科蒂集團 (COTY) 2021 Q3 法說會逐字稿

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 2021 Results Conference Call.

As a reminder, this conference call is being recorded today, May 10, 2021.

On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial 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.

In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release.

I will now turn the call over to Miss Sue Nabi.

Ladies and gentlemen, with another quarter now complete, I'm once again very pleased to share with you our results as well as highlight a number of green shoots we are seeing as we continue to execute on our growth strategy, which I shared with you last month.

Importantly, our result this quarter further exemplified the urgency with which we have reacted during our fiscal '21 to ensure Coty emerged from COVID-19 as a much stronger, more nimble and more focused organization.

Our third quarter net revenue trends improved sequentially from Q2 despite many markets, most notably Western Europe, remaining under lockdown during much of the quarter.

I'm very pleased to say that our prestige business returned to growth this quarter led by China and the U.S.

Building on the progress in the first half of '21, we once again delivered very strong profit as adjusted EBITDA increased over $180 million from last year.

This was supported by both substantial gross margin expansion and continued cost reductions.

Importantly, this allowed us to start the virtuous circle of stepping up our media spending and reinvesting behind our newly repositioned brands.

A little over 2 weeks ago, Laurent and I presented our strategy to accelerate sales and profit growth.

And today, I'm excited to tell you that we are rapidly executing and seeing initial results on all of our key strategic growth pillars.

The green shoots we have seen are encouraging, and we have a strong cadence of portfolio milestones planned through the end of calendar '21.

So let me spend a few minutes reviewing our revenue trends in the third quarter before I hand it over to Laurent to take you through our financials.

Then I will wrap it up with an update on our strategic progress.

Sales trends in the quarter were led by the Asia Pacific region, which increased 20% like-for-like.

This was primarily driven by the very strong performance in China.

Even when compared to our fiscal '19, the pre-COVID baseline sales in China rose double digits.

We are very encouraged by the momentum we are seeing in China, which as you know, is a key pillar in our strategy.

In the Americas, our sales declined 3% like-for-like.

This decline was largely the result of softness within our mass business driven by lower cosmetics consumption.

At the same time, our U.S. prestige business returned to strong growth in the quarter while our mass business in Brazil maintained its momentum.

EMEA continued to be our softest region with sales declining 13% like-for-like.

Throughout the quarter, much of the region was impacted by strict lockdowns and restrictions, which weighed heavily on the sales performance as well as low international traffic in travel retail.

However, with the U.K. having recently opened and many other markets putting in place reopening plans, we remain optimistic the region will soon see an inflection.

Moving on to sales by channel now.

Our prestige business returned to growth this quarter with sales increasing 2% like-for-like.

As I just mentioned, this performance was really driven by the U.S. and China with strong performance across fragrances, makeup and also skincare.

Many of our key focus brands delivered strong double-digit revenue growth in the quarter, including Gucci, Burberry, Marc Jacobs and philosophy.

The growth in the prestige business was noteworthy as it came in spite of Coty's continued active reduction of sales in low-quality channels, which represented a high single-digit negative impact to prestige business in the last 2 years.

On the other hand, the mass beauty business declined 15% like-for-like.

This was largely the result of softness within mass color cosmetics that has stemmed from the lack of use occasions.

On a positive note, with the lapping of the COVID-driven demand decline in March of last year, we have seen mass beauty category sales return to global growth in March.

I'm pleased to say that we continue to make progress on one of our key strategic pillars of increasing e-commerce sales, further building on our efforts during the first half of the year.

During the third quarter, our e-commerce sales grew nearly 30%.

The strength that we saw was fairly broad-based across both regions and categories.

Luxury e-commerce sales increased over 20% and penetration year-to-date stands in the mid-20% level.

Consumer Beauty e-commerce sales increased 56%, with penetration reaching the high single-digit percentage level year-to-date.

And importantly, in Q3, we saw equally strong performance across e-comm pure players and brick & click as we work closely with both sets of strategic customers to improve the consumer experience and elevate our brands in these 2 important channels.

Overall, e-comm sales now represent a high-teens percent of Coty sales fiscal year-to-date.

I will now hand the call over to Laurent to take you through our financial results.

Thank you, Sue.

Our third quarter performance has proven to be another successful period of profit growth with robust profit delivery fueled by gross margin expansion and cost reductions, enabling increased marketing investment behind our brands.

Starting with gross margin delivery.

Our Q3 adjusted gross margin of 62.2% was ahead of external expectations, reflecting a strong improvement of 450 basis points year-over-year and a 350 basis point improvement versus the first half '21 run rate.

These were -- there were 2 key drivers of this expansion, primarily 40% mix and revenue management and 60% supply chain improvement with the latter being through better demand planning and lower excess and obsolescence.

Of the gross margin improvement delivered this quarter, we are confident that approximately half is structural and, therefore, can be maintained.

This is part of our multipronged efforts to steadily improve our gross margins with contributors coming from channel, category and regional mix as well as various COGS-related efforts.

As detailed during our recent strategic update, we have implemented greater discipline in our A&CP as part as our pay-as-we-go process for ensuring nimble and highest ROI resource allocation.

Our investments have also been more concentrated in fewer but bigger initiatives.

As our sales and profit have improved, we have already begun increasing our A&CP ratio sequentially.

A&CP in Q3 was close to 23% as a percentage of sales, up from 20% in H1 '21.

We expect A&CP to step up further in Q4 '21, with absolute working media dollars above the Q4 '19 pre-COVID levels.

This step-up is enabled by our strong profit delivery year-to-date, which is allowing us to both deliver on our profit commitments for the year, while at the same time, providing significantly more fuel for our brands, right, as the beauty market is inflecting, and in support of strong initiatives planned for the remainder of the year.

Turning to profit growth.

The Q3 adjusted EBITDA increased by $180 million year-on-year, reaching $183 million for the quarter and delivering an EBITDA margin of 17.8%.

While sales declined somewhat during the quarter, this substantial profit growth was supported by: a, strong gross margin improvement, as mentioned earlier; b, very focused marketing investment; and c, strong fixed cost reduction, which I will cover next.

As a reminder, with Q3 marking the first full quarter for Coty ex Wella, we have begun delivering various transitional services to Wella as aligned in the transition in the separation agreement.

In the third quarter, we added certain services that we provide to Wella, principally IT activities for which we have been compensated by Wella largely on a cost-plus basis resulting in fairly neutral impact to our profit.

In summary, the robust profit growth achieved is further evidence of our strategy yielding strong results, and we expect to continue to build on this momentum in the coming years.

Focus and discipline across the business is a key part of our strategy.

Our fixed cost reduction program has allowed us to redirect capital to accelerate our brands and focus on profit delivery.

In Q3 '21, fixed costs decreased 15% year-on-year.

And during Q3, we achieved approximately $110 million of savings.

This brings our year-to-date savings to over $270 million.

The largest contributor of the savings year-to-date has been streamlining the organization.

In line with our prior quarterly update, the additional key contributors have been savings in business services, including consultants, recruiters, IT, real estate and facility management costs.

As previously mentioned, the consolidation of our fragrance manufacturing footprint is ongoing and expected to be completed by summer '22.

Some of these changes are not easy decisions to make, but necessary to modernize the business and position Coty for long-term sustainable growth.

Our progress over the last 3 quarters put us on track to achieve our fiscal year '21 of cost savings target of $300 million and fiscal year '23 target of $600 million.

Turning now to EPS.

With adjusted EBITDA for the quarter of $183 million, less $87 million in depreciation and noncash stock compensation, close to $50 million of interest expense, a low-teens adjusted effective tax rate and 944 million diluted shares factoring full dilution from the convertible preferred shares issued to KKR, the Q3 diluted adjusted EPS for Coty ended at $0.0 and, therefore, had no impact.

As for the fiscal year-to-date EPS, based on $633 million of adjusted EBITDA, $268 million of depreciation and stock compensation, roughly $172 million of interest expense and an adjusted effective tax rate in the low teens, the diluted adjusted EPS for Coty ended at $0.10.

Let me spend a minute on a few accounting dynamics impacting our EPS.

First, as we described on the last earnings call, we have taken a decision to carry our 40% stake in Wella as a fair value asset, recognizing changes in its fair value in our P&L rather than the equity income.

This quarter, there was an improvement in the general market environment due to COVID reopening and vaccinations that led to an increase in Wella's valuation by $64 million.

While this is clearly a positive and speaks to the value accretion we expect to see in Wella over time, since this is not a core activity of our business, we have, therefore, decided to exclude these fair value changes from our adjusted net income and adjusted EPS.

Second, we were required by accounting rules to value the preferred dividend to fair value based on the quarter end stock price.

As thus far, we have not paid the dividend in cash, this increased the value of the Q3 preferred dividend by $11 million to $34 million.

At the same time, while the mechanical EPS calculation will yield several cents of adjusted diluted EPS, the accounting rules state that the diluted EPS cannot be higher than basic EPS, hence, the result of our Q3 adjusted diluted EPS being 0. Looking to next quarter, we expect to pay the convertible preferred dividend for Q4 in cash.

And we, therefore, do not expect to have a similar adjustment for fair value.

Looking now at free cash flow for the quarter, which came in line with expectations at approximately minus $218 million, reflecting typical seasonal weakness and the Wella-related working capital reversal of over $100 million.

We also continued with our tight management of CapEx and one-off costs.

Looking at free cash flow fiscal year-to-date, we have generated $143 million.

Based on this delivery, we continue to expect to end the year with positive free cash flow for fiscal year '21.

Turning now to our capital structure.

During the quarter, the combination of the completed KKW deal for $200 million, approximately $100 million of organic cash outflow, roughly $100 million of Wella working capital reversal and some positive ForEx resulted in a financial net debt balance exiting Q3 of $5.1 billion.

And factoring in the $64 million increase in our retained Wella stake to approximately $1.25 billion, our economic net debt at the end of the period was approximately $3.9 billion.

Additionally, in Q3, we successfully completed the issuance of $900 million, 5% senior secured notes due in 2026.

We benefited from very strong demand and increased the bond offering from $750 million to $900 million.

Our capital structure remains very attractive with key maturities in 2023 and 2025 and a net blended cost of debt below 4%.

It is quite clear that we have made tremendous progress over the last year in lowering our net debt balance and resetting our leverage levels.

While our retained Well stake will likely represent a significant monetization opportunity at some point in the coming years, we will continue to be active and tactical in intensifying opportunities to monetize nonstrategic assets and further reduce our leverage.

Let me now turn it back to Sue for a discussion of our operational progress and forward outlook.

Thank you, Laurent.

So many of you joined us several weeks ago as we walked you through our plan to accelerate sales and profit growth and what each strategic pillar entails.

As we have hit the ground running in executing our plans, I'm excited to update you on the progress we are making and some of the early green shoots we are already seeing.

Due to the pandemic over the past year, the global consumer beauty market, particularly cosmetics, has come under significant pressure.

It has been quite clear that social distancing, mask wearing and less opportunities to socialize have impacted consumption of consumer beauty products.

While we are not yet to a point where we are back to pre-pandemic levels, the global consumer beauty market returned to positive growth in March, even despite many markets, such as Western Europe, being under tight restrictions.

I am even more pleased to say that Coty is continuing to narrow its underperformance relative to the overall market.

We believe we are progressing towards stabilization as our brand repositioning gets underway.

This is certainly true for our first brand repositioning with CoverGirl.

The team has been working hard and the efforts are paying off.

The early results have been stellar, with CoverGirl recording the first full month of market share gains in 4 years.

The new brand positioning, which presents a modern take on CoverGirl's brand heritage and distinctive media assets, are really resonating with consumers, as you can see it.

Importantly, it's becoming even more clear that clean beauty is what consumers demand.

Recent Nielsen data shows clean beauty is outpacing the U.S. color cosmetics category by 17 points, with CoverGirl as the second clean beauty brand in America.

We are leveraging CoverGirl positioning as the inventor of clean beauty, and we continue to lean into clean innovation.

While the early results are encouraging, we are just getting started.

Activations behind the Simply Ageless franchise with the new spokesperson, Niki Taylor only recently began to air.

Recall, this utilizes the power of nostalgia in promoting brand trust post-COVID; the milestone of CoverGirl's 60th birthday this year; Simply Ageless, America's #1 anti-aging foundation; and last but not least, the selfies-shot beauty ad, with Niki Taylor shooting the full video herself.

While CoverGirl may be our first brand repositioning that is well underway, we are also moving at full speed across our other key mass brands.

Today, I wanted to specifically highlight how we are in the process of rapidly repositioning both the Rimmel and Max Factor brands.

These brands recently announced new global spokespersons, two beautiful women who are strong supporters of individual expression, female empowerment, and challenging stereotypes.

Let's start with Rimmel, who last week announced Adwoa Aboah as their global brand activist.

Adwoa is an activist, a model and a designer.

As a model, she's made the cover of Vogue multiple times and in parallel, built an NGO advocating for the mental health of young women.

Adwoa really personifies the new direction for Rimmel as the brand that represents the freeing power of makeup.

Moving on to Max Factor now.

Today, we announced that Priyanka Chopra Jonas has been named as the global brand spokesperson.

Priyanka is a global icon with a tremendous social media reach of over 60 million followers and has been named one of the most influential people in the world by TIME magazine.

She is the perfect choice to represent Max Factor's new purpose of transforming from ordinary to extraordinary.

We are very pleased to have Adwoa and Priyanka joining forces with our key brands.

In the coming months, we will be deploying media assets and in-store visuals behind Rimmel and Max Factor featuring this new global brand spokespersons.

We see this as yet another leg towards stabilizing our mass beauty business.

Moving on to our next strategic pillar of accelerating prestige fragrance and makeup growth.

I'm very pleased to say that our prestige fragrance business in the U.S. is booming.

The prestige fragrance category continues to drive the overall performance of the United States luxury beauty space, which is even growing compared to fiscal '19.

Importantly, Coty has been growing faster than the market in recent months and gaining market share driven by several focus brands.

The exceptional performance of Marc Jacobs Perfect has helped boost the overall Marc Jacobs franchise up 5 spots fiscal year-to-date to be the fifth luxury fragrance house in America.

Burberry Her was the fastest-growing Coty icon in the U.S., helping propel the brand up 9 spots in March for women's fragrances.

We continued to see very strong growth from Gucci fragrances, led by the recent Gucci Guilty and Gucci Bloom innovations.

Last but not least, Hugo Boss also outperformed in the U.S. market during March.

Our prestige fragrance performance in China and the broader Asia Pacific region was similarly impressive, with the fragrance market there growing strong double digits and Coty sell-out outpacing the market.

The robust sell-out growth has been driven by Gucci sell-out growing triple digits in China and double digits in the rest of APAC; Burberry sell-out doubling in China and up double digits in Australia; Calvin Klein sell-out, up double digits in China and Thailand.

While the U.S. has helped to lead our performance in prestige fragrances, there have certainly been bright spots in markets across the globe.

I won't go into all of the details on this slide.

But you can clearly see that our brands are winning in various markets and with various franchises.

Moving on now to prestige makeup, where I'm quite pleased to say that both Gucci and Burberry are delivering very robust performance across the globe.

In the U.S., Gucci makeup sell-out is growing in the triple digits this fiscal year.

This has been supported by the recently launched beauty bronzing powder and continued momentum for the lead products.

In the Asia Pacific region, Gucci and Burberry are seeing triple-digit sell-out growth with particularly strong trends in China led by face products.

In EMEA, Gucci makeup is now a top-10 prestige maker brand in Sephora stores where the brand is present.

Touching on our third prestige makeup brand, Kylie Cosmetics.

As we discussed last quarter, Kylie Cosmetics sales in recent months has been limited by the completion of the former manufacturing contract and transition from Kylie's previous manufacturing supplier even as demand for cosmetic broadly remains weak.

However, the launch of the new Kylie Cosmetics line remains on track for this summer.

And in fact, you may have already seen and began to see Kylie's posts on the brand's social media channels hinting at this.

While we cannot reveal many details just yet, we are excited about this new initiative built on a true collaboration between Kylie and Coty, which will include an updated cosmetic product assortment, an omnichannel approach and a best-in-class website and platform, which will allow consumers to seamlessly shop the full assortment of Kylie Cosmetics and Kylie Skincare products.

In sum, while we are still in the very early stages of building out our prestige makeup portfolio, the trends we are seeing today are very encouraging and give us confidence that we have the right brands to meaningfully expand our footprint in the very profitable prestige cosmetics.

During our strategy call last month, I told you that Gucci has over 220 SKUs, and Burberry has just over 150 SKUs, which compares to industry leaders that have over 600 SKUs.

We have, therefore, a multiyear innovation road map to continue building out the assortment of both brands.

In conjunction with our innovation pipeline, we also have plans to selectively expand distribution of our prestige makeup brands though with a focus on ensuring we are in the right doors and listed on the right websites.

For Gucci Beauty, we plan to end the fiscal year with a presence in approximately 250 doors and e-commerce sites.

We expect to grow this by approximately 150 doors and e-commerce site in fiscal '22, bringing the total to approximately 400 doors and website, with Asia Pacific as the leading region.

Now moving to our third pillar of building out a skincare portfolio.

One of the ways by which we want to accomplish this is by further elevating one of the jewels in our portfolio, Lancaster.

In Hainan, where we are positioning Lancaster as not just a sun care brand, but a full skincare offering, we have recently set up Lancaster with a temporary counter which utilize generic fixtures with no media support yet behind the brand.

And despite these limitations, the strong heritage of the brand and superior product performance have allowed Lancaster sales in the Hainan Dufry location in March to be on par with the top 20 skincare brands, with sales further doubling in April.

Needless to say, we are very excited to be opening Lancaster's very beautiful permanent counter at the end of May.

Here, you can see a visual of what this counter will look like.

We will support the opening of the counter with a grand opening ceremony in June.

We will then follow this up with additional dedicated Lancaster counters in the remainder of calendar '21.

This represents the first steps we are taking to leverage Lancaster's Monaco roots and long history of leading skincare innovations ranging from retinol to skin repair and position it as a full-fledged premium and regenerative-focused skincare brand in Asia.

Here, you can see some of Lancaster's leading skincare lines, including its top-selling 365 serum as well as the latest Sun Sensitive lotion, which was recently certified clean and ocean friendly.

philosophy is another skincare asset we own which will play an important role as we build -- we further build out our skincare portfolio.

This is -- there is work ahead as we reposition the brand to being a leader in clean, green, physical skincare.

However, even now philosophy is showing some bright spots.

For instance, in the U.S., Coty skincare grew twice the market in March and almost 10% compared to 2019 driven by philosophy's skincare.

After launching on Amazon this past summer, philosophy is now the second luxury skincare brand on Amazon with sell-out growing in the triple digits.

In this strong position, philosophy has surpassed many leading indie skincare brands who are also present on Amazon.

Our third skincare asset is Kylie Skin.

On Kylie Skin, one of our key focus has been on enhancing the platform, which we really view as being the model for other Coty brands.

I'm pleased to say that some of the KPIs that we track are showing good progress with social media followers and traffic rising.

We also continue to see a solid balance of both new and existing customers.

On the brick-and-mortar side of Kylie Skin, we have also seen strong launches in both Russia and France with sell-outs ahead of targets.

Now on to our fourth strategic pillar of e-commerce.

The digital team has been put in place, and quite honestly, we are continuing to build out has once again utilized some very innovative digital activations to support our online performance.

Some of our recent digital activations include: during Q3, our sales on Amazon doubled.

The performance was supported by live stream events hosted by CoverGirl and Sally Hansen.

These live streams events helped to drive double-digit sales growth following the events.

We sponsored and promoted the micro-influencers TikTok person for CoverGirl Simply Ageless, which led to a very strong sell-out growth at key accounts.

We also used premium site placements for CoverGirl Lash Blast Clean, which boosted the franchise to the #1 position at these key accounts.

CoverGirl hosted the 30-minute Spring Clean Beauty event on Instagram with Lili Reinhart and mega skin influencer, Hyram Yarbro.

The event had record viewship for CoverGirl and resulted in a product endorsement from Hyram.

I'm also pleased to announce that Kylie Skin is one of the first brands to test social commerce features on TikTok, leading this fast-growing social media platform in its transition to make shopping more seamless.

The digital organization at Coty has been tasked with moving us closer to the consumer.

We call this social listening, and the goal is to help us better understand the consumers in real time.

These recent digital activations are examples of what could feed into our social listening and allow us to harness data to move closer to the consumer and ultimately, of course, drive sales.

Now moving on to our fifth strategic pillar of strengthening our presence in China.

As I highlighted earlier, both Burberry and Gucci Beauty saw very strong performance in China during the quarter.

Gucci Beauty was launched on Tmall during the quarter, and performance remained stellar with Gucci Beauty being a top 4 luxury beauty brand launched on Tmall since 2018.

Burberry also saw magnificent performance during the third quarter, exceeding our internal expectations as March sell-out grew over 600%, supported by the newly launched Burberry cushion foundation, which has sold out in multiple retailers.

In fact, on this slide, you can see the absolutely beautiful Burberry makeup podium and displays, which have been recently unveiled in Daimaru Department Store in the heart of Shanghai, which is our #1 door in China.

While we are in the process of repositioning Lancaster as a skincare brand, starting with Hainan, I would like to highlight that the sun care range continues to resonate with consumers in China and is now the #1 sun care brand in Sephora, China.

This is an important milestone as sun care has the deepest penetration in the China market.

Finally, Chloé Atelier des Fleurs remains the #1 productivity in China Sephora among artisanal fragrances.

As part of our expansion strategy in China, we are also growing our footprint in Hainan through additional doors and a larger presence on e-commerce.

As you can see on this chart, we have seen exponential sales growth in Hainan over the past year.

Today, prestige makeup from Gucci and Burberry contributes over 20% of our sales in Hainan.

And our fragrance sales in Hainan are being led by Gucci, Burberry, Chloé and now, Miu Miu.

I would now like to briefly touch on our fiscal '21 outlook, which we presented during our strategic update in April.

For fiscal '21, we continue to expect total sales of $4.5 billion to $4.6 billion with adjusted EBITDA of approximately $750 million.

Importantly, our virtuous circle of reinvestment has commenced.

During Q4, we plan to meaningfully increase our A&CP to support our key focus brands and growth initiatives.

This means that we expect our working media dollars to surpass that of the fourth quarter of 2019.

We have multiple brand repositionings in place.

And this increased investment will help to fuel them, ensuring we are of the best footing as more markets move out of lockdowns and beauty demand recovers.

Lastly, we remain very focused on continuing to deleverage and are committed to exiting calendar '21 with a leverage ratio moving towards 5x.

Having detailed our growth strategy and with another quarter of sales trends improvement and solid profit delivered behind us, it should be coming clear that a new day is upon us at Coty.

During the fourth quarter, we will be ramping up our working investment to support our focus brands and key growth pillars.

Please recall that we are focusing on our top 15, top 20 brands.

Our media will be supporting these brands behind fewer but bigger and better bets.

Importantly, the cycle has now started.

As we move into fiscal '22, we fully expect our reinvestments to be funded through both gross margin expansion and further cost reductions.

This means that we do not view increased profitability and sales growth as trade-offs.

We see a clear path towards achieving both sales and profit growth even as we continue to steadily reduce sales in low-quality channels.

Today, we reported a quarter that shows great improvement compared to where we were just 4 quarters ago, and we outlined a number of green shoots, which we are pleased with.

However, much work remains ahead, and we will continue to act with a strong sense of focus and urgency.

I must say that I continue to be very excited for the many opportunities ahead and cannot wait to share our future milestones and achievements with you.

Thank you all for your time today.

We are now happy to take your questions.

(Operator Instructions) Our first question comes from the line of Nik Modi of RBC.

So I have 2 questions.

I just -- I guess, Sue, given the fluid nature of what's happening with COVID and vaccinations, especially in Europe and Asia, I was just hoping you could give us some context on how things have been maybe in April since there's been a lot of developments in terms of restrictions and lockdowns.

So any color there would be helpful.

And then the bigger-picture question is really around shelf space.

I mean one of the that has plagued Coty, especially in the U.S. in mass, has been shelf space losses.

And so given some of your investments and some of the momentum that it looks like you're seeing right now, curious on how your discussions with retailers are looking in terms of shelf space.

Nik, thank you for your question.

So to give you some context on how April has been, I can say that the region that was under the strictest lockdown was the European one.

And we started to see some improvement in countries, such as U.K., that started to open back the stores early in March.

So we are starting to see some great signs from there.

And we see hopefully -- we'll see hopefully the same kind of things happening in France, in Italy, in Germany in the coming weeks, if I may say.

So we clearly see that this region, that was the most impacted by the lockdowns, is going into another story.

And hopefully, during Q4, will have better, I would say, vision of how this is going to act.

When it comes to the shelf space that you are referring to in mass, remember, during the first earnings call I've been doing, the great news was that because of the success of Clean Fresh makeup in America that started somewhere around Q3 of last year, last fiscal year, I may say, we had this great news to share with you.

That for the first time since many years, CoverGirl shelf space was stable, and it's likely to be the case in fall.

And again, thanks to these green shoots that I'm very proud and very happy to share with you today, which, for the first time, have shown CoverGirl growing its market share since what, 4, 5 years now and significantly growing their market share, we believe that this is clearly another element that's strongly building even stronger confidence in the turnaround we are doing on this brand in America.

And the reactions from retailers, be it in the U.S. or in Europe, has been very positive to the plans that we've been presenting.

Please remember that the success of CoverGirl in the clean beauty area is strategic for our key partners and retailers.

This is an area in which retailers are betting, are investing.

And CoverGirl, and Coty more largely, is leading the game in this area.

You may have heard that this category is trending 7 points -- 17 points ahead of the cosmetics category in America.

So the bets that I've been sharing with you earlier is clearly the right one when it comes to where Coty needs to invest its money and where CoverGirl needs to invest.

And again, this is a win-win situation between us and our partner retailers.

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

Our question is on the working media.

So if you could talk a little bit about which brands, which channels, how you're thinking about leaning into some of the momentum you're seeing already.

And then is there any working media planned in Q4 and into Q1 that would be on brands that are not already seeing momentum?

Thank you, Steph.

So when it comes to the working media, you've heard that we are very happy to say that the fourth quarter working media in dollars, in absolute value is going to be higher than the one we had during the fourth quarter of 2019.

So this is clearly a significant ramp-up versus what you have seen during the first half and again, a significant progress versus the Q3.

So clearly, Q4 will be an area where we'll be back at the front of the scene, if I may say.

In terms of brands, clearly, we'll be investing behind CoverGirl.

You've heard that we've made announcements recently around Max Factor and around Rimmel.

We'll be investing behind these brands, benefiting, of course, from the reopenings that we are seeing in Europe for these brands.

We'll be investing also heavily on -- in China, specifically behind Gucci, Burberry, to really fuel the Tmall expansion, but also the brick-and-mortar momentum we are seeing there.

So is there other brands that -- behind which we are going to invest more during Q4?

Clearly, we will start to put more money behind skincare: philosophy on one side in America, of course, Kylie Skin in America, but also Lancaster in APAC and specifically in China.

So these are the areas where we see the next, I would say, story around Coty.

And so are you willing to quantify the percentage of sales on working media or on total A&P?

What did you mean by quantifying the percentage of sales?

Do you mean how much is it going to be in terms of percentage, not in absolute dollars?

Yes.

Just absolute dollars higher than Q4 '19.

But are you willing to give us some range or percentage range so we could kind of think about the level?

As you know it, Stephanie, we don't disclose these elements of A&CP today.

And I think what I said to you around what we are going to do in terms of absolute dollars honestly gives a sense of how strong this will be.

Because you have to imagine that the fourth quarter of 2019, the absolute media dollars were invested behind a much broader number of brands, a number of franchises.

What we are going to do during this fourth quarter is going to be much more focused.

And therefore, the share of voice of each and every brand/product we'll be investing behind will be much stronger.

And again, we don't know what the competition is going to do, but for sure, we are prepared for this.

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

So 2 questions from me.

I guess the first one is, I just want to put your fiscal '21 guidance in perspective.

And maybe, Sue, if you can comment on whether you're just being cautious on that 4Q guide.

Because you talked about so many exciting green shoots, so many initiatives you have.

But then when I look at your 4Q guide and compare it to 2019 in the same quarter, sales are sequentially -- the rate of change is sequentially decelerating.

So I wonder if there's any perspective around that or if you're just being cautious?

And then my second question was just -- I was hoping Laurent could expand a little bit around his gross margin comment.

And I think he said that roughly half is structural and half is temporary.

So just more color around that would be helpful.

Thank you for your question.

So again, to put a little bit more fiscal '21 guidance in perspective.

As you know it, we are, of course, very cautious because I think this is normal with what's surrounding us today.

But again, if I may say, if you compare to fiscal '19, again, it's not at all the same company we are comparing with.

Fiscal '19 had unique -- that was part of the company with being -- as you know -- you've heard it strongly working on lowering low-quality sales, and this had an impact of a high single digit over the last 2 years.

And again, we are focusing on a smaller number of brands.

So in a way, we are creating the new baseline of the new Coty and, therefore, fiscal '19 is not meaningful for me, if I may because it's not the Coty that we intend to build in the coming years.

To give you a little bit more color on the gross margin, I'll let Laurent to comment on this one, which is indeed a great news for us.

Yes.

Thanks for your question.

So indeed, the gross margin improvement in Q3 is very important for our model because this is really the way we are going to generate fuel and invest in the brand.

So indeed, as we say, half is structural.

So it means that now we can say that 60% is the new base looking forward.

How we are coming to this structural gross margin improvement, so I explained, but I can elaborate a little more on the big drivers.

So number one is definitely the mix management.

So without disclosing precise numbers, but we discussed last time that e-commerce is accretive.

The new strategy we are implementing, skincare, prestige, so these activities are accretive in the gross margin.

And I will say that even within mass, we are really working in depth to make sure that innovations, new initiatives, they are accretive.

So it's a detailed work that we have then with the market with each brand to make sure that all initiatives are accretive in the model so that we invest and we are creating gross margin and fueling the model.

So this is number one.

Number two is what we are calling revenue management.

So here is we need to review in the trade terms how to optimize what is about promotion.

So it's really again to be more in depth, more detail related to the pricing strategy.

So really being very -- to nail down on this promotion strategy, to optimize returns, which is sometimes a big element in our equation.

So here again, it's back to the forecast accuracy and optimizing these returns.

So these are really precise elements, which are structural and will remain and will even accelerate.

And last but not least is, of course, on supply chain, reducing excess and obsolescence.

Again, very detailed work, 360 degree with a brand, with a market, so being better on forecast accuracy.

And of course, more efficiency from the supply chain standpoint and procurement teams.

So again, these are really the 3 pillars we are pushing and really to build the 60% gross margin as a new base looking forward.

Our next question comes from the line of Andrea Teixeira of JPMorgan.

I would just want to follow up a bit on the shelf space comment in the U.S. And if you can also elaborate in Europe?

I do understand, obviously, the puts and takes of the new closures, but thinking of overall distribution for Coty going forward.

And also, like as you see, as you're embedding your guidance, I understand there's a lot of puts and takes there and a lot of conservatism being built there.

But can you comment a little bit more what are you seeing in terms of like coming back to opening, reopening everything in the U.K.?

If you're seeing some buildup of inventory into that market?

So to comment on the shelf space in the U.S. and Europe, again, clearly, what I've said is that we are securing everything.

We're doing everything to secure the shelf space of our brands, be it in the U.S. and in Europe and the green shoots that we are sharing with you.

And again, plans have been shared with retailers also some months ago to really show what is the direction for each and every brand, what are the new innovations and what are the new images.

And how us and retailers are going to work hand-in-hand with a portfolio brand that's clearly bringing added value to their current portfolio.

So this is clearly an area that has very, very positive feedback, if I may say.

And it's super helpful for the teams here inside Coty to see serenely the future and to build the brands and innovation that are going to come.

When it comes to how we're expanding, if I understand what your question the distribution, in mass, this one is clearly broadly stable.

Where we are expanding the distribution is clearly on the prestige side, especially in Asia.

You've heard our plans to increase the distribution, be it online or in brick & mortar for Gucci.

Of course, you've heard how much we intend to strongly increase the distribution of our skincare Lancaster brand in Asia.

So this is clearly the part, I would say, of the business that's going to see strong distribution gains.

The last part of your question was about the inventory in trade entering the fourth quarter.

And again, what we are seeing is that retailers have been very vigilant in controlling inventory, which is pretty lean today.

And in fact, U.S. retailers have been struggling to keep up with the demand for luxe fragrances, to give you an example.

So we are not worried about that building -- stock building.

It's not at all like this.

There is a kind of, I would say, consistency between sell-outs and sell-ins.

That's encouraging.

And just one last, since you mentioned Asia, and I think it's a pretty good point about Lancaster.

But in terms of Kylie Skin and also KKW in the U.S., can you comment a little bit more on the skincare side?

Because I know that's one area that you see a lot of potential.

So can you comment on the timing...

Kylie Skin is clearly one of our key brands in America.

It's clearly a brand that has been doing great with the figures, and we are continuing to build the brand in the near future.

As you may have heard -- and it's going to be a first for the brand, we are going to have probably around beginning of the summer, mid of the summer, we'll have, for the first time, one unique platform where Kylie, I would say, fans are going to be able to shop from skincare to makeup on the same, I would say, platform and on the same website, which is really new and will allow us, for the first time to benefit from creating what we call cross-selling.

This is super, super important in the world of beauty in general and, moreover, in the world of beauty online to be able to sell a foundation, a lip color, but also makeup remover, a moisturizer or an SPF.

So this is clearly going to give us strong room for progress in America for Kylie Skin.

When it comes to the KKW line, as you've heard it, Kim is working very diligently on her skincare line behind the scenes at the moment.

She's, as -- I have said it several times.

She's clearly at the forefront of every new trend that's happening in the beauty and in the skincare arena, and we are super excited to be working with her.

And we are all looking forward to the upcoming launch that's happening in fiscal '22 as we already announced it.

And of course, Kim will personally share more details when she'll be ready to.

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

First thing, can you give us a sense going forward on -- spending more money on A&CP is terrific.

But what's your thinking in terms of the mix between digital and traditional?

Yes.

Indeed, so we continue the journey that -- I mean digital is really where we are investing the most, and we continue.

So it's already majority of our media spending.

It was already the case in H1.

It's the case in Q3 and will remain in Q4.

Got it.

And Wendy, to complement -- sorry.

Sorry, please go ahead.

No, I was wondering because particularly for some of the mass brands, like a CoverGirl, I would think that traditional media, I mean, we've seen some of the TV ads with Niki Taylor.

I'm just wondering, someone like a Priyanka Chopra.

She's so well-known.

I would wonder if TV isn't a great medium for that as opposed to digital.

Absolutely, Wendy.

And that was what I was about to say when I interrupted you.

In fact, you're totally right.

Digital is clearly the area in which we are investing the majority of our money.

But the great news is that we are back on TV.

And by the way, the great market share progress we've seen on CoverGirl during this quarter, the last quarter Q3, was clearly also driven by the return of CoverGirl on TV.

And as you've said it very truly, these brands have such a deep distribution in the middle of America, that TV is mandatory.

So it's really a mix of the 2. Clearly, digital driving, I would say, the excitement, driving the awareness, making sure we are supporting the fact that we are doubling our sales at Amazon.

But at the same time, especially, for example for Simply Ageless, which is going to be a TV campaign with the return of Niki Taylor.

As you imagine, this campaign has to reach America in every part of the country.

Perfect.

That sounds great.

And then if I can, just a follow-up on 2 brands.

Lancaster, you talked very specifically about the early success in China.

Can you just clarify if you have any plans to spend or distribute -- spend behind or distribute Lancaster outside of China?

Is that a brand that you're focused on in Europe?

I know it's sold there a little bit, but is that a growth platform as well?

And then same thing on Max Factor.

I know Max Factor has struggled in the U.S. for a long time.

But Priyanka is such a global celebrity.

I'm wondering if she doesn't play and if it doesn't make sense to expand that brand on a more global basis?

Thank you again, Wendy, for your questions.

The first question about Lancaster, I would say that the focus today is really to reinvent Lancaster as a skincare powerhouse in China.

We're going to build on our #1 position at Sephora in China when it comes to sun care.

As you can imagine, a brand that's so strong on sun care in a country like China, where putting an SPF on a daily basis is part of the daily routine, is going to be a great baseline for us to build this brand on.

And remember, we've shared together several times that the brand is already seeing a level of sales that position it in Hainan, but we can do a kind of extrapolation.

It gives us an idea that this baseline could be around the top 20 skincare brand in China, which is, I think, a long journey and an exciting journey to start.

But it doesn't mean we are not supporting the brand in Europe.

The brand is a European leader in UV protection, a European innovator, recently having this certification for the first sun care that's Cradle to Cradle Silver certificated, which is a first in the world of sun care.

So it's really 1 brand, 2 stories from the different regions.

Skincare is huge in China, so we would need to benefit from this I would say, big trend.

And of course, in Europe, we are continuing to build the brand around its sun care, I would say, brand equity.

Of course, the future, no one knows.

We'll see what happens in China.

Sometimes there is what we call reverse innovation, but that's not the plan at the moment.

To answer your question on Max Factor, which is almost the same kind of question.

We are concentrating the investments and the announcement around Priyanka Chopra to really take Max Factor as the premium brand of the European markets, but not just the European markets.

It's a brand that's highly popular in China, too.

It's a brand that's highly popular in the Middle East.

So I think we have some homework to do in Europe and in the rest of the world before going back to America.

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

Great.

I just wanted to ask about the sort of math that we've been backing into.

The Investor Day, you'd talked about the areas you expect to grow and talking about those areas going from about 12% of sales toward 30% of sales by fiscal '25.

That implies something like a 30% compounded growth rate on those businesses, which in the near term, would certainly seem achievable.

But as you get further out in that period, you're talking about law of large numbers kicking in.

So wanted to, one, just get a sense if that's the right way of thinking about it.

And two, anything you can kind of talk about on why you would have the degree of confidence to maintain that level of growth further out in the period, particularly just on an organic basis?

Thank you for your questions.

So yes, we expect to continue to grow -- the growth and to grow given how small, in fact, we are today.

So in fact, it's true that starting at this level of the sales today, we have a long term, and I would say, long -- big potential in front of us given the size of what we have today.

Think about Gucci makeup and again, the potential is infinite.

I think skincare, the potential at Coty is clearly infinite.

And of course, imaging adding clean skincare on top of this, what we are doing today with Lancaster in China.

So again, there is big potential there.

And of course, this is not limited to this, but these growth areas are those on which we are going to focus our investments to make sure we walk the talk.

When it comes to the second part of the question, it was about you -- you meant, if I understand well, will the growth will be 100% organic.

Is that the question?

Yes.

Yes.

We do have what we need in Coty.

That's what I usually say when I'm asked questions about potential acquisitions, et cetera.

I think what was nice when I've been presenting in April the plan for the company for the next years, for me, the most important part of this, I would say, strat plan was remember the pyramids we've been sharing with you, be it on the cosmetics side or on the skincare side.

And you could see clearly that we can build a skincare portfolio from the entry price level to the super premium price level without the need for any kind of acquisition.

And same thing when it comes to our makeup portfolio.

The makeup portfolio, especially on the prestige side, is super comprehensive with Gucci, Burberry and Kylie Cosmetics that we intend to relaunch -- that's going to be relaunched this summer.

You've seen probably what's happening on Kylie's social media.

She's been doing something great, deleting all her past posts, announcing in a way, in a very strong teaser what's going to happen during this summer.

So we think that we have what we need to achieve the growth that we've shared with you several times now.

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

Great.

Thank you very much.

A couple of questions just to get a little bit more color on results.

One, can you quantify at all the amount of sales that were cut from low-quality channels as you term it?

Just kind of get a sense of what sort of headwind that is.

That's number one.

Number two, one of your competitors remarked that because of increased seasonality in China, their sales were a little bit depressed in the quarter because of the strong impact of 11/11.

So I wanted to get a sense if that was something that impacted you as well.

And then finally, in the slides and in the discussion, you talked about the fair value of Wella increasing $64 million.

Can you discuss to what extent at all that you're involved in that asset?

Any color about the turnaround there and the ultimate outcome?

And how that would affect you?

Rob, thank you very much for your question.

I'll pass it over to Laurent.

Maybe if you want, Laurent, to answer a few questions, I'll try to complement on the one about China.

Yes.

I mean on low-quality sales and indeed, we -- Sue gave already some elements.

It's -- I mean the impact is high single digit over 2 years.

So roughly this is the amount we have.

On your second question, which is in any seasonality, increased seasonality impact in China.

As we said, at this stage, China is still small for us, so China is a great opportunity, and we don't see had any impact from that.

Your third question on Wella.

As I explained, the $60 million impact on fair market value is more an external impact due to the economic -- the macroeconomic context that salons are reopening and so on.

And this is what is included in the fair market value.

So there is no element about the organic performance of Wella.

And at this stage, as you understand that the new team, I mean the -- is really working the whole model.

And so there is no yet any implication from the organic performance in this fair market value.

You cut out -- or at least for me, you cut out.

On the low-quality sales, you said high single digits over 2 years.

So should we be thinking in this quarter something like 3% to 4%?

I would say, again, it's really high single digits over the last 2 years.

No more precision for this quarter.

This is really on average what you have to consider for the last quarter, including this quarter.

Okay.

And then given what you just said on Wella, do you have any insights that you can give to us in terms of what's actually happening at the business?

No, I think it's too early to give you more elements at this stage.

Again, there is -- the team is working and they're taking the business model.

So no more elements that we can now -- we can share with you.

But definitely, again, the impact of the fair market value is again that the hair care segment is back to growth.

Salon are reopening.

And of course, very quickly, this will benefit to the organic performance of Wella.

And we have time for one more question.

Our final question will come from the line of Mark Astrachan of Stifel.

I guess maybe just a broader question building on Faiza's earlier.

So how do we think about -- or how should we benchmark your sales growth progression versus peers?

Obviously, for trends as sequentially accelerating growth, so better, but it's still below peers.

Whether you look at year-on-year or 2 year, the implied guidance kind of same thing for the June quarter.

And your -- you talked about increasing spend in fiscal 4Q.

So should the market start holding you accountable relative to the peer group?

Do you think it's too early given all the changes that are going on in the business?

And how sort of soon do you think you can get back to a rate of global growth.

And then obviously, that's broad comments.

If you could talk specifically within categories to prestige versus mass, et cetera.

Again, how do -- should you think about us in terms of benchmark versus peers?

I would say that you should start looking at us in fiscal '22 on a year-on-year basis.

Because, again, this is a new company, if I may say, that we are reshuffling today.

And the mix part of it should be a key factor for us versus peers when you benchmark us, in fact.

So this is the best way, if I can, to give you the ability to compare us versus peers.

Of course, we are not with the same exposure in terms of regions, et cetera.

So it's really the progress that needs to be assessed rather than the part of the business that's done today in the different parts of the world because we don't have at all the same footprint today.

So again, I think that fiscal '22 should be a growth inflection for us.

So that's clearly the year and the way you should look at us.

What was the second part of your question?

I'm sorry, because I didn't understand very well.

Yes.

Just -- it was more on the broader context of how do you think about it on a segment basis as well.

So the broader question, but specific to prestige versus mass.

So all of the improvement that you're talking about there would come in fiscal '22.

Is that how we should think about it?

Again, what I've shared during the Investors Day was what we think is clearly the winning strategy for Coty: first, stabilizing our mass business.

We're starting to see green shoots over there, and that's really an important part of the story.

Even before growing the brand, just stabilizing is a key element of the company.

Second thing, accelerating the prestige business, which is highly accretive, which will allow us in a way to go stronger in APAC and in China, but also in America and, of course, the rest of the world as soon as lockdowns are behind us.

Prestige fragrances, concentrating more -- focused on creating top-selling female fragrances, building artisanal fragrance houses.

Of course, the prestige makeup story, I've shared it with you several times, and we do have the right brands.

And last but not least, building a skincare portfolio across both divisions.

These are things on which, hopefully, we'll be showing new things, new innovations, and you'll be able to assess the progress of the company on these areas.

Last but not least, e-comm, which was not part of the questions.

But again, e-comm has been growing again 30% during the quarter.

Both divisions, both businesses, if I may say, mass brands and prestige brands have been growing very, very strongly.

And Coty is leading again in many areas, such as at Amazon, doubling the sales at Tmall in China thanks to Gucci and Burberry, but also on our own DTC.

Thank you, again, for your questions and very, very happy that we've been able to share with you these results and first green shoots.

Thank you.

Bye.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may now disconnect.