科蒂集團 (COTY) 2020 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 2020 Results Conference Call.

As a reminder, this conference is being recorded today, May 11, 2020.

On today's call are Pierre-André Terisse, Chief Operating and Chief Financial Officer; and Pierre Laubies, Chief Executive Officer.

I would like to remind you that many of the comments today may contain forward-looking statements.

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

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

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

You can find the bridge from GAAP to non-GAAP results and the reconciliation tables in the earnings release.

I will now turn the call over to Mr. Terisse.

Thank you, Maria, and good morning, everyone.

Welcome to the third quarter conference call of Coty for fiscal '20.

And together with Pierre, who is in Amsterdam or GA, New York, and I am myself in London, and we're very happy to host this exciting conference call.

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

This crisis has been the opportunity for many associates at Coty to take or contribute to many initiatives, which illustrates the role we want and we try to have in this environment.

We have been producing hydroalcoholic hand sanitizer in 12 of our plants in 10 different countries, including in France, in the U.K., and Germany, Morocco and in the U.S., and we have donated it to frontline health care workers.

Our brands, on the other hand, have been donating gloves and caps or shampoo to local hospitals.

And everywhere in the group, numerous relief funds have been established throughout Coty to contribute to what has been a huge solidarity.

So my main takeaway, in fact, over the past few weeks is the great commitment, the energy and the solidarity which has been shown by your associates.

And before we talk of what we are going through and what we are building, I just wanted to publicly thank all of them and each of them for this.

Now moving to the following page.

I -- this is the summary of the upcoming call and release.

As you have seen with the press release we posted, we're announcing something which is far more than just earnings today but rather important initiative which are going to accelerate the transformation of Coty.

The first of them is obviously the announcement of strategic partnership with KKR.

That's a major step with $750 million convertible preferred shares subscribed by KKR improving immediately our liquidity in a strong way.

And at the same time, the signature of an MOU for exclusive talks to be held with KKR on a 60-40 partnership on Professional Beauty and Retail Hair for an enterprise value, which is basically reflecting pre-COVID conditions at $4.3 billion or 12.3x fiscal '19 EBITDA for a scope which does not include Brazil, importantly.

The second element is the delivery of like-for-like net revenues, which are down in Q3 by 20%.

And I think that was -- I had made that clear a few weeks ago but with a strong operating deleverage, we'll come back on that.

And that's been, for us, very much a call to action.

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

And the last element is important as well is the preparation of the restart, which we are going through at the moment, with a focus on what are the most relevant platforms of Coty in this environment.

And here, we've mentioned group 3, we'll come back on that, e-commerce, Kylie Beauty and mass beauty.

So let me come back maybe on these different elements and then we'll have a look at the earnings.

On the strategic review first.

So the third bullet is an important element.

We have concluded that Brazil mass beauty operations would remain fully in Coty.

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

The second element is that the circumstances have, in fact, created opportunity and a creative option, which is a 60-40 partnership on Professional Beauty and Retail Hair, which we call Wella.

And that's a creative because that's basically building things which otherwise would have been difficult in the current context, is building continuity, and I think this element of continuity is very important for the business and very important for the partners.

And it creates an element of sharing value, i.e.

Coty will continue being exposed and benefit from the value creation agenda of this 60-40 partnership.

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

We expect that this is going to bring to Coty incremental cash proceeds of $3 billion, so just this part, the 60-40 JV.

And that will come in addition with the next part, which we are going see afterwards, i.e., the $750 million to $1 billion preferred stock investments.

We have discussed and agreed the main terms, but obviously, that kind of agreement is complex.

So beyond the main terms, which have been formalized with MOU, we now need to complete the work and agree on everything.

That's the work which is going to be taking place in the coming days and weeks with a view to signing at the end of May, so in line with what we had said from the very beginning, by summer.

We expect a closing of this transaction to take place within 6 to 9 months post-signing.

So that should be at the very end of '20 or beginning of '21.

So that's the conclusion somehow of the strategic review.

But the strategic review has carried a second important element, which is the issuance of the convertible preferred shares for $750 million, which are extendable to $1 billion upon signing of the Wella deal.

And this $1 billion, $750 million plus $250 million, comes on top of the $3 billion I was referring to before.

The preferred shares will carry a coupon of 9% and have a conversion price which is 20% above Friday close, and therefore is set at $6.24.

Beyond the strengthening of Coty balance sheet in a very meaningful manner, this formula is a broader partnership, and Coty will benefit from the presence of 2 representative of KKR at its Board.

So that's the, obviously, key element in the strengthening of our liquidity before that.

And ahead of that, we had announced a few days ago that we had been reaching, concluding an amendment of a credit agreement with our lenders and a 1-year holiday of our covenants to reflect the fact that the covenants will be disrupted by the crisis.

And we had also at the same time, a bit ahead of that, in fact, decided to suspend the cash dividend until we come back to what we believe is a proper leverage, below 4x net debt-to-EBITDA.

So as a result of all that, obviously, liquidity is strong.

It was strong at the beginning of Q4 with $1.3 billion in cash on hand at the beginning of the quarter.

And we expect it to remain even stronger, in fact, to be even stronger at the exit of the quarter with $1.5 billion to $2 billion at the exit of this quarter and the exit of the fiscal year.

So that's really what I wanted to say about the transaction we announced today on the strategic partnership with KKR.

The other very important element, next page, thank you, is the amplification of our turnaround and the fixed cost -- the reduction of our fixed cost.

Altogether, we have designed a plan which aim at reducing our fixed costs by $700 million by 2023.

That's going to represent 25% of a base of $3 billion of fixed cost in fiscal '19, and we are taking fundamentally 3 initiatives to do so.

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

I'll come back to that in a minute.

The second element is the acceleration of the procurement initiatives in 2 areas, in the area of business services first but also in the area of commercial expenses, where we have not, in fact, leveraged our scale to lower the cost, and we are going to do so.

We have started to do so, and we are going to complete it and to amplify it.

And at the same time, our intention is that part of the savings there are going to be used to increase the level of support behind our brands and the productive support.

The third element is about the completion and the expansion of our O2 program.

O2 is the change of organization and the program to get a leaner organization, which was designed as part of the turnaround.

We have been during the past few months finalizing the negotiation with the unions.

We are now in a position to implement that.

We are not only going to implement that, but we are going to see the way we can further simplify the organization by leveraging our processes, reviewing our network.

We have many, many sites and locations around the world.

And at the same time, we will be adapting compensation.

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

A number of them are quite advanced.

And we expect to deliver in fiscal '21 more than 1/3 of the savings.

So it's not a program which is going to be back ended.

It's a program which is going to start delivering as soon as the coming fiscal year.

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

The deployment of this fixed cost reduction program, in fact, allows us to confirm our mid-teen operating margin target by fiscal '23 on scope, which is a scope post strategic review, so without the 60-40 partnership in professional and hair retail.

I now very quickly go on each of the streams to give you a bit more color on what it is.

On the supply side, first, our manufacturing footprint consists of 13 factories, which are running at an average utilization which is below 40% with a number of complexity over 30,000 product flow combinations.

We have a big complexity of portfolio with more than 50,000 SKUs.

In all that, that we have a speed to market, which is in our view, suboptimal.

And we need to -- we estimate we need to accelerate that by 20% or more.

And altogether, given the downsizing of our business, we estimate that we need to go for a fixed cost reduction of 20%.

The base of the cost of supply is higher than $1 billion.

50% of it is fixed, so it means that a reduction of 20% will mean that we are going to target cost savings by $100 million.

There's a number of projects which have been visited in the past.

Some of them are relevant, some of them are less.

The supply team, led by Richard, is going to put everything together and to design a road map, which is going to be ready by the end of August for an implementation which will come, which will start shortly after, depending on the topics.

So that's the first element.

The second one is about procurement.

Again, the fragmentation of Coty has prevented us to reduce costs on 2 important fronts.

On the right side of the screen first, our network remained too exploded with many offices around the globe, high travels, high IS cost.

We will capitalize on the moves which we have initiated in the past 18 months.

And for instance, some of you know that we have been -- we are downsizing our presence in the Empire State Building.

We are going to close our office in Pennington.

And we are going to reduce the cost linked to the network to continue that movement.

In the same way, we are going to reduce the recourse to external services, which are obviously costly by themselves, but on top of that, have been in the past generating an inflation of project with often a level of delivery which was not high enough.

And we expect these various measures to help us save 30% of our non-people costs.

That will be, by the way, putting us in the median of comparable companies in terms of cost to revenue, so not in the top quartile, not in the best-in-class, but in the median.

So the measures, the possible measures, the possible improvement as well as benchmark are clearly showing us that this is possible.

On the left-hand side, A&CP.

So I just want to be clear here, we are not looking to cut A&CP.

What we are looking at is rather to increase their impact.

And Pascal, our Procurement Head and the teams have already progressed on the organization of media and concluded global negotiation already for a part.

They will start delivering in fiscal '21.

The second element is that we yet have to platform our marketing materials, so network tester, et cetera.

We are very often fragmented and taking initiative at different costs and generating complexity everywhere.

We are starting the project of platforming, and here, the saving at stake are very, very sizable.

We will, in addition, increase the spend accountability and make sure that every expense goes direct to P&L and is not flowing in a different manner starting from the 1st of July.

Now as I said, we don't want only to get efficiency, but we want as well to increase our impact.

And therefore, we are going in this program to reinvest 50% of our savings immediately in productive A&CP and in working media in priority.

The third bucket is about making Coty simpler.

We have much to do to make it -- to make this organization simpler and more effective.

So you remember that we have initiated a downsizing of our organization a year ago with a target of $180 million.

Now that the negotiation has been concluding with the work partners during the third quarter, we're ready to deploy it.

Our new HQ, by the way, in Amsterdam has opened last week.

And teams are progressively migrating, although obviously, COVID has made it slower than planned.

One of the element of -- I mean one of the element of deal downsizing has been really the writing of the Coty operating system, which is basically the description of accountabilities and interdependency.

And this work has evidenced massive opportunities for process simplification and transversal efficiency, and that's going to help us further decreasing our structural costs in the future.

In addition to this, we'll be revisiting our compensation system and HR policy with a view to better leverage and grow Coty talents.

So to monitor all the above, I mean the 3 pages and the $700 million program, we are setting today a dedicated governance.

I -- in my function as a COO, I'm going to lead the program, and with a subset of DC, which is going to be made of people from supply, from procurement, from HR, from finance, from IS, but also the head of the 2 regions we have, EMEA and then APAC.

And we have appointed our Head of IS/IT, Jerome Auvinet, Chief Transformation Officer, and he will coordinate the various aspect of the transformation.

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

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

As expected and shared with you earlier in April, our net revenues have declined over the quarter by 20% on a like-for-like basis.

And while January and February were showing progresses, in particular, on the performance of our brands in consumer beauty, COVID-19 already had impacted our performance in Asia then in January, February.

But obviously, the big turn happened in March with the first lockdowns in Europe, which started in Italy, expanded to other markets pretty quickly.

And so not only our net revenues were impacted, but the operating income was impacted even more deeply by this loss of revenue and margin as well as by some one-off items.

And I will come back on that.

Obviously, our EPS was impacted as well as a result of this.

And our cash flow was negative as is, by the way, usually the case in the third quarter, but obviously, significantly more here given the drop of profit.

For the first 9 months, on a cumulative basis, our net revenues are now declining by 7% like-for-like.

Our operating income remains in line with that of the first half at $480 million, and our cash flow is broadly stable.

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

Pierre, over to you.

Thank you, Pierre-André.

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

And especially, I want to thank the Coty teams for the tremendous achievement of work and effort that they have put in over the past 2 years to lay down the foundations for a stronger company.

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

The aim of this approach, as you may remember, was an ease to strike the right balance between creativity and discipline.

And we are beginning to see the result of this work materialize across several brands, markets and initiatives.

As you can see on this slide, we had a number of strong innovation successes this quarter even as COVID began to disrupt the demand picture.

Starting with COVERGIRL, we continued our laser focus on improving e-commerce fundamentals.

As a result, COVERGIRL recently surpassed a competitive digitally native brand to become #3 mass cosmetics brand on Amazon U.S. The brand's improved performance, both online and off-line, was in part fueled by the launch of Clean Fresh earlier in the quarter.

This was the first Clean label product line across established mass cosmetics brands and quickly became the #1 foundation in launch in mass.

Similarly, Rimmel maintained the momentum we have seen in recent quarters fueled by media support and strong in-store execution and supported by the recent launch of Scandal'Eyes Volume On Demand mascara.

Rimmel has now reached its highest market share in the U.K. in over 5 years at 31%.

Sally Hansen continues to fire on all cylinders.

The brand continues to build on its leading market position, reaching its highest U.S. market share in several years at 45%.

This is in part due to the launch of clean label line, Good.

Kind.

Pure, which has already reached close to 3% of the main market.

In prestige fragrances, we had a number of great launches.

Only a few weeks after launch, Boss Alive became the #1 female fragrance in Germany.

Similarly, CK Everyone, our first clean label mainstream fragrance, was seeing strong momentum in multiple markets as a top 3 launch at Macy's and top 5 in markets like U.S., Canada and Germany.

While the lockdowns are impacting consumer demand and access, these launches, amongst others, have clearly resonated with consumer and will fuel our recovery once retailers begin to open.

Moving to our performance by segment.

In the Americas, like-for-like revenues declined 18.8% as a result of the lockdowns at the end of the quarter.

This resultant operating deleverage pushed operating margins lower to 2.6%.

However, building on the progress outlined already last quarter, we continue to see green shoots in the region.

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

Sally Hansen, which was already expanding market share, further accelerated this gain with share up 100 basis points and while Clairol also continues to see improvement in share trends.

As the COVID pandemic spreads to the Americas leading to store closure and stay-at-home orders, we saw consumer shift purchasing online.

Our e-commerce sales accelerated beginning in March and remained very robust through April.

We saw particularly outsized e-commerce growth within our mass business, which as you can see on the slide, grew in the U.S. 164%.

While not quite as strong, we are also very pleased with the strong sell-out growth within U.S. Prestige, which accelerated meaningfully in April.

In the EMEA region, like-for-like revenues fell 20.1% due to the COVID situation and resulting lockdowns that we have put in place.

This like-for-like decline led to an operating deleverage, pressuring the margin to minus 2.5%.

Despite the COVID-related pressure, we do see evidence of our turnarounds taking hold.

Within the mass business, some of our key brands were able to take market share to end Q3.

Rimmel, Max Factor and Bruno Banani all grew market share by 50 or more basis points in brick-and-mortar during March.

On the e-commerce side of our business, we have seen sell-out trends accelerate as store closure and lockdowns were implemented.

Similar to the Americas, we have seen particular e-commerce strength within the mass beauty category with some regions such as the U.K. and EMEA growing in excess of 100%.

Our Prestige e-commerce sales growth was not quite as strong.

However, we have seen sales trends accelerate through the month of April as many consumers return to purchasing prestige beauty after weeks of being locked down.

In the APAC region, like-for-like revenue fell 34.8% as the region was one of the earliest hit by COVID during the quarter.

Both China and Travel Retail were hit particularly in Q3.

Encouragingly, we are starting to see trends improve in China, though many markets continue to have lockdowns in place.

Overall, the like-for-like decline led to very meaningful operating profit deleverage in the quarter, pushing our margin down to minus 14.1%.

Despite this, we continue to see positive signs that our strategy is having success.

As shown here, both Sally Hansen and Clairol gained over 100 and 200 basis points, respectively, of market share in Australia during March.

In addition, we also grew market share within the China Prestige makeup market.

Although our overall market share remains quite small today, we continue to believe the Prestige makeup market, particularly within China, will be an important long-term growth driver.

Moving to e-commerce.

We have experienced very strong growth in recent months similar to other regions as consumers shifted more spending online.

Just to highlight a couple of markets, Australia and Japan, with both experienced e-commerce sell-out in excess of 100% during the March and April period.

For our Professional Beauty business, like-for-like revenue declined 11.9%.

This decline was due to the COVID-19 pandemic, which forced many salons to close particularly during March.

Moreover, the like-for-like decline led to operating margins being pressured falling to 5.4%.

However, we continue to be very pleased with e-commerce strength of the Professional Beauty business including ghd, which delivered another quarter of very solid growth.

As I just mentioned, many salons were forced to close during the quarter and still remain close to these days.

Despite this, demand for salon services such as coloring remains very strong.

Based on a survey we conducted in the U.S. and the U.K., the majority of respondents want a salon appointment within the first 2 weeks of salon reopening.

We view this as a very encouraging sign that the difficulties many salon have -- sorry, many salons are facing are likely to be temporary.

Before returning the line back to Pierre-André, I would like to reiterate my thanks to all the Coty associates for the journey accomplished together.

They all have been truthful in their action and attitude to our vision that to build a bigger business, we needed first to build a better one.

I've just shared with you a few of our green shoots.

There are many others growing currently in the company and many more to come.

I know that the current times are very testing, having lived myself through some of these events in the past.

Yet, I know also that our people have the skills and the drive to get through this crisis while staying the course of strengthening our fundamentals.

I have absolute confidence that the Coty people will not waste this crisis, that they will use it to individually and collectively learn and grow and that our company will come out of it stronger than ever.

Pierre-André, I'm turning the mic back to you.

Thank you, Pierre.

Thank you, Pierre.

It's good to have had you and to have you.

Now turning back to the result of the third quarter.

Taking over on the minus 20% like-for-like net revenues, which in dollar terms meant a decrease of on-net revenues like-for-like by $370 million.

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

And so the loss of revenues was only indicated by variable costs and went almost for almost half of it, straight to the operating income for a loss of OI of $174 million.

On top of this $174 million, we recorded several nonrecurring charges for a total of $53 million.

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

Secondly, our excess and obsolete provision was boosted by COVID as obviously, mechanically, our expected sales in the coming 12 months decrease.

And as a result of that, we made some provision on the inventories beyond 12 months.

And last, we could not incorporate to our costs a certain factory -- to our COGS, sorry, certain factory costs as we had been slowing down or even stopping the production in those factories.

So as a result of all the above, the operating income went to 0 for the quarter, down by $227 million, and our EPS was negative, given the fact that we have interest and tax charges below the operating income.

Next line, sorry.

Our free cash flow is usually weak at this time of the year, in the third quarter, but it was obviously amplified by the weakness of the EBITDA, which stood at $103 million.

The working capital and the one-off costs were negative for $322 million.

And we also closed at the very beginning of January, the King Kylie deal, investing $600 million.

And that, together, increased the debt to a level of $8.1 billion at the end of the quarter.

I will conclude by -- after having talk of the cash, the liquidity, the reduction of our costs.

I will conclude by just leveraging on what Pierre has been telling you on the performance of our brands in the middle of this crisis in this quarter.

Having a look at what we see as some of our key assets for growth at the outset of the recovery, and that's quite interesting.

On luxury, our innovation pipeline comprises many projects.

Some of them are yet to come.

And you see on the left of the chart, the Daisy Petals by Marc Jacobs.

And some of them have been very successful at launch, as mentioned by Pierre, although COVID had obviously interrupted the dynamic, and this is the case of Boss Alive and CK Everyone.

So this is obviously as we reactivate our distribution going to be an asset for us.

The mass beauty is increasingly so.

The recent trends have definitely shown progress for 3 of our CB brands.

And you remember that in the last quarter, we have been talking of Sally Hansen and Rimmel, which continue performing well.

But in addition to that, COVERGIRL with the launch of Clean Fresh has been clearly improving in terms of trend.

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

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

We cannot restart everything at the same time.

And we'll be restarting in priority the SKUs and the product which we believe can grow faster and can build a stronger net revenue base.

The following element is e-commerce.

You probably have heard that from many companies.

We have as many other shifted resources and energy to this channel with some success, I must say.

Sally Hansen and COVERGIRL are gaining market share on Amazon in the U.S. and I believe COVERGIRL as well -- COVERGIRL, in particular, became #3 brand, so gained 1 position.

It was #4.

It became #3 during this quarter.

So we are progressing and progressing well.

We also accelerated the preparation of -- the preparation to expand Kylie.

We'll be launching Kylie in Europe this month in May.

I think on the 22nd of May, that's going to be done with Douglas.

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

And so I'm mentioning these several examples because these are all the sets and platforms which are relevant in the current circumstances and have been showing strong or improved trends.

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

So I move now to conclusion and make sure we have some time for questions.

I just want to say that we are very excited.

It's obvious that we are going through a time of uncertainties, but we have been getting equipped to face those and to -- not only face those but to leverage the uncertainties and the opportunities we are going to cross.

We have now the right balance sheet.

We have the right balance sheet now.

And we have -- we'll have an even stronger balance sheet at the end of the year.

We have the right program to adapt our cost and our mindset.

And I think that's very, very fundamental with the $700 million cost reduction program.

And we have the relevant, and we believe the right top line levels.

And therefore, we are all very exciting of having all these assets in hand and be able to be of something very attractive.

That's all for this pretty long presentation, and we'll try to answer your questions now.

Thank you.

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

And Pierre, great working with you.

Good luck going forward.

Just 2 questions on my end.

One is on the taxes related to this transaction, Pierre-André, if you can just give us any perspective on how to think about that?

And then the second question just gets down to your margin targets.

And what kind of assumed top line have you embedded in that assumption?

Okay.

Thank you, Nik.

And by the way, good to talk to you.

On the taxes, we are talking of an amount which is going to be within $300 million.

Obviously, we need to complete the calculation, but that's going to be within $300 million.

On the margin, so we have to assume that we don't know what the growth is going to be.

The reality is that I think we have everything we need to capture it.

But you and I see the environment.

We see the lockdown stopping and then restarting.

You see the very -- the social distanciation (sic) [distancing] and its impact on the restart of the business.

And therefore, we have to -- I have -- as the CFO and the COO, I have to assume that it's not going to get better soon.

And if it does, that's perfect because I will have the right cost structure.

But if it doesn't, I need to get protected.

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

So it will take us time to do so.

Even in this case or even in the case where that would happen, we will be delivering the mid-teen -- sorry, the OI margins I've been talking about.

Excellent.

And if I can just throw in one more.

It seems pretty impressive, actually, you're ramping up your cost savings quite a bit without extra cash charges.

So I just wanted to see if you can provide any context around that because this is the first time at least I've seen that happen.

Sure.

Well, the reality is that in the progress we see -- we've made so far, we've seen a level of one-off cost which has been narrower than what we had indicated.

We had been pretty careful at the outset of the turnaround because the history of the company was encouraging us to take some headroom.

Now the reality of what we have been managing for the past 1 year has been lower.

And therefore, the envelope we had to deploy the turnaround is enough to cover the additional costs which we will incur.

Having in mind 2 things: A, there's a lot in the plan, which is not going to be -- or not only going to be about people and severance.

So there is a lot which will be done by -- through method and discipline rather than through severance.

And the second one is that, yes, we've improved.

I mean we've -- for the past 1 year with the team, it's a silent work, but it's a work which we have done very methodically.

We've been trying to make sure that we will minimize these one-off costs because we knew that they had been extremely helpful for the company.

So yes, I mean with this $500 million, net by the way because we believe in the restructuring, we can also have some capital gain which are going to finance some costs.

We can do it with this envelope.

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

Great.

Congratulations on the transaction.

A lot of moving pieces here, and I just want to make sure I heard this right.

I think maybe I didn't.

But you're talking about taking $700 million of fixed costs out.

But I think I also heard that the total that you're going after is $850 million.

Is the $150 million reinvestment in the business?

I'm just trying to understand those parts again.

And again, my apologies because I know you mentioned it.

And then second, it looks like the working capital was pretty negative in the quarter.

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

Yes.

Well, thank you.

No, indeed, I -- it's -- let's be clear on that.

So what I said is that we have a total program, a total list of opportunities, if you wish, serious opportunities obviously, not only ideas, which amounts to $850 million.

And we feel sufficiently confident in these opportunities to be able to commit on $700 million, which means that we assume that some of them are not going to be realized or not realized fully.

That's -- every time you do that kind of program, that's what you have to assume.

In the $700 million we are discussing, most of the elements are growth.

But there is one element which is net and it's the A&CP component, which broadly speaking is going to be -- I mean efficiencies.

We expect efficiency to be in the region of $250 million to $300 million, and half of that to be invested.

So in the $700 million, I'm counting only half of the saving I'm going to make on that side, okay?

So there are 2 elements.

One is the fact that we have headroom.

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

On the working capital side, so I think the dynamics we have in mind are the following.

We don't have much increase in inventories now.

We had at the beginning of the quarter because at some moment, we saw demand going down.

But obviously, production did not stop right away, but it stopped growing.

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

And not many have come to serious difficulties to the point that they will become a risk for us.

But many of them have been in difficulty, basically telling us that they needed help and support and that they will be postponing some payments.

And we have to take that on board.

But obviously, we have to take that and share it with our environment.

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

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

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

So my first question is just about the $700 million of reduction in fixed costs.

Sort of how quickly do you think you can get there?

I think it sounds like it's by fiscal '23, where the program ends.

But I'm wondering if you can give us some guidepost in terms of what type of savings we should expect in fiscal '21 as a start.

Well, I mean my answer is going to be simple.

It's not going to be backloaded.

It's going to be more front-loaded.

We expect savings in fiscal '21 to be more than 1/3, between 35% and 40% in fiscal '21, and then probably 1/3 in fiscal '22 and the remaining in fiscal '23.

And the reason for that is that, again, I mean some initiatives, first of all, are part of the turnaround.

So only 2/3 of it is incremental.

That's the first point.

The second point is that some initiatives are going to be leveraging on the current circumstances.

And what we are going to do on travel, what we are going to do on consulting are clearly going to be the extension of the crisis management mode we've been in for the past few months as many other companies.

And the last element is that many, many things have been studied at Coty, many projects, which had not been implemented because we had decided to pursue other priorities.

And now we've put them together.

They exist.

They have a lot of strong foundation, and some of them can go pretty fast.

So that's the reason why we'll go for -- from the phasing I mentioned.

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

Great.

I guess first, just your businesses are very different.

Some are significantly hurt by the pandemic and recession that's going to come like luxury, while one could argue that Consumer Beauty should hold up better given wider availability in channels that are open.

So can you talk about your view?

And then maybe a little bit in terms of performance beginning of quarter to end of quarter and then April trends across your key businesses.

Yes.

Well, as I said, the beginning of the quarter was showing, well, in reality, 3 different trends: a, remember that we've been going from divisions to segments and there was some level of noise on that; b, more importantly, we had the beginning of COVID and the slowdown of travel retail following the Hong Kong issues, and so the performance of Asia and Travel Retail was weak; but c, at the same time, we have been seeing very successful launches, a pretty good performance of -- yes, of CK Everyone, of Boss Alive, and very interesting performance from COVERGIRL, Clean Fresh and from Sally Hansen Pure.

The 2 of the 3 brands which we launched together with our sustainability platform.

So that was a mix of it, with plus and minuses but broadly speaking, in line with what we expected.

And then March -- and to be precise from the second week of March, became very much under pressure.

I mean it started in Italy, but it's been spreading to Europe very, very quickly.

And April, obviously, we expect it's going to be significantly worse.

May is likely to be in the same regions.

And the big question is going to be about June and our ability to recover.

And I think it depends very much business by business and probably market by market, among other reasons, because the phasing of the pandemic and the lockdown is different, depending on the countries and business by business.

People want to go back to hairdresser.

I think that's fairly obvious for everyone.

And the opening of some luxury store is going to take a bit more time.

But yes, April and May will be difficult.

We expect June to start showing some sign of recovery.

And we expect Q1 to be showing as well some sign of recovery, but I think Q1 will not be, by any mean, return to previous level into normal.

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

Just a follow-up question on your e-commerce comment.

It seems to be the one thread that was pretty positive across all of the segments.

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

Pierre, you want to take that?

I'll take it, Pierre-André.

Yes, sure.

I think really where we decided to make a decisive effort in e-commerce has been really on Consumer Beauty, where we are really underplaying our fair share.

So we -- in luxury and in professional, clearly, we continue to strengthen.

And the growth has been solid in line with the market growth.

So that is very good.

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

So it's a very, very good result, at least for the place where we can get data.

I'm talking sell-out here, and which is a very, very substantial acceleration for market on the same panel, which we measure to be in the mid-teens, so around 15%.

So that's a spectacular performance.

Why have we done that?

I mean to be honest with you, a lot of basics, right?

A lot of focus on conversion, a lot of focus on the basics of e-commerce, building our skill set into the organization and really building a playbook.

Building a playbook, deploying the playbook, deploying the playbook in the key market, and after that, deploying the playbook from the key market to the smaller market.

So I think that we are -- we have made a step here, and we have made a substantial step change.

And I do not see why we will go backward going forward.

So -- and that's really very pleasing.

And again, in my view, it is very exemplary of the culture that we want to create.

A culture of drive but also a culture of discipline and distribution of playbooks so that makes sure that everybody catches on that.

And we feel very, very good about that.

In the same way, and we feel very good about our general trend in Consumer Beauty overall.

To give you a bit of data, I'm talking like combination of brick-and-mortar and e-com.

If we look at our business in Consumer Beauty, something like 12 to 18 months ago, we would have lost market shares in 80% of our market.

Now in the last period, we are stable or gaining share in 80% of our markets.

And very often, the reason why we lose share is because we have made active decision of withdrawing some brands from the market, for instance, from Bourjois in the U.K., right, where we knew we were not able to operate at scale.

So I'll be honest with you.

I think we are working the plan, and the plan is working.

Okay, we have the crisis.

But I really believe, and I said it earlier, I believe we will come out of this stronger because we now start to embed our OpEx program or our conversion-focused program on e-commerce, our advertising program, our marketing, our investment at scale behind a more limited number of brands as well as, yes, we have experienced a bit of setback, but a focus on gross margin, lowering promotion, building working media, all this stuff works.

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

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

And as you think about kind of the pro forma portfolio, would you say that you now have what you need to grow?

And I know you've made the comments on 2019 when it gets back to that, but let's try to pretend in a non-COVID world, right.

Would the portfolio be better structured for growth now?

Or do you still need additional assets to kind of get towards those faster-growing subsectors within beauty?

You want to take that one or...

Yes, yes.

I mean I'll start and you can -- and we can play it together.

I think the fundamental difference a year ago is exactly what we said we wanted to achieve with the opening of strategic review, i.e.

refocus the company, refocus the company on fragrance, on cosmetic, on skin care.

Give out certain number of categories on which we can make a difference, which are basically adapted to the level of human investment efforts we can have.

And at the same time, resize the balance sheet to make sure that we have the means to develop these categories and to win in these categories.

And so yes, I mean my answer would be that we have achieved exactly what we said we will be achieving.

We have, in luxury and in fragrance particularly, a number of assets which are evidenced by the new launches we are doing and by the success of some of our brands.

In Consumer Beauty, we have the OpEx simplification program and the program of reinvestment behind our brands, which start working fundamentally.

In skin, we need to accelerate.

Now we have one very, very strong and important element, which is playing both in skin and in direct-to-consumer, and this is Kylie.

And I can promise you that this is going to be a real, real asset for the company.

And all that with: a, less debt, level of debt, which is, I believe, the right one to have financial flexibility to support that portfolio; and b, with a real intention and program to address the simplification of Coty and to make it not only lighter in terms of costs but also much more manageable.

And so yes, I think strategically, we have resized the company, re-scoped it to something which -- in which -- or with which it can win.

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

I guess just first maybe a bit more detail on the deal announced.

So can you maybe preliminarily talk about dilution when the deal closes in 6 to 9 months?

And then on the Brazil business, so I recall your commentary about it having a fairly large hair component.

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

Yes.

Thank you.

So in terms of dilution, we'll come up with precise numbers.

The stage at which we are is an important step, but don't forget that we are only talking of an MOU and there's a number of parameters we need to fix, including the precise carve-out, the buildup of -- the stand-up of this new 60-40 company and the full way we are going to address the consequences on Coty.

What's sure is that there are stranded costs, but the stranded costs are going to be addressed by the -- for a part by the -- sorry, by the $700 million cost reduction program.

The way to look at that and to get a confirmation of that is the fact that we confirm our midterm target for operating margin even though this is now applying to a group, which is going to be about 1/3 lever in terms of size.

So we'll deal with that, and that's going to be part -- that's going to be as part of the $700 million cost reduction program.

On Brazil, yes, you're right.

It's more than that, but it's a part of that.

And basically, that means that similar to what we do in luxury, where we have licensees of some brands, Brazil is going to be the licensee of the Wella brand in that country in the consumer space.

As long as both parties find it interesting now, the Wella brand is a very important brand in Brazil.

And the platform we have with Hypermarcas is an extremely efficient platform in Brazil with not many equivalent in terms of its ability to produce, distribute at the right cost and with efficiency and with reach.

So my bet is that this is going to continue for a quite long period of time.

Conversely, we are reorganizing our luxury business in Brazil, and we have decided that we will be leveraging the intermarket platform to try and accelerate our penetration in the rest of our businesses.

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

One of the things I know you talked about last July was a need or a desire to really pull back on your SKU assortment and really narrow your SKU count.

And just in the context of what you mentioned in terms of the conversations with some of your retailers who are going through a difficult time right now, I'm just wondering is that an opportunity to move faster on the SKU reduction?

And so if you could update us how much progress have you made?

Is COVID-19 a particularly good opportunity to move faster?

Or what's your thinking on that SKU side?

Pierre, you want to take?

Or you want me to do...

Sure.

I think -- honestly speaking, I don't think that COVID makes a difference to our plan.

We had the plan to focus on our power SKUs and to give them a disproportionate share of shelf and align, I would call it, our power SKUs with -- across the line from a distribution, promotion and advertising standpoint.

That is exactly what we are doing, for instance, with COVERGIRL in the U.S.

So our view is that clearly, yes, we can always accelerate and we will because we have now, I would call it, refined our approach.

We started with a limited number of markets, and now we see that this plan is working.

So we are expanding and we are accelerating.

We are now at the second phase where we are looking at combination between markets.

We have not only looked at complexity within market, but now we are looking at complexity between market.

And that's the next stage of the rocket on that one.

But I mean I'll be honest.

I don't think COVID changes everything to the plan.

We need to continue to push.

We need to continue to push our core franchise, and as I said earlier, to have a total activation through the line from distribution to promotion to advertising through our core franchise.

And we know that it is also the way we build brand attribution for our advertising support to make sure that we advertise the core line -- or the core sub-franchise of the brand.

And we have seen it have a fantastic result in COVERGIRL in the U.S. market, for instance, where our top 6 or 7 franchises are really growing very fast.

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

I wanted to ask about Kylie and the trends you're seeing in that business as you're kind of navigating through this crisis.

Obviously, their largest retailer partner experienced some disruption, closing stores and so forth.

And obviously, Kylie has a pretty big e-com presence.

So I just wanted to figure out the balances as you're working through there.

And then if there's been any sort of manufacturing issues with that business, are you able to keep up with supply?

And if there were, are there any chance -- any plans to move manufacturing in-house a little quicker than you had previously planned?

Well, a lot of very good questions.

So yes, I mean we are constrained by -- on cosmetics, we've clearly been constrained by production.

The third-party manufacturing we're using has been shutting down.

And therefore, we've been out of stock for a lot of the cosmetic references, which is a pity, by the way, because direct-to-consumer still works and is very active.

So we are indeed looking at what are the options.

We are -- in the short term, that's going to be, I think, the reopening.

But in the more medium term, of course, because we need to be able to make sure that we have supply at all time, we can't be in that kind of position again.

The other side is skin care.

And here, we have really, really seen a lot of traction.

A lot of traction on the direct-to-consumer side, in particular, beyond what we thought.

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

Now what we're also doing is take advantage of this period to, number one, accelerate on the building of the infrastructure we need and the frame we need to be able to leverage Coty network and size for the benefit of Kylie, and we've been pretty active on that.

And we'll be, in fact, ahead of -- we are ahead of the plan we had.

And on the other hand, we have accelerated the launch in Europe, as I said during the call.

And on the 22nd of May, so it's in 11 days' time, we'll be launching Kylie product in skin in Europe.

So a lot of promising elements.

We have to solve this question of the supply, but we have everything we need to do it.

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

All right.

Well, thank you again.

Very happy to have been able to share these important news with you.

And I wish you all -- we wish you all, Pierre, Olga and I, to stay safe and to stay close to this incredible market, full of uncertainties but also full of opportunities.

Thank you, and we wish you a very good day.

Thank you very much.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may now disconnect.