科蒂集團 (COTY) 2020 Q4 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 Fourth Quarter Fiscal 2020 Results Conference Call. As a reminder, this conference is being recorded today, August 27, 2020. On today's call are Pierre-André Terisse, Chief Operating and Chief Financial Officer; Peter Harf, Coty's Founder and Executive Chairman; and Sue Nabi, Coty's appointed CEO.

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 our financial results and our expectations reflect certain adjustments as specified in the non-GAAP financial measures section of our release.

(Operator Instructions) Thank you.

It is now my pleasure to turn the call over to Pierre-André Terisse to begin. Please go ahead.

Thank you, Maria, and good morning, everyone. This is indeed Pierre-André speaking. I'll start this call with the financials, and then I will hand the call over to Peter and then to Sue.

To start the financial review this time, let's have a look at the scope of reporting as there are some meaningful changes. As you know, we have signed the sale of 60% of Wella, being our Professional Beauty division plus Retail Hair, to KKR on the 1st of June 2020. With the sale not being subject to any substantial condition, as of that date, Wella is considered a discontinued operation in our GAAP. As a result, we have recasted the accounts for fiscal '19 and fiscal '20, and we now present continuing operations, being the former Coty less Wella revenues and direct costs and directly attributable costs.

The cost borne by Coty on behalf of Wella following the closing will, for a part, be re-invoiced through transitional service agreements, and we have therefore prepared a set of numbers called Ongoing Coty, which better reflect what Coty ex Wella is expected to be post closing. Going forward, most numbers will refer to Ongoing Coty, and I will specifically flag when I use other metrics. You can find the bridges from total Coty to continuing operations and then to Ongoing Coty in the recast historical financial posted on our Investor Relations website as well as in today's earnings release and in the slide presentation.

In terms of numbers, Coty adjusted operating income in fiscal '19, on the left, was $950 million or 11% margin. Wella profit ex central cost was $459 million or after including the estimated cost, $407 million. And as a result, Ongoing Coty operating income was $543 million or 8.7% operating margin, and Ongoing Coty EBITDA was $875 million.

Looking at fiscal '20. Total Coty adjusted operating income stands at $161 million or 2.4% of net revenue. Wella stood at $271 million and Ongoing Coty at a negative $110 million operating -- adjusted operating income with an EBITDA of positive $226 million. Fiscal '20 variance versus '19 reflected the impact of COVID and the closure during most of the fourth quarter of most of our sales channels as well as some other production sites. And so Coty fourth quarter was marked by external shocks.

COVID-19 triggered a global real economy and supply crisis that led to turmoil in financial markets. It did hit Coty harder than its competitors because of 5 reasons. First, pre crisis, the company was already experiences -- experiencing, sorry, a weak demand situation. Second, Coty's current category mix is skewed towards fragrance, color cosmetics and Professional Beauty, which were the categories most affected by COVID-19. Within these categories, Coty was still losing market share in some markets. Fourth, the company is underrepresented in China, which is the market that bounced back first. And last, Coty is weaker than its major competitors in digital and e-commerce.

Against this backdrop, Ongoing Coty net revenues were down, therefore, a big 60% in Q4, with Prestige being the most impacted at minus 73% while mass was less negative at minus 48% as mass retailers remained partially open. April was the lowest point, but every month since then has showed progress across the portfolio in both mass and luxury as well as for Wella. And in particular, July and our latest expectation of the month of August showed significant progresses and stand at approximately 2.5x April levels, reflecting the reopening of a number of stores, albeit with a lower traffic than usual. While many things remain to be done, Q4 also reflected continuing improvements with a strong momentum and market share gains in e-commerce, a good performance of COVERGIRL Clean Fresh and Sally Hansen Good. Kind. Pure and improving market share in color cosmetics in key markets in the U.S. and the U.K. specifically.

In terms of profit, total Coty Q4 net revenue dropped close to $1.2 billion versus last year, led to an operating income drop of $526 million, which is 44% flow-through as the fixed cost reductions initiated in the quarter were insufficient to offset the magnitude of the net revenue drops. This was exacerbated by 3 elements totaling approximately $50 million: bad debt provisions, plants underutilization costs as well as excess and obsolescence provisions as we tried to take a prudent view in closing the fiscal '20 accounts. While Wella including TSA costs showed a minimal loss for Q4, ongoing Coty adjusted operating income was a loss of $323 million for the quarter. As for nonrecurring elements, the drop of our stock price led to an increase of our discount rates, which was the primary driver of an impairment of close to $400 million of our brands and goodwill.

Turning to free cash flow. For total Coty this time, the negative adjusted operating income translated into a negative free cash flow of $316 million for the quarter, which was in line with our guidance of $300 million to $500 million negative as we managed to strongly limit CapEx, one-off costs as well as to balance the working capital, thanks to good work from the procurement and the finance teams. This negative free cash flow was more than offset by the first tranche of convertible preferred shares subscribed by KKR for $750 million. And net debt, as a result, decreased by $300 million versus the end of March to land at $7.8 billion, despite close to $100 million negative foreign exchange impact. To be noted, as a post-closing event, we have received at the end of July the second tranche of convertible preferred for $250 million.

I will end up with some updates on the side of Wella. With the closure -- while the closure of most salons resulted in a drop of sales of 41% in Q4, things improved from the lowest month, which was again in April, and July and August confirmed the strong progresses with underlying trends negative mid-single digits. While the business is recovering, we are obviously working on the closing of the transaction, which we expect to take place by the end of calendar '20. And following this, Coty will both considerably reduce its debt and leverage to a level which will be adequate to support our Turnaround Plan, and at the same time, Coty will keep a 40% interest in a low-risk business with a strong potential.

And with this, I now hand over to Peter.

Thank you very much, Pierre-André. Let me start by thanking all the people of Coty. They helped us -- they gave their best to help the company weather the storm of the worst economic and health crisis the world has seen in the last 80 years. So many people in many countries gave all they had to make the damage for the company as small as possible. I thank everybody for that very, very much.

We had a very challenging quarter. We had a challenging year. I don't want to repeat what Pierre-André already said, but he also talked about green sprouts. He talked about the fact that we are seeing improved business in fiscal '21 in the first quarter. And I'm glad to report that we are making -- we're going to be making money in the first quarter of '21. We have significantly lowered our breakeven point. So at a lower sales level than in fiscal '19 -- fiscal '20, we will make a significant amount of operating income.

I've been now CEO for 3 months. Before that, I was working obviously very closely with the Coty management, and my focus has been, all the way, relentlessly to bring the company back on track to realize its underlying potential. Right from the start, I was aware of the issues that were concerning our investors, our shareholders and the company. This specifically relates to capital structure, operational underperformance, the product portfolio and the top management. We have taken decisive action to tackle each and every one of these concerns head with bold step changes. In each of the areas of concern, we are showing clear progress during the past few months. Let me take stock.

Firstly, we recognize that Coty leverage ratio is high. To lower Coty's debt level and to strengthen our balance sheet, we entered into the agreement with KKR, selling 60% of Wella, we call it divestco to KKR, but maintaining, as Pierre-André stressed, I mean, the 40% that are very valuable and highly profitable assets for the company going forward. We got for that -- we were going to get for that $2.5 billion net cash proceeds. We expect the transaction to close by the end of calendar '20. Between Q4 '20 and Q1 '21, KKR also injected $1 billion cash into remainco for convertible preferred stock. Upon conversion, this will give KKR a 17% stock -- share of remainco, but we will retain the absolute control of over 50%.

Secondly, with Coty underperforming on operating margins and efficiencies, we have set rigorous objectives for fiscal 2021. We need to be profitable for the full year and significantly profitable for the full year. And we are striving for constant like-for-like debt -- like-for-like net debt, excluding the proceeds from the Wella divestiture, even if the ongoing COVID-19 pandemic will impact the beauty industry more strongly than many anticipate.

Second, make the balance sheet lighter and the business less complex through smart disposals, a reduction in the number of sites, outsourcing and more third-party manufacturing. We also reduced third-party expenses, people and non-people costs, CapEx, nonworking advertising and consumer promotion to the absolute minimum. Clear action plans and progress in these areas give us confidence that we will deliver over 1/3 of the savings from our $600 million fixed cost reduction program in fiscal '21.

We also realized that our portfolio exposure is lagging behind new consumer demands and trends. We've taken concrete steps to rebalance and to strengthen our portfolio to be competitive in light of this changing consumer demands. We built platforms that address Coty's structural weakness in skin care, Northern Asia, e-commerce and D2C, direct to consumer, by acquiring the irrevocable rights to Kylie Jenner's and Kim Kardashian West's cosmetics. We create also the space for additional brand building and brand investments in order to re-dynamize our existing portfolio under Sue Nabi's leadership.

With regard to Kim and Coty, Coty entered into a strategic transaction to buy 20% of Kim Kardashian West. That, by the way, secures the irrevocable rights that we have in Coty going forward for the Kim Kardashian brand name and the other activities around the brand. Coty will be responsible for the portfolio development in skin care, hair care, personal care, hair products and also in fragrances. Kim and Kylie gave Coty the platform to sell skin care and a lot of beauty categories globally, in particular in Northern Asia. We are renegotiating licenses that we have in our Prestige portfolio that do not provide sufficient profitability for Coty, and we are making progress also on that front.

Next, I realize that Coty's culture needs to be fit for the fast pace and the changes in our cosmetics industry and that the initiative the company is implementing need us to be very, very light footed. So we are bringing back the agility and the nimbleness that is part of Coty's DNA. We have flattened the organizational structure, simplified the decision-making processes, formed a small group of leaders that can take important actions fast. So we are making Coty ready for good things to come.

In July, we corrected a key shortfall, probably the worst issue that distracted Coty throughout the years. We have not had a beauty industry veteran at the helm who truly understands the nuances of the beauty industry and can drive the business -- the cosmetics business forward effectively. We corrected this problem by recruiting Sue. Sue Nabi, a proven, successful beauty leader has been -- has the due prerequisites to become the CEO of Coty.

Sue is a 27-year veteran in the beauty space with a breadth of experience across all the areas which are most relevant to Coty's future. She was at L'Oreal for more than 20 years with leadership positions across the mass and the luxury segment in color cosmetics, skin care and fragrances and is well plugged into the key international market. Particularly, she has a deep knowledge of Northern Asia.

She not only brings deep expertise and experience in the area that Coty operates in, but also in areas that we want to strengthen, including skin care, e-commerce, direct to consumer and Asia. In a long career in the beauty business, she has successfully navigated countless cycles and trends, adversities, including reinvigorating various established brands. With the uncertain markets and industry conditions ahead of us and the pivotal changes she will make at Coty, her breadth and depth of experience will be especially crucial. In her latest venture as the founder of Orveda, she has proven that she's also a venture entrepreneur who understands start-ups. This understanding, while having, at the same time, a strong corporate and institutional background, brings a much needed nimble entrepreneurial mindset to Coty and could not be more relevant for our current needs.

Before I turn it over to Sue for comments, I want to leave you with a few key thoughts on the new Coty powerhouse that we will be underway of becoming. First, I highlight the Coty of today is very different from the Coty even a few months back because we have taken proactively decisive and bold actions addressing the various key concerns identified head on as we looked through the business. We can clearly see green shoots emerging despite this challenging environment as we gain market share through strong e-commerce momentum, successfully launch new product, and Kylie Skin in particular is on track to expand. Like I said, we have seen a strong rebound in the last couple of months, which we expect to continue. Coty is back.

For our investors, we have to be making sure that as we block and tackle to sustain our business, we have also look to future-proof the company with the new initiatives that will enable Coty to operate more efficiently and that give us the room to grow the business. The new and different Coty has a more robust capital structure, improved operations a streamlined and re-dynamized portfolio, a complementary stable of strong heritage brands and direct-to-consumer brands; is diversified across categories and channels; has the breadth to play in both value and in premium; has digital and social media capabilities that will help us grow aggressively in these areas of the digital space; has growth potential both in the white spaces that we are trying to address and from reinvigorating existing brands; has a focused management team led by a proven and successful beauty expert.

I have always said, including when I took over the role of CEO a few months ago, that there's a lot of potential in Coty. Today, I'm even more convinced that the new Coty has more potential than ever before to unlock and to create value. We are rewriting the Coty story to elevate us to a beauty powerhouse with the right to grow and the right to win.

Sue Nabi will lead us. And with pride, I hand over to her now.

Thank you very much, Peter. Ladies and gentlemen, for me, there is no better moment to join Coty. Although my official first day will be in 5 days, I'm happy to share with you why I'm strongly convinced of a bright future ahead for Coty.

First, I would like to thank you, Peter, for pivoting the company to the new Coty and putting in place the necessary changes to set up a strong foundation for me to build on. In over 25 years in this industry with many opportunities, I have learned my lessons on what makes a beauty business or a brand successful. As I took a step back to assess the potential of Coty, I realized very quickly that this is a diamond in the rough.

Coty is transforming. Now is the beginning of something new, something hopefully very exciting and something clearly modern. Today, stakeholders want something meaningful. What people love are great comebacks, success stories they can be part of. I want to create an inspiring, very nimble, successful new Coty with the whole Coty team.

The seeds of the new modern Coty are, in fact, already in place. We have 2 key and well-positioned operating franchises mirroring the world of beauty and a new continent to be explored. All modern beauty groups are simplifying their organizations for more clarity, and they all end up having a luxury franchise and a mainstream mass franchise. Coty is the first and only company at this level that is exploring the potential of the new continent of the direct-to-consumer business model through personality-led beauty with strong social media engines and followers.

The new Coty will be driven by 3 key factors for me: first, the mass franchise, which is a key one, especially in the new norm that we are in, characterized by uncertainty and, of course, economic difficulty. Yet, its mission is essential and vital more than ever. When the COVID-19 crisis hopefully will end, it will be the place where a large number of people around the world can access the latest trends and innovations, find the best quality at an affordable price, experience the diversity of all kind of beauties and probably, and this is very important, the place where many will buy their first beauty products and fall in love with the beauty of tomorrow.

Secondly, the luxury franchise is key as it allows everyone to access iconic fashion brands, yet still at an affordable price compared to fashion itself, to enter the world of red carpets; in one word, dream. Luxury beauty would become the entry point for many to buy iconic logo brands at affordable prices even as luxury fashion is more severely impacted by the current pandemic.

Third, the new continent of opportunities. The new continent of DTC personality-led beauty, I'm thinking about Kylie and Kim Kardashian West, of course, is key as it is a continent full of promises. This has nothing, nothing to do with the business of celebrity fragrances. It is, by essence, what every brand is dreaming of: a large -- very large captive data-rich audience, and it is probably the most profitable and lucrative of all retail models. It's nimble by essence, and it will allow us to adapt to trends and make corrections on a daily basis.

It will not only be a new continent, but also a major lab for the whole group, where we will test, learn, correct and expand our success to the rest of Coty brands. With this in mind, this new continent will allow Coty to show to the world also, and this is very important, that our company, our group, our brands can and will formulate top-quality skin care with a mapping of the market that will be comprehensive in terms of positionings, prices, but also technologies and psychologies. Personally, having said that, I do not see any other company that combines that -- these 3 key engines.

When it comes to brands, Coty has also one of the most beautiful portfolio of brands, brands that stand for something universal, brands that are deeply rooted, some of them being loved brands. Brands like COVERGIRL, Rimmel or Bourjois are brands that are rooted in American, British or French culture. This is unique, this is precious, this is powerful and this is a great basis to write a new chapter for all these brands. These brands, like all our brands at Coty, have a big responsibility, though. They need to act flawlessly. They need to be role models and at the forefront of everything.

The magic of a brand is not just about image. It starts at the product level always, products that are hopefully new, better and different. A brand like COVERGIRL invented modern long-wear non-transfer technologies. It has also invented modern molded mascara brushes. It has also invented clean beauty decades ago. And with COVERGIRL's Clean Fresh becoming the #1 foundation launched this spring, the brand is once again leading the way in a key area.

The Luxury business of Coty has one of the most amazing portfolios of the beauty industry, with the trendiest and most successful fashion brands such as Gucci or Burberry that shall become makeup leaders and also the most iconic leaders in the fragrance arena. All our brands needs to be the champion of something. This will be one red thread of my philosophy, of Coty's philosophy.

All these reasons -- and these are the reasons why I believe in Coty, and I believe strongly in its bright future. French writer Victor Hugo said there is nothing more powerful than an idea whose time has come. I would add the time for the new Coty has come. I look forward to starting as CEO and to sharing more specific plans with you at the next earning session. Thank you very much.

Thank you. We are now ready to take some questions.

(Operator Instructions) Our first question comes from the line of Faiza Alwy of Deutsche Bank.

So my question is for Sue. First of all, congratulations. It's great to hear you on the call. I wanted to hear more from you about what you think Coty needs to do over the next couple of years to get to the place that you wanted to go. You mentioned skin care. You mentioned a few other things. You mentioned transformation.

Can you talk about investments or what needs to happen? What would you like to see over the next couple of years to get to the place that you want to be?

Thank you for your warm welcome. Thank you for your question. I think for the next years, the work that has to be -- that's on my road map is first to really make everything to repair and correct what has been done wrong recently with the mega brands, et cetera. And we've been working, by the way, quite hard during this July and August month. Even if I'm not yet in Coty, but we've been working with the teams to strengthen these brands, to strengthen their brand equities.

So first, I would like to strengthen the makeup portfolio and the consumer beauty portfolio. Second, I would like to accelerate the Luxury division. And third, I would say is really to take full advantage of the fabulous, promising, very profitable and dreamy business model of direct to consumer-led beauty brands. So these are the 3 simple ideas I have in mind.

Of course, this acceleration will happen in all categories, repairing makeup brands, making sure makeup brands are in link and in sync with the beauty needs of people today and tomorrow. In the fragrance industry, what is the new way to sell fragrances? How can we use online abilities to get to people's houses? And of course, in skin care, it's really to build an expertise in-house with the right talents, with the right research and of course, a portfolio that will allow us to be visible from what I call a simple, very, very accessible skin care to probably the most high end.

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

Sue, this question is sort of a bit of a follow-up to the first one. It's great to hear your perspective on beauty and what you believe is important for the recovery path for Coty. But it sounds like you're mostly aligned with decisions the company has made already, the divestitures, the partnership on social media brand, et cetera. So can you talk a little bit about where you differ in view versus prior decisions?

And then Pierre-André, just one quick one for you is, if you could just talk about the key drivers of that first $200 million of cost savings that you're expecting for fiscal '21.

Yes. I'll take the first -- the second part first. What is very much the same, as what we had already shared in May and June, and fundamentally, what -- the work which has been done in the summer by the team under the leadership of Peter has been to start the implementation to make sure that all actions were embedded into the management and with a very clear action plan. So we know that the $600 million plan touches many areas, including, by the way, supply chain. But the immediate actions are very much linked to, A, the acquisition project, which we have been discussing for the past few quarters, and it's execution, acceleration and amplification. So we are now in an action mode on than that.

Secondly, the reduction of the non-people cost with new golden rules within the group, which aim at reducing very, very meaningfully the IT, finance, HR, administrative costs, I mean all the costs which create complexity in the business. And of course, we continue working in many different axis, but the primary source of cost reduction for this year are going to be the 2 areas I mentioned, and we are talking of something which is going to be north of $200 million.

And then I leave it to Sue for the other part of the question, which is -- which was about the difference in point of view versus what has been done so far in the areas she mentioned and what she brings new.

Okay. So thank you for the question. So the difference of point of view, I will try to summarize it as simply as possible. I think we need to work on products. We need to become the best experts in the world when it comes to creating beauty products, as simple as this. And this is probably something that had been lacking in the past.

So I really would like this company to become a product-driven, product-centric, but also new business model-centric company. And this is my passion, my expertise, and this is my wish. So this is going to be a strong driver because, at the end of the day, what happens is that it's always in the bathroom -- in the intimacy of a bathroom that a customer, be it a male or female customer, has a relationship with the product. And if your product is not the best one in the market, if it's not the one that delivers better than the others, if it's not a product that's perfectly designed for usage, but also for performance and last but not least, if it's not a product that you feel not guilty by using because it's sustainable, then you'll be happy to stick to this product. So it's all about products. Beauty industry is all about products.

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

I also have a follow-up question, Sue, for you. Just based on your comments about products, if you could just help us think through how the company has invested its R&D dollars and the changes that you would make to emphasize that product development. You also mentioned in your prepared remarks the idea of formulating top-quality skin care. And then you gave an example of COVERGIRL Clean Fresh product, which would be in color cosmetics. Maybe talk a little bit about skin care development, R&D focused on skin care and how you see that from a financial perspective over the course of the next couple of years.

Thank you for your question. As you can imagine, this is a bit early for me to present a full strategy, to comment on the elements you're asking me to comment. But the only thing I can tell you is that there are key trends all around health in a way. And these trends are key things we would like to implement through all our portfolio.

And the second biggest trend that everyone has noticed is digital. And this one is also another key trend that we would like to implement 360 degrees into all our portfolio. So these are the 2 key things I'm working on, health and digital.

Our next question comes from the line of Javier Escalante of Evercore ISI.

I have a question for Pierre and one for Sue. So Pierre, if you can revisit a little bit Q4 because it feels that destocking was an issue, at least in the U.S. We see that U.S. sales in tracked channels were down 20%. You are reporting twice as much. So we'd like to understand the gap between retail sales and reorder and to what extent that contributes to -- refilling the pipeline contributes to the swing in profitability in Q1.

And also, if you could expand on the outsourcing piece. You have manufacturing plants. My understanding is that you want to divest them and set up some sort of third-party manufacturing. For Sue -- I'm sorry for the long question.

For Sue, I'm interested in what can you do with makeup right now given the situation we're in. I've been very impressed with what Kering is doing with Gucci Beauty. They are putting a lot of creative and investment behind it. So with that in mind, shouldn't this be something that Tmall in China would -- should work there? And what is the impediment to open up a shop in Tmall?

I'll -- yes. So it's Pierre-André. I'll take the first part of your question. And by the way, about Tmall and Gucci, we are working towards an opening before year-end. I'm talking calendar. So this is absolutely on the table. We'll get back with more news when we have something more definite to say. But this is definitely something we are going to proceed with.

On the performance of -- well, maybe on the outsourcing first. I mean when we said that we would review the cost base, we said that we would basically reduce everything. And in the everything, there is obviously the corporate of the company, the administration, the finance. There is as well a lot of things to do in procurement. And then there is the use of the capacity of the factories and the fact that we are not using the capacity enough, and we need to find a solution or solutions which will basically optimize the way we use our supply network. And we are looking at every possibilities to do that, exploring it.

We are not yet in a project mode, but we are really in an exploratory mode. And I think it's our duty to see what we can do to optimize our supply chain and within that particular issue, to optimize the use of our capacities and the use of our existing plants. So nothing else to say at this stage. But as part of the overall $600 million program, we are indeed looking at this as well.

On the performance of Q4, for April -- I mean you know March already was very difficult. April was definitely very, very tough. We basically had most of our channels closed, talking about obviously travel retail, and that remains true as of today, but also the department stores, the beauty stores. And as Peter said, we are under-indexed. We are catching up now, but we are under-indexed in e-commerce. And so we had a very, very large impact.

And of course, destocking at retailers was part of the reason. But I think there was as well, fundamentally, a reason of consumer. And the testimony of that is the impact on luxury, which I said in my speech was definitely much higher than the one we have had on mass.

Now the good thing is that we are recovering. I mean April has been very low at minus 67%. May was better. June was better. And definitely, July and August show very meaningful improvement. There is an element of de-loading for sure in Q4, and there is an element of reloading in Q1 but in a way which, for me, reflects the confidence of the retail, basically. So the retail saw no people coming anymore, and they were basically scared. So they had to adjust their stocks, and they have to manage their treasury.

And today, they are seeing consumers coming back. I mean it's not full speed, but they're basically more confident, and they are reloading some level of inventory. But the fundamental thing is that consumer is coming back. And that's true in mass, that's true in luxury and that's true as well at Wella, where the adaptation of the hairdressers to the new normal has been remarkable and is today helping. So there are many reasons to be careful because this COVID crisis is not over, there's further development. But we are definitely seeing a good start of the year.

And I'll leave it to Sue to answer.

Yes. Let me maybe try to understand better the question. If the idea -- what's the program on our color cosmetics brands? I would say that we are going to work on 3 parts. Of course, restrengthening the sense of purpose of each brand, especially COVERGIRL; working on the products; and working on anything that's around retail, be it brick-and-mortar or e-commerce retail.

And when it comes to the products, I think everyone knows the story of clean makeup, which was the first medicated foundation, and this is very modern. This is exactly what people are looking for today. In a way, they are looking for medicated products to put on their faces. And the success of Clean Fresh, which was the latest launch, becoming #1 in the U.S. during this spring, says a lot about what people are going to look for in the coming months.

The movement of the clean-ification of beauty is also a key one. And our brands, especially COVERGIRL, can lead this movement. There are also many other trends, but I will keep this between the team and myself so that we can surprise the world with new amazing launches in the future. Thank you.

So long question, long answer.

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

First, congratulations to Sue. Welcome aboard. Pierre-André, I wanted to ask a question on leverage. And obviously, your leverage is extremely elevated exiting fiscal year '20, given the pressure on earnings. But I wanted to maybe get some perspective on how we should think of it evolving going forward.

And I know you're not giving specific guidance, but I was hoping to get some thoughts on where you think your leverage will be this time next year. Do you expect to use all the proceeds from the Wella transaction to pay down debt? And then longer term, do you still think you'll be able to achieve your medium-term leverage ratio of 4x? And how long does it take to get there?

Yes. I mean I'm not going to -- as you said, so I agree with you, I'm not going to give any guidance on that. The only thing I can say is that -- I mean the dynamics of our debt are the following. The $1 billion from KKR is in the bank now. We ended the quarter with 7.8, which is indeed too high. We've managed to deliver pretty good performance, I should say, given the level of net revenues we had in terms of cash flow at minus $320 million for the quarter.

We are confident because we are very much paying attention on that, and it's one of our priority to deliver an even better performance, so to stabilize the cash flow for fiscal '21. And this is before taking into account Wella. So we are definitely on the right track.

Then in terms of closing of the Wella transaction, we expect to close it by the end of the calendar '20, so within the coming few months. The process is basically going well. There are no substantial conditions. We keep working well, and the business is doing well, which is to me, a very, very important element and reassuring element. The business of the -- business of Wella will help by nail, by the way, which is definitely doing very good. And by hair altogether, it has been recovering fairly fast compared to Q4.

And so the dynamic of the debt is very simple. You take the debt at the end of Q4. You take into account the kind of cash flow I've given you. You take into account proceeds, which we have already said would be $2.5 billion. We have, of course, the $250 million coming from KKR, which are not in the 7.8. At the same time, we have Kim absolutely coming. And that's basically it. You have all the elements, and that will build a Coty which will be definitely much, much sounder and solid in terms of balance sheet and financial position. I hope it answers a bit your question even though I did not guide, but I did indirectly.

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

Sue, I wanted to congratulate and welcome you as well. I have a question for Sue on how the most recent M&A with Kylie and Kim is speaking to the brand attributes and sustainability you mentioned.

And also 2 questions for Pierre-André related to M&A... First, on Kylie. If my math is correct, Kylie only contributed a few million dollars in the fourth quarter. And I understand the issues with the third-party manufacturer and also basically, KKB (sic) [KKW Beauty] is related to that and that perhaps you may want to take the time to find the right partner and also make another -- other Coty products, as Sue was mentioning before. Should we see this announcement by calendar year or the new quarter? Or should we still see delays in the timing of KKB closure because of that?

And just a clarification, Pierre, on the Wella deal. Is there a potential change in valuation given that the trends in professional hair became worse than it was in spring or is that valuation intact?

Yes. Sorry. Can you repeat the last question? And then be a little bit more precise about -- on your question about Kim and Kylie and what you call the new partner, which is not very clear to me.

Yes, sorry. So 2 questions for you, Pierre-André. First, on Kylie. If my math is correct, and correct me if I'm wrong, it only contributed a few million in the fourth quarter. I understand there was a disruption in your third-party manufacturing and of course, the issues with consumption itself. So I want to understand like what is the negotiation with the third-party manufacturing.

I'm assuming you're getting a new partner as we speak. And should we see that announcement soon? And if that announcement also kind of precludes or prevent you to actually execute or close the KKB deal. As I understand....

Okay. If I understand the question -- sorry. And your question about Wella was what?

Yes. Is Wella -- basically, you -- if there is anything -- given that the announcement was made back in spring and then, obviously, COVID has become worse than expected, so I think if there is any risk to the valuation.

Okay. So I'll take these 2 questions, and then I will leave it to Sue to give some elements about Kylie, Kim and sustainability.

So on Wella first. No -- the answer is no. I think when we -- the first part of the agreement was in May, then the second part was at the beginning of June. By that time, we knew already what the effect of COVID will be. And in fact, we have already passed the worst month, which was April. And we had already seen some improvement. And if any, the evolution of the situation has been better than what we thought at that time with all the parameters we had in mind, so absolutely no risk on that.

And by the way, we have an agreement with the price. So there's no question of adjusting to -- the valuation, neither up or down, but certainly not down. So that's for Wella.

On Kylie and Kim, so just remind the exact parameters. Kylie is $600 million for 51%. We have already paid that. That was in January '20. So at the beginning of the second half of '20. It's in our record. In fact, you have a number on the cash flow statement, Page 4 or 5 of the deck which shows 666, and that's, for the most of it, the payment of this $600 million for Kylie. And there is nothing else coming on Kylie.

On Kylie, we have obviously to work on the situation. I'm not going to comment on potential disruption of partner. I mean as other businesses, it has been impacted by COVID and by some shutdown of factory. But the important thing to have in mind is that meanwhile we have been working a lot on skin care. There were some elements of skin care in Kylie when we took this stake of 51%. And we are developing it and developing it rapidly. We have already expanded the range -- the distribution of the range with distribution in Europe with Douglas. We are working as well on expanding the direct-to-consumer. So it's going okay.

And then with respect to Kim, we are talking of $200 million for not 51% but 20%, and that will be coming at the beginning of calendar '21. So we are talking of the third quarter of fiscal '21 for us, January, February. And again, it's very much going as planned. And we already are working on skin care on this particular time.

So that's for me. And Sue?

Yes, yes. If I understand what the question is about, the potential sustainability of influencer-led beauty businesses, et cetera. So I have to say that I'm very intrigued by the new possibilities offered by brands like Kylie Beauty and Kim Kardashian West. These -- all these personality brands have, as you know, hundreds of millions of followers on social media. These followers are consumers who are very engaged with the brands, who offer their feedback. They are going to directly or indirectly provide a lot of data points, which will allow us to strengthen, adjust and create the best products possible precisely for them.

More importantly, I should say that, at Coty, we are focused on developing very strong skin care ranges for both brands. Skin care products, as you know it, they see much stronger loyalty than other beauty products, such as fragrances, for example. And in addition, both Kylie and Kim skin will play one of the fastest growing areas of skin care, which is the mid-range, of course, and the entry Prestige areas. So as a summary, I would say that people will first buy because they love and trust Kim and Kylie, and they will repurchase because they love our products.

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

I wanted, just to start, to clarify. So in looking at the July, August commentary, trying to triangulate on a bar chart in your presentation, admittedly, it looks like if you kind of extrapolate the sales average, that July, August would be down something on order of kind of high single digits year-on-year. So I just wanted to make sure that I was looking at that or interpreting that correctly.

And then just bigger picture perhaps for Sue. So how do you think about what needs to be done to make COVERGIRL, Max Factor and some of the bigger brands relevant again? Obviously, you've seen, certainly for COVERGIRL, multiple brand relaunches in recent years. So what could potentially get you to a different spot this time around? And admittedly early, but how do you think about EBIT margins for the business over time in terms of trying to grow sales but also invest appropriately in the business?

Yes. I'll take the first question first. I'm not sure you can read the chart the way you do, among other reasons, because you have Q3 but you don't have the quarters before. What I will say is that -- so on the back of a minus close to 70, then 50 and 40 in the course of Q4, we have definitely changed the shape of the net revenues. We are around the minus 20 for July, August, which is a real improvement. Having in mind, for instance, that the travel retail, which used to account for about 9% of our net revenues, is still extremely, extremely penalized by the absence of traffic. And therefore, the rest, and here I'm talking of remainco only, I'm not talking of Wella, is progressing rapidly compared to what we had in Q4.

Now the very important thing for us is not only that, it's the fact that, as mentioned by Peter, we've been doing ahead of the work on the cost side, lowering the breakeven point and, therefore, creating the condition for this quarter to be profitable, even though we are not back yet to the level of '19. And therefore, we are really entering '21 with a new cost base, a new management of costs, which allows to protect the profitability and to protect the cash flow and if we continue seeing some good news on the net revenue side to invest and to fuel the growth. But if we don't, we are protected. And that's the most important elements.

Sue, can you just remind the...

So your question is about relevancy of brands such as COVERGIRL, Sally Hansen, et cetera, correct?

And Max Factor.

Yes, exactly and what it takes to refresh them to get back to sustainable and profitable growth.

We'll have to work for sure. But again, I'm quite convinced about the potential of this brand, especially COVERGIRL, which is, as -- I don't know if you know it, but it's the most loved brand in America, far ahead of many competitors. This is a key point. But COVERGIRL probably is in need of a new sense of purpose to really strengthen its visibility and messaging to its customer and to the new generation.

Secondly, as I said it before, it's all about creating new, better and different products that are better than what the competition is doing. And for this, we're going to work hard to make this happen. We're going to focus more on the key products that we feel are going to change the destiny of each brands. And of course, we'll do a very strong SKU management also because this is the kind of things that can make your fabulous innovation invisible in stores. So this is also something that we are working on very, very hard.

And of course, we're going to focus very strongly on ways to convey this new brand equities and sense of purposes through digital media like social media, but also on our e-commerce platforms and probably see how we can take these brands into the DTC world. So these are really, for me, the 3 areas. But the most important, again, is to make sure we are proposing people, women, men, whoever is looking for makeup, the right makeup post pandemic and the right makeup versus the competition.

Okay. Well, thank you for these questions and for your attention. We'll stop now. As Peter said, we are very excited of this new page we're opening with Coty, extremely focused because there is a lot of things to do, but very excited. And we look forward to seeing you on the road. Thank you.

Thank you.

Bye.

Bye-bye.

Thank you, everyone. This does conclude today's conference call. You may now disconnect.