Pierre-André Terisse - Chief Operating Officer & Chief Financial Officer, Coty, Inc. Pierre Laubies - Chief Executive Officer & Director, Coty, Inc. .

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Good morning, ladies and gentlemen. My name is Maria and I’ll be your conference operator today. At this time, I would like to welcome everyone to Coty’s Third Quarter Fiscal 2020 Results Conference Call. As a reminder, this conference is being recorded today, May 11, 2020.

On today’s call are Pierre-André Terisse, Chief Operating and Chief Financial Officer; and Pierre Laubies, Chief Executive Officer. I would like to remind you that many of the comments today may contain forward-looking statements.

Please refer to Coty’s earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from these forward-looking statements.

All commentary on like-for-like net revenue reflect the comparison of the business at constant currency in the current and prior-year excluding the impact of acquisitions and divestitures.

In addition, except where noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the earnings release. 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 Mr.

Terisse. .

Thank you, Maria, and good morning, everyone. Welcome to the third quarter conference call of Coty for fiscal 2020. I’m together with Pierre, who is in Amsterdam; Olga in New York; and I myself in London. And we’re very happy to host this exciting conference call.

Before we start and we go in the middle of the topic, I just would like to thank Coty teams for what they have done and what they have demonstrated for the past few weeks and month now, beyond their hard work to handle the situation from the business standpoints.

This crisis has been the opportunity for many associates at Coty to take or contribute to many initiative, which illustrates the role we want and we try to have in this environment. We have been producing hydro-alcoholic hand sanitizer in 12 of our plants, in 10 different countries including in France, in the UK and Germany and Monaco and in the US.

And we have donated it to frontline healthcare workers. Our brands, on the other hand, have been donating gloves and caps or shampoo to local hospitals. And everywhere in the group, numerous relief funds have been established throughout Coty to contribute to what has been a huge solidarity.

So, my main takeaway, in fact, over the past few weeks is the great commitment, the energy and the solidarity, which has been shown by your association. And before we talk of what we are going through and what we are building, I just wanted to publicly thank all of them and each of them for this. Now, moving to the following page.

This is the summary of the upcoming call and release. As you have seen with press release we’ve posted, we’re announcing something, which is far more than just earnings today, but rather important initiative, which are going to accelerate the transformation of Coty. The first of them is, obviously, the announcement of strategic partnership with KKR.

That’s a major step with $750 million convertible preferred share subscribed by KKR, improving immediately our liquidity in a strong way, and at the same time, the signature of an MOU for exclusive talks to be held with KKR on the 60/40 partnership on Professional Beauty and Retail Hair for an enterprise value, which is basically reflecting pre-COVID conditions at $4.3 billion, or 12.3 times fiscal 2019 EBITDA for a scope, which does not include Brazil, importantly.

The second element is the delivery of like-for-like net revenues which are down in Q3 by 20%, and I think that was, I admit that clear few weeks ago. But with a strong operating deleverage. We’ll come back on that. And that’s been for us very much a call to action.

And we are announcing today a comprehensive plan to reduce our fixed cost base by $700 million or 25%, to make sure, in fact, we have the right cost structure and we adapt to the new environment fast enough.

And the last element is important as well is the preparation of the restart, which we are going through at the moment with a focus on what are the most relevant platforms of Coty in this environment. And here we’ve mentioned group three. We’ll come back on that; e-commerce, Kylie Beauty, and Mass Beauty.

So, let me come back maybe on these different elements, and then we’ll have a look at the earnings. On the strategic review; first, so the third bullet is an important element. We have concluded that Brazil mass beauty operations would remain fully in Coty.

They are one of the key assets of our Consumer Beauty brand, Younique, and we are very happy that they will stay within this unit and keep contributing and helping us building Consumer Beauty brand.

The second element is that the circumstances have in fact created opportunity and a creative option, which is a 60/40 partnership on Professional Beauty and Retail Hair, which we call Wella, and that’s creative because that’s basically building things, which otherwise would have been difficult in the current context, i.e., it’s building continuity.

And I think these elements of continuity is very important for the business and very important for the partners, and it creates an element of sharing value, i.e., Coty will continue being exposed and benefit from the value creation agenda of this 60/40 partnership.

The valuation, as I mentioned, I alluded to reflect the strategic nature and the resilience of this business at more than 12 times 2019 EBITDA, which even the current circumstances is a real sign of strong confidence.

We expect that this is going to bring to Coty incremental cash proceeds of $3 billion, so just this part, the 60/40 JV and that will come in addition with the next start, which we are going to see afterward, i.e., the $750 million to $1 billion preferred stock investments.

We have discussed and agreed the main terms, but obviously, that kind of agreement is complex. So, beyond the main terms, which has been formalized with an MOU, we now need to complete the work and agree on everything.

That’s a work, which is going to be taking place in the coming days and weeks with a view to signing at the end of May, so in line with what we had said from the very beginning, by summer. We expect a closing of this transaction to take place within six to nine months post-signing, so that should be at the very end of 2020 or beginning of 2021.

So, that’s the conclusions on how – of the strategic review, but the strategic review has carried a second important element, which is the issuance of the convertible preferred shares for $750 million, which are extendable to $1 billion upon signing of the Wella deal.

And this $1 billion, $750 million, plus $250 million comes on top of the $3 billion, I was referring to before. The preference shares will carry a coupon of 9% and have a conversion price, which is 20% above Friday close and therefore is set at $6.24.

Beyond the strengthening of Coty balance sheet in a very meaningful manner, this formalized a broader partnership and Coty will benefit from the presence of two representative of KKR at its board.

So, that’s the obviously key element in the strengthening of our liquidity before that and ahead of that, we had announced a few days ago that we had been reaching, concluding an amendment of our credit agreements with our lenders and a one-year holiday of our covenants to reflect the fact that the covenants will be distorted by the crisis.

And we had also at the same time, a bit ahead of that in fact, decided to suspend the cash dividends until we come back to what we believe is a proper leverage below 4 times net debt-to-EBITDA. So, as a result of all of that, obviously, liquidity is strong.

It was strong at the beginning of Q4 with $1.3 billion in cash on hand at the beginning of the quarter, and we expect it to remain even stronger, in fact to be even stronger at the exit of the quarter with [ph] $1.2 billion – $1.50 billion to $2 billion at the exit of this quarter and the exit of the fiscal year.

So, that’s really what I wanted to say about the transaction we announced today and the strategic partnership with KKR. The other very important element – next page – thank you – is the amplification of our turnaround and the fixed cost – the reduction of our fixed cost.

All together, we have designed a plan, which aim at reducing our fixed cost by $700 million by 2023. That’s going to represent 25% of a base of $3 billion of fixed cost in fiscal 2019 and we are taking fundamentally three initiative to do so.

The first is going to be a revisiting of our end-to-end supply with a view to adapt to the change of demand to increase our flexibility, extremely important, but also to improve the efficiency and to reduce our cost by an amount of $100 million. I’ll come back to that in a minute.

The second element is the acceleration of the procurement initiative in two areas, in the area of business services first, but also in the area of commercial expenses where we have not, in fact, leveraged our scale to lower the cost and we are going to do so. We have started to do so and we are going to complete it and to amplify it.

And at the same time, our intention is that part of the savings generated are going to be used to increase the level of support behind our brands and productive support. The third element is about the completion and the expansion of our O2 program.

O2 is the change of organization and the program to get a leaner organization, which was designed as part of the turnaround. We have been, during the past few months, finalizing the negotiation within the unions. We are now in a position to implement that.

We are not only going to implement that, but we are going to see the way we can further simplify the organization by leveraging our processes, reviewing our network. We have many, many sites and location around the world and at the same time we will [ph] adding compensation.

Between the various projects I’m mentioning here, in fact we have a pool of [ph] $850 million, an addition of $700 million because we know that we need to take some headroom.

A number of them are quite advanced and we expect to deliver in fiscal 2021 more than a third of the savings, so it’s not a program, which is going to be back-ended, it’s a program which is going to start delivering as soon as the coming fiscal year.

The goal we have is really to make Coty more efficient, to make it simpler and to make it fit for growth.

The deployments of these fixed-cost reduction program, in fact allows us to confirm our mid-teen operating margin target by fiscal 2023 on the scope, which is a scope plus a strategic review, so without the 60/40 partnership in Professional and Hair Retail. I’ll now very quickly going in each of the streams to give you a bit more color on what it is.

On the supply side first, our manufacturing footprint consists of 13 factories, which are running at an average utilization, which is below 40% with a number of complexity over 30,000 product flow combinations. We have a big complexity of portfolio with more than 50,000 SKUs, you know that.

We have a speed-to-market, which is in our view suboptimal and we estimate we need to accelerate that by 20% or more, and all together, given the downsizing of our business, we estimate that we need to go for a fixed-cost reduction of 20%.

The base of the cost of supply is higher than $1 billion, 50% of it is fixed, so it means that the reduction of 20% will mean that we are going to target cost savings by $100 million. There’s a number a project, which has been visited in the past, some of them are relevant, some of them are less.

The supply team led by Richard is going to put everything together and to design a roadmap, which is going to be ready by the end of August for an implementation, which will come, which we’ll start shortly after depending on the topics. So, that’s the first element. The second one is about procurements.

Again, the fragmentation of Coty has prevented us to reduce cost on two important fronts. On the right side of the screen first, our network remain too exploded with many offices around the globe, high travels, IIS costs. We will capitalize on the moves which we have initiated in past 18 months.

And, for instance, some of you know that we have been, we are downsizing our presence in the Empire State Building. We are going to close our office in Pennington. And we are going to reduce the cost link to the networks to continue that movements.

In the same way, we are going to reduce the recost through external services, which are, obviously, costly by themselves. But on top of that, have been in the past generating an inflation of project with often a level of delivery, which was not high enough. And we expect these various measures to help us save 30% of all non-people costs.

That will be, by the way, putting us in the median of comparable companies in terms of cost to revenues, so not in the top quartile and in the best-in-class, but in the median. So the measures, the possible measure, the possible improvement, as well as benchmark are clearly showing us that this is possible. On the left-hand side, A&CP.

So, I just want to be clear here, we are not looking to cut A&CP. What we are looking at is rather to increase their impact. And Pascal, our Procurement Head and the teams have already progressed on the organization of media and concluded global negotiation already for [indiscernible]. They will start delivering in fiscal 2021.

The second element is that we yet have to platform our marketing materials; furniture, tester, et cetera. We are very often fragmented and taking initiative at different cost and generating complexity everywhere. We are starting the project of [ph] platforming. And here the saving at stake are very, very sizable.

We will, in addition, increase the spend accountability and make sure that every expense goes direct to P&L and is not flowing in a different manner starting from the 1st of July. Now, as I said, we don’t want only to get efficiency, but we want as well to increase our impact.

And, therefore, we are going in this program to reinvest 50% of our savings immediately in productive A&CP -in working media in priority. The third bucket is about making Coty simpler. We have much to do to make this organization simpler and more effective.

So, you’ll remember that we have initiated the downsizing of our organization a year ago with a target of $180 million. Now that the negotiation has been concluding with the work partners during the third quarter, we’re ready to deploy it.

Our new HQ, by the way, in Amsterdam has opened last week and teams are progressively migrating, although, obviously, COVID has made it slower than planned. One of the element of these downsizing has been really the writing of a Coty operating system, which is basically the description of accountabilities and inter-dependency.

And this work has evidenced, massive opportunities for process simplification and transactional efficiency. And that’s going to help us further decreasing our structure cost in the future. In addition to this, we’ll be revisiting our compensation system and HR policy with a view to better leverage and grow Coty talents.

So, to monitor all the above, the three pages and the $700 million program, we are setting today a dedicated governance.

I in my function as the COO, I’m going to lead the program and with a subset of [indiscernible], which is going to be made of people from supply, from procurement, from HR, from finance, from IS, but also the head of the two regions we have, EMEA and then APAC.

And we have appointed our Head of IS/IT [ph] Jon Overnet, Chief Transformation Officer, and he will coordinate the various aspect of the transformation.

So, that in a nutshell is the program in which we are going full speed right now, and which I just want to repeat is an expansion of the turnaround and acceleration of the turnaround and is the right level of savings we need to be able to address the size of Coty right now and give us flexibility to – in our growth.

I’ll now turn to the third quarter results with the first snapshot before I hand over to Pierre.

As expected and shared with you earlier in April, our net earnings have declined over the quarter by 20% on the like-for-like business; and while January and February were showing progresses, in particular around the performance of our brands in Consumer Beauty, COVID-19 already had impacted our performance in Asia then, in January/February, but obviously the big turn happened in March with the first lockdowns in Europe, which started in Italy, expanded to two other markets pretty quickly.

And so not only our net revenues were impacted, but the operating income was impacted even more deeply by this loss of revenue and margin, as well as by some one-off item and we’ll come back on that.

Obviously, our EPS was impacted as well, as a result of this and our cash flow was negative, as these, by the way, usually the case in the third quarter, but obviously, significantly more here given the drop of profit.

For the first nine month on a cumulative basis, our net revenue are now declining by 7% like-for-like, our operating income remains in line with that of the first half at $480 million and our cash flow is broadly stable.

So, I’ll come back at the end of the presentation on the main profit elements, but I will hand it over to Pierre to talk about the top line trends we have observed both on the impact of COVID, but also on our performance in terms of sell-out and launch. Pierre, over to you. .

Thank you, Pierre-André. As this is my last earnings call with Coty, I want to take a moment to thank everyone on this call for accompanying us on this journey, which continues of course, as Pierre-André has just indicated.

And especially, I want to thank the Coty teams for the tremendous achievement of work and effort that they have put in over past two years to lay down the foundations for a stronger company.

The Coty associates has demonstrated both in our first phase together and now in these testing times resilience, as well as an inspiring ability to learn and adopt new ways of working.

The aim of the support, as you may remember, was and is to strike the right balance between creativity and discipline, and we are beginning to see the result of this work materialize across several brands, markets and initiative.

As you can see on this slide, we had a number of strong innovation successes this quarter, even as COVID began to disrupt the demanding picture. Starting with CoverGirl. We continued our laser focus on improving e-commerce fundamentals.

As a result, CoverGirl recently surpassed the competitive digitally-native brand to become number three mass cosmetics brand on Amazon US. The brand’s improved performance both online and offline was in part fueled by the launch of Clean Fresh earlier in the quarter.

This was the first clean label product line across established mass cosmetics brands and quickly became the number one foundation launch in mass.

Similarly, Rimmel maintain the momentum we have seen in recent quarters fueled by media support and strong in-store execution and supported by the recent launch of Scandaleyes Volume-on-Demand Mascara, Rimmel has now reached its highest market share in the UK in over five years at 31%. Sally Hansen continues to fire on all cylinders.

The brand continues to build on its leading market position, reaching its highest [ph] US market share in several years at 45%. This is in part due to the launch of clean-label line good.kind.pure, which has already reached close to 3% of the [ph] main market.

In Prestige fragrances, we had a number of great launches, only a few weeks after launch, Boss Alive became the number one female fragrance in Germany. Similarly, CK Everyone, our first clean-label mainstream fragrance was seeing strong momentum in multiple markets as the top three launch at Macy’s and top five in markets like US, Canada and Germany.

While the lockdown saw impact in consumer demand and access, these launches, amongst others have clearly resonated with consumer and will fuel our recovery once retailers begin to open. Moving to our performance by segment; in the Americas, like-for-like revenues declined 18.8% as a result of the lockdowns at the end of the quarter.

This resistant operating deleverage pushed operating margins lower to 2.6%. However, building on the progress outlined already last quarter we continue to see green shoots in the region.

For the first time in many years, CoverGirl’s market share in brick-and-mortar retail stabilized and actually expanded, even as the mass cosmetics market has been impacted.

Sally Hansen, which was already expanding market share, further accelerated this gain with share of 100 basis point, and while Clairol also continues to see improvement in share trends. As the COVID pandemic spreads to the Americas, leading to store closure and stay-at-home orders, we saw consumer shift purchasing online.

Our e-commerce sales accelerated beginning in March and remained very robust through April. We saw, particularly, outsized e-commerce growth within our mass business, which as you can see on this slide, grew in the US 164%.

While not quite as strong, we were also very pleased with a strong sell-outgrowth within US Prestige, which accelerated meaningfully in April. In the EMEA region, like-for-like revenues fell 20.1% due to the COVID situation and resulting lockdowns that were put in place.

This like-for-like decline led to an operating deleverage, pressuring the margin to minus 2.5%. Despite the COVID-related pressure, we do see evidence of our turnarounds taking hold. Within the mass business, some of our key brands were able to take market share [ph] up to end Q3.

Rimmel, Max Factor and Bruno Banani all grew market share by 50-or-more-basis-points in brick-and-mortar during March. On the e-commerce side of our business, we have seen sell-out trends accelerate as store closure and lockdowns were implemented.

Similar to the Americas, we have seen particularly e-commerce trends within the mass beauty category with some region such as the UK and EMEA growing in excess of 100%.

Our Prestige e-commerce sales growth was not quite as strong; however, we have seen sale trends accelerate through the month of April as many consumers return to purchasing Prestige Beauty after weeks of being locked down. In the APAC region, like-for-like revenue fell 34.8% as the region was one of the earliest hit by COVID during the quarter.

Both China and Travel Retail were hit particularly in Q3. Encouragingly, we are starting to see trends improve in China, though many markets continue to have lockdowns in place. Overall, the like-for-like decline led to very meaningful operating profit deleverage in the quarter, pushing our margin down to minus 14.1%.

Despite this, we continue to see positive sign that our strategy is having success. As shown here, both Sally Hansen and Clairol gained over 100 basis points and 200 basis points, respectively, of market share in Australia during March. In addition, we also grew market share within the China Prestige make-up market.

Although our overall market share remains quite small today, we continue to believe that Prestige make-up market, particularly within China, will be an important long-term growth driver. Moving to e-commerce; we have experienced very strong growth in recent month, similar to the regions as consumers shifted more spending online.

Just to highlight a couple markets. Australia and Japan will both experience e-commerce sell-out in excess of 100% during the March and April period. For our Professional Beauty business, like-for-like revenue declined 11.9%. This decline was due to the COVID-19 pandemic, which forced many salons to close, particularly during March.

Moreover, the like-for-like decline led to operating margins being pressured, falling to 5.4%. However, we continue to be very pleased with e-commerce trend for the Professional Beauty business, including ghd, which delivered another quarter of very solid growth.

As I just mentioned, many salons were forced to close during the quarter and still remain closed to these days. Despite this, demand for salon services, such as coloring remains very strong. Based on a survey we conducted in the US and the UK, the majority of respondents want a salon appointment within the first two weeks of salon re-opening.

We view this as a very encouraging sign that the difficulties many salons are facing are likely to be temporary. Before returning the line back to Pierre-André, I would like to reiterate my thanks to all the Coty associates for the journey accomplished together.

They all have been truthful in their action and attitude to our vision that to build a bigger business, we needed first to build a better one. I’ve just shared with you a few of our green shoots. There are many others rolling currently in the company and many more to come.

I know that the current times are very testing, having lived myself through some of these events in the past. Yet I know also that our people have the skins and the drive to get through this crisis, while staying the course of strengthening our fundamentals.

I have absolute confidence that the Coty people will not waste this crisis; that they will use it to individually and collectively learn and grow and that our company will come out of it stronger than ever. Pierre-André, I’m turning the mic back to you. .

Thank you, Pierre. Thank you, Pierre. It’s good to have had you and to have you. Now, turning back to the result of third quarter. Taking over on the minus 20% like-for-like net revenues, which in dollars terms meant a decrease of our net revenues like-for-like by $370 million.

And given that the impact was late in the quarter and that we did not really have necessary time to react, there was no evolution of our fixed costs, which remained broadly flat versus the previous year.

And so the loss of revenues was only mitigated by variable costs and went almost – for almost halve of it straight to the operating income for a loss of OI of $174 million. On top of this $174 million, we recorded several non-recurring charges for a total of $53 million.

First, the depreciation of the ruble and the Brazilian real led to some revaluation of intercompany receivables and resulted in foreign exchange losses.

Secondly, our excess and obsolete provision was boosted by COVID as obviously, mechanically our expected sales in the coming 12-months decreased and as a result of that, we made some provision on the inventories beyond 12 month.

And last, we could not incorporate to our COGS certain factory costs as we had been slowing down or even stopping the production in those factories. So, as a result of all the above, the operating income went to zero for the quarter, down by $227 million.

And our EPS was negative, given the fact that we have interest and tax charges below the operating income. Next slide; our free cash flow is usually weak at this time of the year in the third quarter, but it was obviously amplified by the weakness of the EBITDA, which stood at $103 million.

The working capital and the one-off costs were negative for $322 million. And we also closed at the very beginning of January the King Kylie deal, investing $600 million and that’s together increased debt to a level of $8.1 billion at the end of the quarter.

I will conclude by – after having talk of the cash the liquidity, the reduction of our costs, I will conclude by just leveraging on what Pierre has been telling you on the performance of our brands in the middle of this crisis and this quarter.

Having a look at what we see as some of our key assets for growth at the outset of the recovery, and that’s quite interesting. On Luxury; our innovation pipe comprises many projects; some of them are yet to come. And you see on the left of the chart, the Daisy Petals by Marc Jacobs.

And some of them have been very successful at launch, as mentioned by Pierre, although COVID had obviously interrupted the dynamic and this is a case of Boss Alive and CK Everyone. So this is, obviously, as we reactivate our distribution, going to be an asset for us. The mass beauty is increasingly so.

The recent trends have definitely shown progress for three of our CB Brands. And you remember that in the last quarter we had been talking of Sally Hansen and Rimmel, which continue performing well. But in addition to that, CoverGirl, with the launch of Clean Fresh, has been clearly improving in terms of trend.

And this is in the context for mass beauty is likely to benefit from a foreseeable switch to affordable beauty by consumer.

The other element, which is interesting, is that the OpEx program we have been designing and the growth ahead, cut the tail is going to have a very direct use in these circumstances because we have to prioritize, obviously, the restart.

We cannot restart everything at the same time, and we’ll be restarting in priority the SKUs and the product, which we believe can grow faster and can build a stronger net revenue base. The following element is the e-commerce. You probably have heard that from many, many company.

We have, as many others, shifted resources and energy to this channel with some success, I must say, Sally Hansen and CoverGirl gaining market share on Amazon in the US, and I believe CoverGirl as well. CoverGirl, in particular, became number three brand to gain one position. It was number four; it became number three during this quarter.

So, we are progressing and progressing well. We also accelerated the preparation to expand Kylie. We’ve been launching Kylie in Europe this month in May. I think on the 22nd of May, that’s going to be done with Douglas.

And at the same time, the performance of skincare for Kylie in direct to consumer has been strong, and we’re working at widening and strengthening the platform.

And so, I’m mentioning these several examples because these are all the sets and platform, which are relevant in the current circumstances, relevant in the current circumstances, and have been showing stronger improved trends.

And we will be using them, clearly, in the context of results, which we believe is going to be gradual, and selective, depending on the markets in which we, therefore, will be running in a very articulated and organized manner with a view to maximize our impact and to maximize our success with consumer.

So, I’ll move now to conclusion and make sure we have some time for questions. I just want to say that we are very excited. It’s obvious that we are going through a time of uncertainties, but we have been getting equipped to face dues and not only face due but to leverage the uncertainties and the opportunities we are going to cross.

We have now the right balance sheet; we have the right balance sheet now, and we’ll have an even stronger balance sheet at the end of the year. We have the right program to adapt our cost and our mindset, and I think that’s very, very fundamental with a $700 million cost reduction program.

And we have the relevant, and we believe the right top line levers. And, therefore, we are all very excited having all these assets in-hand and be able to be of something very attractive. That’s all for this pretty long presentation, and we’ll try to answer your questions now. Thank you. .

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Nik Modi of RBC. .

Yeah, thank you. Good morning, everyone and, Pierre, great working with you. Good luck going forward. Just two questions on my end.

One is on the taxes related to this transaction, Pierre-André, if you can just give us any perspective on how to think about that And then the second question just gets down to your margin targets and what kind of assumed top line have you embedded in that assumption? Thank you. .

Thank you, Nik, and by the way good to talk to you. On the taxes, we’re talking of an amount, which is going to be within $300 million. Obviously, we need to complete the calculation, but that’s going to be within $300 million. On the margin, so we have to assume that we don’t know what the growth is going to be.

The reality is that I think we have everything we need to get through, but you and I see the environment. We see the lockdown stopping and then restarting.

You see the very, well, the social distanciation and its impact on the restart of the business, and therefore, we have to, I have – as a CFO and a COO, I have to assume that it’s not going to get better soon and if it does, that’s perfect because I will have the right cost structure, but if it doesn’t, I need to get protected.

So, in building that, I have assumed in building this mid-teen margin, I’ve assumed that we will not come back to or we needed to be equipped to face the case where we will not come back to 2019 net revenue level before the back-end of the plan and even after that.

So, it will take us time to do so, even in this case, or even in the case where that would happen, we will be delivering the mid-teen, sorry, OI margins I’ve been talking about. .

Excellent. And if I can just throw in one more. It seems pretty impressive actually you’re ramping up your cost savings quite a bit without extra cash charges, so I just wanted to see if you can provide any context around that because this is the first time at least I’ve seen that happen. .

Sure. Well, the reality is that in the progress we see – we’ve made so far, we’ve seen a level of one-off cost, which has been narrowed than what we had indicated. We have been pretty careful at the outset of the turnaround because the history of the company was encouraging us to take some headroom.

Now, the reality of what we have been managing for the past one year has been lower, and therefore, the envelope we had to deploy the turnaround is enough to cover the additional costs, which we would incur. I think in mind, two things.

A, there’s a lot in the plan, which is not going to be or not only going to be about people and severance, so there’s a lot, which will be done by – through method and discipline rather than through severance. And the second one is that, yeah, we’ve improved that.

For the past one year with the team it’s a silent work, but it’s a work, which we have done very methodically. We’ve been trying to make sure that we will minimize these one-off costs because we knew that they had been extremely helpful for the company.

So, yeah, with this $500 million net by the way because we believe in the restructuring, we can also have some capital gain, which are going to finance some cost. We can do it with this envelope. .

Our next question comes from the line of Robert Ottenstein of Evercore. .

Great. Thank you very much, and congratulations on the transaction. A lot of moving pieces here and I just want to make sure I heard this right. I think maybe I didn’t, but you’re talking about taking $700 million of fixed costs out, but I think I also heard that the total that you’re going after is $850 million.

Is the $150 million reinvestment in the business? I’m just trying to understand those parts again, and again, my apologies because I know you mentioned it. And then second, it looks like the working capital was pretty negative in the quarter.

Can you talk a little bit more about that and what the working capital outlook looks like for the rest of the year? Thank you. .

Yeah, hi. Well, thank you. No, indeed, let’s be clear on that. So, what I said is that we have a total program, a total list of opportunities, if you wish; serious opportunities, obviously, not only ideas, which amounts to $850 million.

And we feel sufficiently confident in these opportunities to be able to commit on $700 million, which means that we assume that some of them are not going to be realized or not realized fully. That’s every time you do that kind of program, that’s what you have to assume.

In the $700 million we are discussing, most of the elements are gross, but there is one element which is net, and it’s the A&CP component, which broadly speaking, is going to be efficiencies. We expect efficiency to be in the region of $250 million to $300 million, and half of that to be reinvested.

So, in the $700 million I’m counting only halve of the saving I’m going to make on that side, okay? So, there are two elements.

One is the fact that we have headroom, and the other one is the fact that we are counting only the net of what we save on the A&CP, because we think it’s important, in fact, to do an exercise of reallocation to what is working and what is going to be activating the demand.

On the working capital side, so I think the dynamics to have in mind are the following. We don’t have much increase in inventories now. We had at the beginning of the quarter, because at some moment, we saw demand going down. But obviously, production did not stop right away, but it stopped growing.

The interesting element is about payables and receivables because we have seen on top of the decline of net revenues, we have seen the situation of some of the customers being difficult.

And not many have come to serious difficulties to the point that they will become a risk for us, but many of us have been in difficulty – basically telling us that they needed help and support and that they will be postponing some payments. And we have to take that onboard. But, obviously, we have to take that and share it with our environment.

So, we’ve been adjusting the cash flow and the way we manage cash to make sure that we would be spreading and sharing this element of contraction of liquidity, which exists across the supply chain in our industry and in many industries at the same time.

So, [indiscernible] all the details to maybe be a bit long, but to say that we’ll see in Q4 another quarter of negative evolution of working capital, which we are controlling very tightly – balancing basically the need to control cash, and on the other end, the need to build – to continue building medium term relationship with our partners. .

Our next question comes from the line of Faiza Alwy of Deutsche Bank. .

Yes. Hi. Thank you. .

Hi. .

So, my first question is just about the $700 million of reduction in fixed costs. So, how quickly do you think you can get there? It sounds like it’s by fiscal 2023 where the program ends. But I’m wondering if you can give us some guidepost in terms of what type of savings we should expect in fiscal 2021 as a start. .

Well, I mean, my answer is going to be simple. It’s not going to be back loaded. It’s going to be more front loaded. We expect savings in fiscal 2021 to be more than a third between 35% and 40% in fiscal 2021. And then probably a third in fiscal 2022 and the remaining in fiscal 2023.

And the reason for that is that, again, some initiative, first of all, are part of the turnaround, so only two-third of it is incremental. That’s the first point.

The second point is that some initiatives are going to be leveraging on the current circumstances and what we are going to do on travel, what we are going to do on consulting are clearly going to be the extension of the crisis management mode we’ve been in for the past few months, as many other companies.

And the last element is that many, many things have been studied at Coty, many project, which had not been implemented because we had decided to pressure other priorities. And now we’ve put them together; they exist.

They have a lot of strong foundation and some of them can go pretty fast, and so that’s the reason why we’ll go [indiscernible] I mentioned. .

Our next question comes from the line of Olivia Tong of Bank of America. .

Great. Thanks. Good morning. .

Hi, Olivia. .

Hi.

How are you?.

I’m good. .

Good. I guess first, just your businesses are very different. Some are significantly hurt by the pandemic and recession that’s going to come, like Luxury, while one could argue that Consumer Beauty should hold up better given wider availability and channels that are open.

So, can you talk about your view? And then, maybe a little bit in terms of performance beginning-of-quarter to end-of-quarter and then April trends across your key businesses? Thanks. .

Yeah, well, as I said at the beginning of the [indiscernible] three different trends. A, remember that we’ve been going from divisions to segments and there was some level of noise on that.

B, more importantly, we had the beginning of COVID and the slowdown of Travel Retail following the Hong Kong issues, and so the performance of Asia and Travel Retail was weak.

But C, at the same time, we have been seeing very successful launches, pretty good performance of CK Everyone, of Boss Alive and very interesting performance from CoverGirl, Clean Fresh and from Sally Hansen Pure. Two of the three brands, which we launched together with our sustainability platform.

So, that’s where the mix of it, with plus and minuses, but broadly speaking in line with what we expected. And then March and to be precise, from the second week of March became very much under pressure, it started in Italy, but it’s been spread into Europe very, very quickly. And April, obviously, we expect is going to be significantly worse.

May is likely to be in the same regions.

And the big question is going to be about June and our ability to recover, and I think it depends very much business-by-business and probably market by market, among other reasons because of the phasing of the pandemic and the lockdown is different depending on the countries; and business by business, people want to go back to hairdresser.

I think that’s fairly I guess for everyone. And the opening of some luxury store is going to take a bit more time. But yeah, April and May will be difficult. We expect June to start showing some sign of recovery, and we expect Q1 to be showing as well some sign of recovery. But I think Q1 will not be by any mean return to previous level and to normal. .

Our next question comes from the line of Steph Wissink of Jefferies. .

Thanks. Good morning, everyone. Just a follow-up question on your e-commerce comment. It seems to be the one thread that was pretty positive across all of the segments.

I’m wondering if you can maybe break down for us across mass, pro and prestige, what your strategies are to grow your online share and how that may transition or advance coming out of the crisis? Thank you. .

Pierre, you want to take that?.

I’ll take it, Pierre-André. [ph] Yeah, it’s Pierre. I think really, where we decided to make a decisive effort in e-commerce has been really on Consumer Beauty where we are really underplaying our fair share. So, in Luxury and in Professional, clearly, we continue to strengthen, and the growth has been solid in line with the market growth.

So, that is very good. Where we have been really, as I said earlier, catching up, has been on the Consumer Beauty where we have by and large if I look at the last month, our business is growing globally by 75%.

So, it’s a very, very good result, at least [indiscernible], and which is very, very substantial acceleration for market on the same panel, which we measure to be in the mid-teens, so around 15%. So, that’s a spectacular performance.

Why have we done that? To be honest with you, a lot of basics; a lot of focus on conversion, a lot of focus on the basics of e-commerce, building our skill set into the organization and really building a playbook.

Building a playbook, deploying the playbook, deploying the playbook in the key market, and after that, deploying the playbook from the key market to the smaller market. So, I think that we are, we have made a step here. And we have made a substantial step change. And I do not see why we would go backward going forward. And that’s clearly very pleasing.

And again, in my view, it is very exemplary of the culture that we want to create – a culture of drive, but also a culture of discipline and distribution of playbook, so that make sure that everybody catches on that. And we feel very, very good about that. In the same way, then we feel very good about our general trend in Consumer Beauty overall.

To give you a bit of data, I’m talking like combination of brick-and-mortars and e-comm. If we look at our business in Consumer Beauty, something like 12 to 18 months ago, we would have lost market shares in 80% of our market. Now in the last period, we are stable or gaining share in 80% of our markets.

And very often the reason why we lose share is because we have made active decision of withdrawing some brands from the market, for instance, Bourjois in the UK, right, where we knew we were not able to operate at scale. So, I’ll be honest with you. I think we’re working the plan and the plan is working.

Okay, we have the crisis, but I really believe, and I said it earlier, I believe we will come out of this stronger because we now start to embed our OpEx program, our conversion focus program on e-commerce, our advertising program on marketing, our investment at scale behind a more limited number of brand, as well as, yes, we have experienced a setback.

But the focus on gross margin, lowering promotion, building working media, all this stuff works. .

Our next question comes from the line of Lauren Lieberman of Barclays. .

Hi, Lauren. .

Good morning. Hi. So, I just, I guess, I want to go back and think about today versus last July. And just thinking about strategic priorities from here versus what they may have been and how they may have changed since July.

And as you think about kind of the pro forma portfolio, would you say that you now have what you need to grow? And I know you’ve made the comments on 2019 and when it gets back to that, but let’s try to pretend in a non-COVID world, right? Would the portfolio be better structured for growth now? Or do you still need additional assets to kind of get towards those faster-growing sub sectors within beauty? [indiscernible].

Yeah, I mean, I’ll start. And we can play it together. I think the fundamental difference as a year ago is exactly what we said we wanted to achieve with the opening of the strategic review, i.e., refocus the company – refocus the company on fragrance, on cosmetic, on skincare.

Give ourselves a number of categories on which we can make a difference, which are basically adapted to the level of human investment efforts we can have and at the same time, resize the balance sheet to make sure that we have the means to develop these categories and to win in these categories.

And so, yeah, I mean my answer would be that we have achieved exactly what we said we will be achieving. We have, in Luxury, and in fragrance that you know a number of assets, which are evidenced by the new launches we are doing and by the success of some of our brands.

In Consumer Beauty we have the OpEx simplification program and a program of reinvestment behind our brands, which start working fundamentally. In Skin, we need to accelerate. Now we have one very, very strong and important element, which is playing both in skin and in direct-to-consumer and this is Kylie.

And I can promise you that this is going to be a real, real asset for the company and all that with; A, less debt, level of debt, which is I believe the right one to have financial flexibility to support that portfolio.

And B, with a real intention and program to address the simplification of Coty and to make it not only lighter in terms of costs, but also much more manageable. And so, yeah, I think strategically we have resized the company, re-scoped it to something which – in which or with which it can win. .

Our next question comes from the line of Mark Astrachan of Stifel. .

Yeah, thanks, and good morning, afternoon, everyone. I guess just first... .

[indiscernible].

...maybe a bit more detail on the deal announced. So, can you maybe preliminarily talk about dilution when the deal closes in six to nine-months? And then on the Brazil business, so I recall your commentary about it having a fairly large hair components.

So, I guess, I’m curious how to think about that business now given what has been announced and how to think about it competitively, as well as whether any other pieces of it or how much of the business gets sold as part of the deal. Thanks. .

Yeah, thank you.

So, in terms of dilution, we come up with precise numbers at this stage at which we are is an important step, but don’t forget that we are only talking an MOU and there’s a number of parameters we need to fix including the precise carve out, the buildup of the standard of this new 60/40 company, and the full way we are going to address the consequences on Coty.

What’s sure is that there are stranded costs, but the stranded costs are going to be addressed by the $700 million cost reduction program.

The way to look at that and to get confirmation of that is the fact that we confirm our mid-term target for operating margin even though this is now applying to a group, which is going to be about one-third lever in terms of size. So, we’ll deal with that, and that’s going to be as part of the $700 million that are cost reduction program.

On Brazil, yes, you’re right. It’s more than that, but it’s a part of that, and basically, that means that similar to what we do in Luxury, where we are licensees of some brands, Brazil is going to be the licensee of developed brand in that country in the consumer space as long as both parties find it interesting.

Now, the Wella brand is a very important brand in Brazil and the platform we have with Hypermarcas is an extremely efficient platform in Brazil with not many equivalents in terms of its ability to produce, distribute at the right cost and with efficiency and with reach. So, my bet is that this is going to continue for a quite long period of time.

Conversely, we are reorganizing our Luxury business in Brazil and we have decided that we will be leveraging the [indiscernible] market platform to try and accelerate our penetration in the rest of our businesses. .

Our next question comes from the line of Wendy Nicholson of Citi. .

One of the things I know you talked about last July was a need or a desire to really pullback on your SKU assortment and really narrow your SKU count. And just in the context of what you mentioned, in terms of the conversations with some of your retailers, who are going through a difficult time right now.

Just wondering, is that an opportunity to move faster on the SKU reduction? And so, if you could update us, how much progress have you made? Is COVID-19 a particularly good opportunity to move faster or what’s your thinking on that SKU side? Thanks. .

Pierre, you want to take or you want me to do?.

Sure. I think, honestly speaking, I don’t think that COVID makes a difference to our plan. We had the plan to focus on our power SKUs and to give them a disproportionate share of shelf and align, I would call it our power SKUs with – across the line from a distribution promotion and advertising standpoint.

This is exactly what we are doing for instance with CoverGirl in the US. So, our view is that clearly, yes, we can always accelerate and we will, because we have now I would call it refined our approach. We started with a limited number of markets and now we see that this plan is working, so we are expanding and we are accelerating.

We’re now at the second phase where we are looking at combination between markets. We have not only looked at complexity within market, but now we are looking at complexity between market and that’s the next stage of [indiscernible] on that one, but I’ll be honest; I don’t think COVID changes everything to the plan. We need to continue to push.

We need to continue to push our core franchise.

And as I said earlier, to have a total activation fully aligned from distribution to promotion to advertising through our core franchise, and we know that it is also the way we build brand attribution for our advertising support to make sure that we advertise the core line or the core sub-franchise of the brand, and we have seen it as a fantastic result in CoverGirl in the US market, for instance, where our top six or seven franchises are really growing very fast.

.

Our next question comes from the line of Joe Lachky of Wells Fargo Securities. .

And that’s going to be our last, please. Thank you. .

Hi. I wanted to ask about Kylie and the trends you’re seeing in that business as you’re kind of navigating through this crisis. Obviously, their largest retailer partner experienced some disruption closing stores and so forth, and obviously, Kylie has a pretty big e-comm presence.

So, just wanted to figure out the balances as you’re working through there. And then, if there’s been any sort of manufacturing issues with that business? Are you able to keep up with supply? And if there were, are there any plans to move manufacturing in-house a little quicker than you had previously planned? Thanks. .

Well, a lot of very good questions. So, yeah, we are constrained by – on cosmetic, we’ve clearly been constrained by production.

The third-party manufacturing we’re using has been shutting down and therefore, we’ve been out-of-stock for a lot of the cosmetic references, which is a pity by the way because the direct-to-consumer still works and is very active, so we’re indeed looking at what are the options we are in the short-term, That’s going to be, I think the reopening, but in the more medium-term, of course, because we need to be able to make sure that we have supply at all time.

We can’t be in that kind of position again. The other side is skincare and here, we have really, really seen a lot of traction, a lot of traction on the direct-to-consumer side in particular beyond what we thought.

So, it’s really good because it means that we have confirmation that the skincare range of Kylie has a lot of future in front of her and we need to develop that.

Now, what we’re also doing is take advantage of this period to, number one, accelerate on the building of the infrastructure we need and the frame we need to be able to leverage Coty network and size for the benefit of Kylie and we’ve been pretty active on that, and we’ll be, in fact, ahead of – we are ahead of the plan we had.

And on the other hand, we have accelerated the launch in Europe. As I said during the call and on the 22nd of May, so it’s in 11 days’ time we’ll be launching Kylie products in skin in Europe; so, a lot of promising elements. We have to solve this question of the supply, but we have everything we need to do it.

And then on the demand, the direct-to-consumer what you call e-commerce is really an opportunity for both by the way Kylie, but also the rest of Coty. .

End of Q&A:.

:.

All right. Well, thank you again. Very happy to have been able to share these important news with you, and I wish you all, we wish you all, Pierre, Olga and I, to stay safe and to stay close to this incredible market, full of uncertainties, but also full of opportunities. Thank you. And we wish you a very good day. .

Thank you, ladies and gentlemen. .

Thank you very much. .

This does conclude today’s conference call. You may now disconnect..