate growth and improve profits and cash flow. So from a growth point of view, we will have going forward, a divisional structure. Why is that important? Because the divisional structure is a much focused structure than what we have in today.

So as I already showed you, it will focus very much on the single distribution channel and only two to three categories per division. And with that we hope that we're going to get not just increased focus, we get increased competence and we get a much more competitive basically capability in place in order to compete in the market.

We also are going to substantially further increase our focus on sell-outs by an increased digital customer engagement, improving the in-store excellence, and to drive high levels of product innovation.

Another topic which we still have to come to and which will further detail post in the next couple of months is the rationalization of the portfolio and the wholesale business. Why is that important, is because we still need to tighten down the focus on fewer brands and fewer doors in order to drive a higher growth and a better quality business.

And finally, clearly from a growth point of view, we will be looking in due time to further acquisitions, Patrice will highlight this a little bit later, but clearly our pro forma financial profile will very much allow us to participate in further acquisition opportunities.

In a minute, we'll come to profit and cash flow, but clearly we're anticipating material earnings per share accretion due to synergies. And we also expect substantial incremental cash flow due to both higher profits as well as net working capital benefits.

Finally, we'll very much from an incentive system make sure that the management is very much driving in combination of top-line growth, margin expansion and cash flow generation.

And we'll do that both through the combination of short-term bonus structure as well as long-term incentives in order to make sure that we're getting a balance basically focus behind those three basically key leaders.

So that gives you a quick snapshot of the strategic rational basically for the business, as you can see from the slides I just presented. This is very similar to what we discussed in July. And so, we are very much confirming the strategic rational of the merger with the P&G business.

I'm now going to hand over to Patrice, who is going to take you through the transaction update, the progress we've made, as well as the financial benefits of the transactions..

Thank you, Bart. So couple of point s on the slide 13, the transaction summary. So first on the structure, very much of the same. So transaction proposal was valued at $12.5 billion, comprised of $9.6 billion of equity and $2.9 billion of debt.

We have a collar mechanism of plus or minus $1 billion, based on the trading price of Coty stock with a range of $22.06 to $27.06 with a middle range of $24.56.

Based on the latest share price and we've assumed here the price on April 13, which was for the S-4 filing of $29.81, Coty estimates the issuance of 412 million shares and $2 billion of assumed debt. The split between the P&G and the Coty shareholders would be 54%/46%. So now few words on the mechanics of the transaction.

The preferred option from the P&G side is to do a split-off. In a split-off, P&G offers its shareholders the option to exchange their shares of P&G common stock for shares of the new Coty. For the offer to be fully subscribed, 6% of the P&G shares need to be tendered, only 6% of them.

In terms of timing, it's fair to say that the transaction is expecting to close in the course of the month of October 2016. Now next slide 14, the update on the progress that we have made. So as you have seen, all of you, so we have filed the S-4 on April 22. We had the unconditional anti-trust clearance for the E.U. and the U.S.

and we have confirmed the transfer of 10 Fragrance licenses. Operationally as Bart said, we have now an organization structure, we have designed an organizational structure with all the associated headcounts and the decision regarding the location has been mainly made.

In terms of staffing, the Executive Committee and the management team of the division has been appointed, and we are now going to the next layer. In terms of deal economics, I will come back to that on a few slides, but we've done most of the work.

In terms of portfolio and wholesale rationalization, it's fair to say that the work is still very much in progress. But what we can say at this stage is that on the portfolio rationalization in terms of discontinuation and divestments, we'd have some discontinuation and divestment in the range of 6% to 8% of the combined new portfolio.

So I'm sure you're going to have a lot of question on the impact on the deal economics, is it EPS neutral? Yes or no, etc, etc. We're not ready to answer any of this question yet. We just want to signal to the market what we have in mind for the time being, but still work in progress.

In terms of go-to-market change, we are assessing some of these, especially in emerging markets and of course, there is an extensive preparation in terms of processes, in terms of systems, in terms of infrastructure.

There is 200 people full-time within Coty working on that with a lot of help from experts that has done this type of transaction in the past. So we are very much in motion. In terms of financing, so as you all know Coty entered into a secure financing commitment of $4.5 billion.

We have used the opportunity to upside this to $5 billion in last month actually in April 2016. Galleria, is fully-owned by P&G, entered into secured financing commitments of the same amount $4.5 billion expected to be ultimately assumed by Coty upon the close. Now back to Bart, on the management team..

Yeah. I think you've seen that we have put in place a very strong management team not just at the executive committee level, which we see basically on the screen at the moment.

The executive committee team has very extensive experience in consumer goods across the board and in addition to that where relevant, they also have basically very extensive beauty experience. It is an increasingly diverse group also below this team, we have made many appointments already.

So, we've made practically all the appointments at the level below this group. And we are well advanced in terms of making appointments at the levels below that.

And you will see that across the board, we have made very good appointments, some of them which have been announced externally as you've seen basically with Shannon Curtin basically last week in the United States. So we have made a raft of new appointments. They are not all basically from P&G and Coty, some of them are from external.

So the mix has changed and is changing as we speak, but overall very good team. Back to you, Patrice..

Thank you, Bart. So now on the financial update. So on the slide 17, so certain statements in this presentation are forward-looking statement. So I'm not going to go through. Kevin already alluded to that at the start of the call.

The only point I'd like to emphasize is the bottom of the page where this acquisition of the P&G Beauty Brands is a complex carve out transaction and as a result of that the integration efforts might for certain period of time detract as from improving the performance of the underlying business.

So these being said, the next four slides are, I' m sure slides that most of you are expecting. So we're going to spend a bit of time on that going through these slides. So on the slide number 18, on the synergies. So all these four slides are really a refresh of the July presentation.

So you will see that in the format, we did roughly the same to make sure that you had a comparable basis. So first of the synergies, so we'll start from the fiscal 2015, adjusted carve-out EBITDA coming from P&G, which include already $380 million of synergy that we materialize day one.

Then we have the impact of two of the license that are not coming with the transactions, so Dolce & Gabbana and Christina Aguilera. So we've taken $130 million, which is the brand contribution.

So what is the brand contribution? The brand contribution is the gross margin deducted from all the investment in advertising in consumer promotion to support and to nurture the brand. Then you have the synergies of $400 million, which is an update versus the July presentation. So let me spend a little bit of time on this $400 million.

So first point, our ongoing position has been to build an organization by division focusing on each of the segments. Two, how did we do that? We did that with a bottom-up approach by function and by country. So very in-depth work. And then we have costs, this targeted organization in each of this countries, in either country.

Challenge against benchmark based targets. So, this is where we landed now with this targeted organization that has been costed. And when you compare the Coty organization plus the P&G organization minus the targeted organization, you come at with the $780 million synergies. So this $780 million synergies represent 16% of the acquired revenues.

And they are very much going to be a phase with 40% materializing in year one, 70% after year two, and 80% after year three, and then the full synergies after year four. In order to be able to realize these synergies, we're going to incur $1.2 billion of cost. So, let me spend a little bit of time on these costs.

So first 90% of them are cash cost and out of this $1.2 billion, you have 25% that is really related to the specifics of this transaction, which is a combination of the carve-out under an RMT umbrella. So, this is roughly $320 million that is related to that. So let me give you a couple of example on these costs. So first you have the TSA cost.

Second P&G is a highly integrated business with a big GBS shared service center. And so we have to disentangle the P&G Beauty with the rest of the P&G business, which is increasing complexity and as a result of that, associated cost. Third point, the RMT required the business of P&G to be carve-out and then integrated.

What does that mean? This means that we need to set up interim P&G entities and processes that then, after the exit of the TSA needs to un-wided and integrating into the Coty processes. And of course, we need to train people to be able to do so.

Now fourth, most of the carve-out aim at either increasing the scope like adding new categories for instance or increasing the scale. Actually, we're doing both, which increasing the complexity and then the cost associated to that.

So that's roughly what is leading to 25% of the cost, which is the $320 million, which is for us due to this very unusual transaction. Second part of this $1.2 billion, you have roughly $135 million that is due to go-to-market Galleria changes that will happen later on.

This is very much work in progress, but we're going to reset up some of the go-to-market from Galleria. The last part $745 million is directly related to the synergies. So we are generating $780 million synergies with the one-off directly attributed with synergy with $745 million. And I think this is really the way you should look at it.

So we're building on the bottom-up basis an organization which is extremely focused, divisionalized, focusing on the expertise in the respective segments, but a very lean organization. So now what does that mean in terms of operating margin? So first, all these slides do not include Hypermarcas.

So same start as what you have seen in July but of course updated. So what you can see is that you start in slide 19 from the standalone Coty, which is 12% plus operating margin. We added the carve-out business from P&G, which added 200 basis points, so we would result in 14% operating margin without touching the business.

Then you deduct which is an impact of 40 basis point, the impact of D&G and Christina Aguilera, and then with all the synergies, we have 430 basis points.

So this means that we are going to add 600 basis points to the Coty's standalone business in operating profit margin over a four-year period making Coty clearly an industry leader at 18% operating margin. Okay. Our top peers are in the range of 15 to 17 operating margin percentage.

So, really with this transaction, we immediately focusing ourselves to an 18% pro forma operating margin and this doesn't include Hypermarcas as I said. So now, next slide, what does that mean from an EPS standpoint? So, first, this slide exclude the purchase price accounting related to the amortization.

And we are currently revisiting the metrics with which we should measure the underlying performance of the business, and in doing so, what we pay attention to is that it needs to be similar to the way we measure the business on a near-historical basis. And it also needs to be comparable to our peers.

And that's the reason why we are currently assessing and evaluating the option to exclude the purchase price accounting-related amortization. So, when you go through this slide, you start with the Coty fiscal 2015 adjusted EPS, which is $0.99.

Then you have the dilution based on the issuing of shares, which is the same number as what we quoted in July, then you have the contribution of the P&G carve-out business, which is $0.83 that leads to $1.20 to $1.25. Then you deduct the D&G and the Christina Aguilera brand contribution, which is $0.11.

And then you add all the synergies that will generate, which is $0.39. What does this mean? This means that we will increase by 50% the EPS versus the current standalone Coty business. And I really think this is the way you should look at it.

We have a current standalone Coty business, which is in the range of $1 of EPS and now would be more in the range of $1.50 after this transaction on a pro forma basis. And this is, of course, after we implement all the synergies, so after year four. So, now in term of cash, cash is king.

So slide 21, so in terms of working capital, so immediately at closing, we will more than double the cash generation of Coty standalone to generate on a free cash flow basis between $800 million and $900 million without further reduction of the working capital. Then you add some analysis that we have made on the working capital.

And so we are refreshing this analysis by increasing the working capital synergies from $200 million to $500 million, so half a billion dollars over four years. The bulk of that would be realized by the end of fiscal 2018.

So actually you have two effect on that, the first one is that you have a one-off half a billion dollar cash generation, and the second one is that by doing that, we'll be very close to zero working capital, which means that your cash conversion ratio is optimal. So your earnings are converting into cash immediately.

Now in terms of CapEx, so we're increasing by $100 million the CapEx versus our July assumption, which is mainly you have three main legs into this CapEx of $500 million. You have real estate because we need to stand up some organization and co-locate the division in most of the markets. So that's point one.

Point two evidently like in all the transactions, you have a lot of IT infrastructure that we need to build and step up.

And it's fair to say that all the work that we have done in the last two years is now producing some really good results and is allowing us to avoid come CapEx that we'll have to add, provided we didn't do anything in the last two years. And of course you have then the supply-chain CapEx to be able to stand up a couple of factories.

So 90% of this one-time CapEx will be incurred through fiscal 2018. And then we'll come back to a much more normal ratio of CapEx, which you could estimate being 4% of top-line. Now on the capital structure, we are slightly increasing the pro forma leverage to 3.2 times net debt-to-adjusted EBITDA.

Why is that? Because we're reflecting the aftermarket acquisition and the share buyback program that we have executed between the months of July and the month of December fiscal 2015. We are going as we said to increase the dividend per share to $0.50 post-closing.

And so it's clear to me and it's clear to all of us that we are going to have a combined business with a lot of strategic and functional flexibility with a very lean cost structure and with a very moderate pro forma leverage of 3.2 times which once again, as Bart said, give us ample ammunition to further participate in the consolidation of this industry..

Excellent..

So now, I will leave the floor to Bart for the wrap-up..

So yeah, in summary, the merger creates a very good pure-play new global leader and challenger in beauty, with $9.2 billion in net revenues. You've seen basically the substantial increase in pro forma EPS of roughly $0.50, off more or less a dollar where it sits today, so a very substantial increase.

It is targeted to generate substantial pro forma free cash flow of about $800 million to $900 million providing ample flexibility for the future.

Post rationalization of Coty's portfolio and wholesale business, which we are working on, the merger creates a clear opportunity to accelerate growth both organically and via future M&A and that is very much because we are going to create a different structure for the company, a much more focused structure with a more focused portfolio with better staffing behind that and with ample, basically, you know, support levels behind that.

We have appointed already a very strong new management team, which is being well-aligned to drive shareholder value. So, overall, I think you know, I can confirm today that the strategic rationale for the transaction remains. We've made excellent progress basically from an integration point of view year-to-date.

We should be well-positioned to absorb this business and you've seen Patrice take you through the financials, which are substantially better than where they were – when we announced the transaction. So, with that said, I suggest we take the first question..

Our first question comes from Wendy Nicholson with Citi. Your line is open..

Hi, Good morning. Thank you. Two questions, first is with regard to sort of your updated look at the business.

Can you comment on the trends that we've been watching in the Procter business, the brand you are acquiring? Have those basically been as expected or worse than you would have expected a year ago when you announced the transaction? And then second thing.

Just looking back at the quarter you just printed, your comment that the core business may suffer little bit of disruption.

Just broadly speaking, it feels as if kind of the cost to compete in the makeup cosmetics industry has gone up, we are just seeing slower growth in the industry, slower growth from you, slower growth from Estée and yet a continued high level of investment.

And my question is, does that concern you? Do you think differently, I mean the cost savings outlook for the Procter acquisition looks fantastic, but do you think today that you might have to invest more to achieve the same level of growth that you had hoped to achieve just given the competitive dynamics in the industry? Thanks..

So, in terms of the trends, the trends have not changed dramatically since we bought the business. So, clearly within the business, you've seen the S-4 filing. So you have the numbers, the business is declining 2%. So, clearly if you ask me am I excited about this? Clearly, the answer is no.

Within that business, though, there are certain parts which are doing very well. For instance the salon business is performing very nicely. The Fragrance business is doing better than it has done historically.

On the other side, basically we do have some concerns about Color Cosmetics and substantial concerns about the hair coloring and styling at the retail level. So it is not a uniform picture on the P&G business and if you ask me am I excited about the business trend, the answer is no.

There is still a lot of work that needs to be done in order to address that. In terms of the investment levels basically which are required in this business, it is definitely a challenging business in particular because the whole industry to some extent is fragmenting in terms in pockets both from a channel and a brand point of view.

And clearly, you know that requires basically stronger activity in order to maintain growth momentum. Will that eventually mean that we need to invest more? I'm not sure because we have quite substantial investment levels on the business already.

I think what is more required is that we have a tighter more focused business in order to compete and we'll be coming back to this when we talk about the rationalization of both basically the portfolio and the number of doors in which we compete..

And just following-up on that. When you were talking about the Coty quarter.

Does this apply to the broader business? You said at the very end, I think, in the Q&A that some of your reinvestment wasn't having the payback that you had expected it to when you were working to improve on sort of the return on your investment spending, but given the vastly more complex organization, how do you go about improving that? Is that a systems process? Is that a people's process? How do you make sure that the money that you're reinvesting actually pays off?.

Yeah. I would say very good point from a return on investment point of view. There is more work that needs to be done within Coty. We need to become much more of a sell-out focused organization. Parts of the company doing a good job, other parts of the company are not.

It is something which we are actively you know working on and addressing, but we are not there. Like I said before we have certain brands – brand country combinations which are doing extremely well. So if you look at Rimmel overall is doing very well. Sally Hansen outside of the U.S. is doing very well, Marc Jacobs is doing very well.

Miu Miu has done very well, but we also have other pockets where we are not getting the return on investment. So there is certainly room for improvement and it's not just a question of systems, it's a question of training of people..

Our next question comes from Lauren Lieberman with Barclays. Your line is open..

Thanks. Good morning. You made a point of mentioning throughout that Hypermarcas was not included in these numbers, so if you could talk a little bit about the degree to which incremental CapEx on that business or any kind of incremental spending, how that would impact this forward look? Thanks..

Yeah Lauren, so thanks for the question. So in terms of incremental CapEx for Hypermarcas, this is going to be extremely marginal. So in the big scheme of things given the picture we are looking at, I don't think that's going to be very much at all. So that's what we see.

You know we intentionally decided in this presentation to exclude Hypermarcas to make things more comprehensive and more readable rather than mixing different acquisition etc. So we'll come back there on, but honestly in big scheme of things Hypermarcas is not very much at all..

Okay.

And same goes, Patrice, with the – just in terms of incremental spending to hire people in Brazil and so on, because my understanding is you're getting almost no infrastructure with Procter in Brazil?.

Yeah, but that's really the – this is one of the benefits of the transaction with Hypermarcas is that it's going to smooth, it's going to be an enabler for the transaction because actually what we are acquiring there is the go-to-market state-of-the-art factory and warehouse. So, we are getting that via the Hypermarcas acquisition.

So I expect some limited impact from that some point..

Okay.

And then the phasing of synergies that you share on slide 18, just to be clear that they – does that refer to the $400 million incremental or the total basket?.

No. No, that refers to the total. So, the $780 million synergies are going to be phased with 40% in year one, which is all the $380 million at the time of closing, 70% year two, 80% year three and 100% a year four. So, that's because the total of the $780 million..

Our next question comes from Mark Astrachan with Stifel. Your line is open..

Thanks, and good morning, everybody.

I wanted to go back to the operating margin expectation, the 18% that you talked about, how much implied reinvestment is in there, is there any step-up relative to current levels? And you were talking about, Bart, not anticipating any sort of meaningful reinvestment, but may be you could give us a bit of color in terms of what is actually baked into that numbers as a percentage of sales or just broadly if you don't feel comfortable giving a specific target?.

Yeah, so thanks for the question. So, actually in this exercise the way we did it is really to take the pro forma of Coty, to take the pro forma of P&G, and then to deduct the two brands that are not coming in terms of brand contribution and to add the synergies.

We didn't change anything in terms of underlying business, in terms of assumption, in terms of operating model.

So, it's really just by adding the synergies and adding the P&G business mechanically the operating margin is at 18% and that's the reason why I mentioned it doesn't include Hypermarcas, it doesn't include any change in the way we're going to invest etc., this is just a pro forma without touching the business and just materializing the synergies..

Got it, so..

Yeah. Just to clarify. There is no basically reinvestment assumed basically in these numbers back into A&P. And as we discussed earlier, in my mind there is not really a need for substantial reinvestment behind the business. There is a need for improvement in return on investment.

Investment levels in this business are quite high as they are on both sides. The number one improvement which needs to be had is to improve the ROI on the investment.

Now part of the exercise also needs to be is a narrowing of the focus of the business because, and just to give you an example in Fragrances, the number of brands which we will be managing post basically transition is very, very large.

And so in order to improve return on investment, we also need to narrow the focus because simply from a go-to-market organization is the number of brands, which will be sitting in the portfolio is too large basically to do an outstanding job. So it's really, it's about focus in ROI..

Got it. And sort of related to that last point.

So you talked about 6% to 8% of combined new portfolio being rationalized without giving specifics is it fair to think that the focus on that would be in some of the underperforming areas and categories? And I just wanted to relate that to a comment or question on the quarter if you could just talk about the impact of rationalization or discontinuation of certain brands on the businesses as reported today?.

Yes. So the 6% to 8% of rationalization which needs to take place refers pure and simple to discontinued and divested brand. It does not refer to any reduction in number of doors in wholesale business. So the bulk of that will have to be done.

The vast majority will have to be done on the Fragrance category because therein we have the largest numbers of brands between the two portfolios.

So it is premature basically to sit here and to have a final discussion about that because the ongoing basically discussions are still taking place with the business in terms of how exactly we're going to structure this.

In terms of impact from the quarter, we are rationalizing doors basically in the quarter and year-to-date and we're also rationalizing lines within the business because historically Coty has basically over the last decades expanded into too many lines, into too many doors in order to have a healthy and a strong business with a very strong focus.

And so, I could give you a speculation on the number, but it is clearly not helpful from a growth point of view when you do that. So rationalization and increasing focus is in my mind is a key requirement for this business to be healthy in the long run. And that means some short-term pain that we're going to have to go through..

Our next question comes from Javier Escalante with CER. Your line is open..

Hi. Good morning, everyone. I have actually two questions. One is has to do with year one, right. You mentioned that savings are going to be $400 million, but in the filing it seems like there is a temporary agreement with Procter in which it may last six months in which you are going to be hiring services from Procter for the human resources, the IT.

So how that $400 million – you are realizing the savings but at the same time you will need to be spending money against those savings because you don't have the infrastructure yet? That's my first question..

Yes. So the answer to this question is that, this is going to be done through TSA, so the TSAs are only on a couple of areas which are mainly finance, IT and supply-chain. And these TSAs allow us to gradually step up and are going to last one year.

And so you have this actually in the one-offs so that's part of the $320 million of specific or one-off specific transaction that I have listed, which is the 25% of the overall $1.2 billion, this is including there. So the cost of the TSA are including to the $320 million..

But you are including that cost as a one-time cost as opposed to an ongoing cost, because these services are going to be rendered for six months?.

Yeah. You're correct. So these costs that are going to be there for one year are considered as one-off cost..

Okay. So my second question has to do with coming back to the 6% to 8% rationalization and potentially reducing the number of doors and the assumption that was made in the evaluation of the Procter business that the secular growth rate were viewed to be 1.5% and 2.5% positive so this is 2025.

So basically the assumptions valuing this business is that, the entirety of the business will be growing even so 10 years down the road and yet what we are sharing is that you are going to reduce the size of the business.

So, I do not understand the relationship between what you said about what is your expectation again for the top-line growth on an organic basis of this combined business because in the evaluation it seems that you are implying that it's going to be up to two and a half per year, I guess, down the road, but at the same time everything that you had suggested implies little growth..

We have never made any basically forward-looking statement regarding the growth of the business either for P&G or for Coty. Right now the P&G business is declining minus 2%. You have the Coty numbers.

Clearly what we are working on is to change basically the growth outlook, but we have not made any basically statements forward-looking statements regarding the growth rate of the combined entity..

Our next question comes from Linda Bolton Weiser with B. Riley. Your line is open..

Yes, Hi. I guess the previous slides you had provided, were kind of on an EBITDA basis, is there any reconciliation anywhere you'll be providing or any comments that kind of go through these numbers on an EBITDA basis? And the tax rate has been sort of different in different time periods for Coty.

What tax rates are you assuming in these EPS calculations? Thanks..

Yes, so I'm sure on the reconciliation between the EBIT and the EBITDA you can take that later on with our IR team. I think they have all the detail and we'd be able to provide that view. In terms of blended tax rate that we have assumed in the EPS calculation, we have assumed a 26% blended tax rate..

Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open..

Hey, so synergies at 16% of sales in this acquisition is far above what we've generally seen from other CPG peers, which have been more in the high single-digit range over time.

So, can you run through what's giving you confidence in that number, given it's so much higher than we've seen versus peers in the industry? And then can you give us more of a sense of kind of magnitude for some of the key areas or key buckets of savings with that synergy number?.

Yeah, so we certainly can. So, we've gone through a very exhaustive bottom-up exercise to take a look at all basically pockets of synergies.

So, I would say that probably is the one good thing that we are having between this lengthy time between announcement and closure is that we have plenty of time to study everything in excruciating detail which we have done.

So, in the supply area we have literally gone through everything in terms of buy, make, and deliver the product and it looked that every single aspect in terms of what we can assume from an optimization point of view in terms of procurement, in terms of manufacturing, in terms of logistics.

We've also have costed out the entire organization down to the last head, practically in every single division as well as in the corporate headquarters and any other functional support staff. We have used that basically in order to cost out entire SG&A footprint for the combined entity.

So, there is a very, very detailed basically calculation between all of this. So, in terms of the split, it is very much balanced between I would say broad what is – which you can expect in cost of goods and in SG&A. There is a relatively even split between the two.

The synergy number of 16% is definitely at the high end of the range but it is not basically, these types of numbers have been achieved before in other types of transactions. So it's not like a number which is out of the range..

Okay. And then Bart, you mentioned a couple of times about wanting to further participate in the consolidation of beauty industry.

From a timing standpoint, when should we think about acquisitions becoming a focus again? I would guess there is a pause here as you integrate P&G and Hypermarcas with the heritage Coty reorganization et cetera which might limit acquisitions in the next couple of years, it that fair? How do you look at that from a timing standpoint? And then also, can you just share some of the financial hurdles you look forward in acquisitions, particularly in terms of return criteria? Thanks..

Yeah. Thanks for the question. So we usually do not comment about our M&A. It's is the best way to be really effective. And so we're not going to provide a lot of detail.

However, the only thing we can say is that for the time being we have to integrate this business and to make sure that the combination of P&G and Coty works, and that we have a very successful integration. So that's going to be the focus of the organization in the coming 18 months..

So in terms of hurdles you know we run your standard approach, so in terms of P&L and cash flow forecast look at – on not just a discounted cash flows but mostly in terms of how much basically over the cost of capital basically we return, and at what point we breakeven against the cost of capital.

So I would say EPS accretion is also being looked at but as you all know most transactions are EPS accretive in the consumer goods space. So that's generally is not the main hurdle because that's almost a given. It's much more basically in terms of return relative to the cost of capital that we look at..

Our next question comes from Bill Schmitz with Deutsche Bank. Your line is open..

Hey guys, can you just clarify one thing on slide 18? So you have that sort of phasing of synergies.

Is that the incremental synergies or is that the aggregative synergy number? So does that exclude like the $380 million from P&G or is that you know just the incremental beyond that?.

So I'm not sure I understand the question, but I give you an answer. I think you are right, that's your question but the total level of synergies is $380 million plus $400 million, which is the $780 million that we have quoted..

Yeah. No, that's clear. But there is that bullet on page 18 that has like the percentage of synergies realized by year you know it's 40%, 70%....

Yeah. So this is based on the total, Bill. So this is the split, the phasing per year based on the $780 million..

Okay.

It doesn't make a lot of sense though because it seems like that whole $380 million is just allocated overhead so shouldn't that all be gone once you lap it after the deal closes?.

Yeah. It will go out and equal. And that's why, that is the 40%-plus..

So there is no other – okay, but there is no other synergies then except for just lapping the overhead allocations?.

No, because in the early days, you actually need to staff up before you staff down so you do not, and this is a carve-out, it's you know – people generally don't get this, but if I combine two companies, I could realize synergies in year one. But we are not getting basically a complete company. We are getting a partial company.

And so, in a partial company, I'm actually going to have to staff up to absorb it in order to before I can staff it down. So you have basically, yes, the full $380 million goes away but then you know, I need to have certain resources basically in that organization in order to – which I can then basically take down once we are integrated.

You have to realize these are three basically steps in the transaction. That is the carve-out and stand-up and stand-up is required from a Reverse Morris Trust point of view. So, P&G actually has to stand up its own organization independently.

Then there is the transition phase which is in the transitional services phase and then there is basically the final integration. It's a much more complex process than a normal basically merger of two companies..

Yeah. That makes senses.

Are these synergy numbers net synergy numbers then? Are they net of cost associated with – do you know what I am saying because that what it sort of implies if you are saying you have to staff up to hit those synergies, do you know what I mean?.

Yes. So, actually the 40% in year one is a net between the synergies that's we are realizing and the staff up that we need to do in order to be able to build the business, the combined business..

Okay. That makes sense and then just one last one, on the Salon Color business. I mean how long do you think it's going to take you guys to really learn that business? And then do you think you can be successful in the U.S.

without owning your distribution because I think that's probably the critical inhibitors that L'Oreal owns their distribution, so they have much better reach into the salons, tell me if you disagree with that? And then maybe some thoughts on that end?.

So, first of all, on salon, we need to understand that the entire organization comes with the transaction. So, in terms of the entire commercial basically infrastructure comes with the transaction with all the associated staffing.

And I would say the good thing about the salon business, it took P&G a while but they actually have figured out how to run this business and you can see in years four, the business is actually doing just fine. And so from a trend point of view, is doing very well.

The management team and the entire commercial infrastructure is coming with the business. And they have basically good results behind that. So, do other people in Coty have to learn certain things about the salon business? Absolutely.

But I think there is a lot of work between the two organizations taking place at the moment to make sure that we have a smooth transition of this business.

In terms of owning the distribution, well, clearly, I do not agree that we need to own the distribution because we have proven that while not owning the business from a distribution point of view, we can grow the business and certainly on the salon, the salon business in the United States on the P&G side has a very good performance.

So I think that in itself proves that the business can succeed without owning the distribution..

Okay. Great. Thanks so much..

Our next question comes from Olivia Tong with Bank of America Merrill Lynch. Your line is open..

Great. Thank you. I know these aren't your businesses yet, but what's your assessment of why the mass hair and cosmetics businesses that you're acquiring has been underperforming, particularly since the deal was announced. Basically you have the fiscal 2015 then the first half numbers.

And what do you think needs to happen to get these businesses back to health?.

Yeah. So, I would say there are several factors. First, it's been hit very hard by FX because part of the business is in places like Brazil, so that's not helpful clearly. Having said that, I don't think that's the bigger issue.

The bigger issue is that this has been managed by the corporate sales force and within Procter & Gamble within their hair category.

And so when you have a corporate sales force like you have in the United States, which is managing an orphan asset which is being divested, as you can imagine, the focus is not going to stay on it, and this is exactly what's happening. And, clearly, at Coty, we are quite concerned about the business trends within this business.

And so, I think increasing the focus which we will have immediately after close, hopefully is going to help basically nurture this business back to a better performance, but right now, it's an orphan asset being handled by a corporate sales force, which has at least another 20 priorities. So that clearly is not very helpful..

Got it. And just to revisit the year one – the accretion or the synergy targets, particularly in year one.

So $0.50 by year four, but do you have a sense of what pro forma EPS would look like when adding in these businesses in year one, is it just as simple as 40% of that $0.50 target?.

There is – there is a phasing of the benefits that you can see. So, you could make a certain modeling behind that if you wanted to. We have not provided any guidance on this point..

Yeah. We are not providing any assumption in terms of the phasing or so on the cost to execute, etc. So I think you can make that assumption, but that's the only thing we can say at this stage..

Got it. Thank you..

Our next question comes from Joe Lachky with Wells Fargo. Your line is open..

Hi. My first question is on kind of the status of the innovation for the Procter business. I know – I remember you guys had some issues when you bought Philosophy as far as the pipeline not being as strong as you had expected and so, and it took multiple years to kind of turn that business around.

So I'm just wondering what's your view of the innovation pipeline at Procter?.

So, we do not have a complete view on that at this stage. We should not forget that the two businesses are competing businesses. And we have not been allowed access from a legal point of view in terms of the innovation pipeline. So that's still to come..

Okay.

And my second question on slide 24, part of the adjusted EBITDA is a depreciation accounting reclass, and I was wondering if you could just shed some light on what that is and why you guys are handling it as depreciation versus SG&A of Procter? Is it just carve-out accounting or some sort of acquisition related accounting difference, is that the reason for the reclass? Thanks..

No, it's carve-out accounting actually. So it's really now we translate the chart of account of P&G into our chart of account and that's the result of this. So that's really fixtures actually that's why we are excited, that's we are replacing ..

Okay. Thanks..

Our next question comes from John Faucher with JPMorgan. Your line is open..

Thanks. A couple of questions here, first off, you're talking about the 6% to 8% in potential divestitures, and I was wondering is that included in your run rate that you've given us in terms of earnings per share and EBITDA and margins.

And then one sort of clarification on the cash costs, do the cash costs include or exclude the CapEx associated, sort of the one-time CapEx. It sounds like those cash costs actually exclude the CapEx? Thanks..

So, no, the rationalization is not included in the run rate EPS or EBITDA numbers at this stage in the game. Right now, basically the first thing we have to determine what exactly we're going to rationalize and what the ramification of that is. So, it is not, specifically not included.

On the CapEx?.

On the CapEx, actually, John, your understanding is correct. So, the one-off costs exclude the CapEx impact..

Got it. And then one final sort of housekeeping question here just because I've been getting questions on it. So obviously deal is closing in FY 2017 sort of probably late Q1, early Q2.

So when you look at year one, year two, year three, year four, it is fiscal 2017 through fiscal 2020, right, that's how we should be looking at this?.

No. The closing is scheduled for October of this year, right, so, yes. So you know the closing will be in FY 2017. Yes..

Excellent..

You look at the right way..

Yes..

Thank you..

Our next question comes from Javier Escalante with CER. Your line is open..

Hi, thank you. I would like to go to slide number 20 where you show the pro forma Coty being, 2015 being $1.20 to $1.25 and then four years from now being $1.48 and $1.53. Does it mean that you expect the combined company to grow EPS at 5% organically, this is the way to read this? Thank you..

So, no, actually that's not what we are saying in this slide. In this slide what we are saying is that we on the pro forma basis if you have the Coty business, the P&G carve-out business plus the synergies minus D&G and Christina Aguilera you increase your EPS by 50% after year four.

We are not speaking about growth rates, underlying improvement of the business, we are not adding Hypermarcas, we are not doing any of this. We are only doing a mathematical exercise where we are saying, we are Coty standalone you know day one the carve-out business from P&G will come plus we will generate some synergies.

This is the impact of these three factors into our current EPS, that's all what we are saying, which is already by the way a pretty substantial increase in EPS..

But just to be clear, so organically on the underlying business, I would not make you know any aggressive assumptions because you have to realize is that the same people, which was doing the integration also have to manage the business just to be crystal clear.

So this is a very complex transaction which has to be integrated over the next couple of years. So it's the same people which are doing both..

Our next question comes from the Dara Mohsenian with Morgan Stanley. Your line is open..

Hey, Patrice, I just wanted a couple of clarifications and maybe I'm looking at this wrong, there is a lot of info here, but it looks like your pro forma free cash flow expectations moving down to $800 million to $900 million from $900 million previously.

Is that correct and why is that given the higher synergy and pro forma EBITDA assumptions? And then also the brands that aren't transferring over Dolce and Aguilera, it looks like you're paying $300 million less in the deal despite losing $130 million in EBITDA, so is that correct or am I missing something on that front? Thanks..

So, Dara. So first on the $800 million, $900 million Dara, this is at closing. So, this is without the synergies, this is without the working capital synergies.

This is not when we receive the business, the pro forma free cash flow generation will more than double day one, that's the way you should look at it, and then you add the working capital synergies and all the rest.

So, now on Christina Aguilera and Dolce & Gabbana, first we have put in the S-4 a conservative assumption, but at the end of the day for the time being, we are not in the driving seat of that. So we need to wait until we see what happens on the D&G and Christina Aguilera before we can draw any conclusion first point.

Second point, the $130 million this is not the EBITDA. The $130 million is the gross margin minus the brand investment which is the NCP. The cost structure attached to that is part of the synergies level that we have indicated..

Okay. That's helpful. Thanks..

Our next question comes from Linda Bolton Weiser with B. Riley. Your line is open..

Hi.

Of the $400 million of synergies, excluding the $380 million that are initially recognized how much of that $400 million falls in year one?.

So, we have not provided this level of detail. What we have said is that we will generate $780 million, and this $780 million have the phasing of 40%, 70%, 80% and 100%. What you can assume is that the totality of the $380 million are going to materialize day one.

Okay? And the first year, as Bart has indicated and as I have indicated, we have to staff-up the organization and stand-up the organization. You need to understand that as Bart said, it is a carve-out. So what does that mean? This means that P&G is organized with the big share service center called GBS. We do not get any of this.

So from a back-office function for instance, we don't get any person to close the books. So we need to staff-up and to stand up our organization in order to be able to close the books of the month one. So that's one example amongst many others.

So I think the way you should look at it is that the $380 million are going to materialize year one, and then you're going to have a couple of investments that we -need to do in order to be able to staff-up the organization.

But the true way to look at it is that we're going to generate $780 million of synergies with 16% of the acquired revenues and 70% of that is going to materialize after year two..

Right. I think that concludes basically today's session. So I think we've gone through the deal in all detail and summarized it for you. If you have any further questions, please don't hesitate to call us. Thank you very much for attending the call. Thank you..

Thank you, ladies and gentlemen. That does conclude today's conference, you may all disconnect and everyone, have a great day..