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 Second Quarter Fiscal 2020 Results Conference Call. As a reminder, this conference call is being recorded today, February 5, 2020. On today’s call are Pierre Laubies, Chief Executive Officer; and Pierre-André Terisse, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty’s earnings release and their 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 reflects the comparison of the business at constant currency in the current and prior year, excluding the impact of acquisitions and divestitures. In addition, except where noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the non-GAAP financial measures section of our earnings release. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release. I will now turn the call over to Mr. Laubies.

Thank you, Maria. And welcome, everybody, to Coty’s second quarter fiscal ‘20 conference call. I will start by reviewing the progress we have made on our turnaround plan in the last few months. Pierre-André will then discuss our financial results, outlook, our newly introduced sustainability target, and some of the recent strategic developments. Exactly one year ago, I was sharing with you and our key leaders my first impressions of Coty. My first impression at the time was that we had reserves of performance to unlock in the way we ran our company and that the path to building a bigger business would have to go through building a better one. Our turnaround plan has been underway now for two quarters, and we are beginning to see clear evidence of progress in the key parts of the business. Like we alluded to about it six months ago, our key priorities over these last two quarters have been to rebalance working media and non-working media, grow penetration by advertising our brands at scale with the right media mix, improve our gross margins by better managing our mix, price, and promotion levels, put together an organization more adequate to our size, find the right balance between discipline and creativity in everything we do, and deliver consistent financial performance in a quality way. I am very happy to report that our teams across our business units, factories, and corporate centers have been doing just that. We are, of course, far from having solved all the challenges we face and seized all the opportunities ahead of us, yet we can see that we are on the right track, that our plans are starting to work, and that now is the time for us to be consistent and persistent. This allows us to reconfirm our fiscal ‘20 targets. At the same time, we are beginning our work to reshape our portfolio to provide financial flexibility and raise our growth potential. We will come back to that. I will take now the opportunity to concretely illustrate our approach by sharing some details of our turnaround plan activation. We continue to grow our working media spend, which was up 8% in the quarter, as we focus on investing behind our priority brand-country combinations. The media spend behind these priority businesses in Consumer Beauty grew over 15% in the first half of the year. We also continued to refine the mix between traditional and digital media, activating digital-first campaigns in our younger-oriented brands while ramping up TV media behind our more mainstream brands. Our organization is very intentional in driving strong gross margin improvement, activating the levers at the center of our strategy. We have implemented list price increases in a handful of countries with a broader deployment on track for the second half. Each of our divisions has been actively managing the mix of their sales, prioritizing higher-value products and channels. We are continuing to monitor that we have the best possible alignment between sell-in and sell-out, thus avoiding value-restrictive selling tactics. Finally, we are advancing on our objective to be a leaner and more aligned organization, supported by an enabling culture with the right balance of creativity and discipline. The new organizational structure has been deployed effective January 1, and the teams are now working under a new regionally focused framework. We have stepped up our service level to our customers, whilst at the same time, increasing our forecast accuracy. And we have begun to execute our fixed cost restructuring program. As part of our efforts to be a healthier business, we are steadily restoring the pricing architecture of our brand and premiumizing our portfolio, and we are making strong progress within both Consumer Beauty and Luxury. In Consumer Beauty, the average net revenue per unit in the past six months has increased by approximately 2%, with even higher growth in Europe. This has been achieved through a combination of implementing net price management in a few countries, though the bulk of the effort will be deployed in the second half, active revenue management as we have prioritized and supported higher-value products, and more disciplined promotional activity while remaining competitive in the marketplace. In Luxury, while we are starting from a stronger position, we are also capturing premiumization opportunities. The average selling prices increased by approximately 4% with improvement in each of our top three markets. The driver for this expansion includes reduced promotional activity, improved mix management, including greater emphasis on eau de parfums, reduced gift set activity, and selective price management. Last quarter, we shared with you early progress in some of our priority brand-country combinations. With that progress continuing to build across a number of brands and markets, I am pleased to offer the global view on our end market performance. As you can see on this slide, the global mass color cosmetic market, as tracked by Nielsen, has decelerated moderately over the past year. In our Q2, the mass color cosmetics market declined by approximately 3% compared to a decline of 2% for the last 12 months. At the same time, our focus on sales and marketing fundamentals has allowed us to improve our global sell-out by approximately 130 basis points, even in a slowing market backdrop. The improved sell-out plan in our cosmetic brand reflects strong progress in the U.K. with Rimmel and Max Factor, in Germany with Max Factor, and in Australia with Sally Hansen and Rimmel. It is worth highlighting that the action plans we have activated in the U.K. behind Rimmel, including substantial increases in working media, support on halo sub-brands, and a couple of strong launches, have allowed Rimmel to grow its penetration, hence, its market share of the U.K. cosmetics market by recruiting light and medium shoppers, exactly in line with our strategic intent. Our sell-out performance in the U.S. is more mixed, though our underperformance gap relative to the category has been moderating in total and very positive on our core franchises. Some of these drivers of underperformance are due to external factors like competitive promo pressure. We can only live with those. But some are also within our control, and we are taking the necessary corrective action. It is important to highlight that due to the strong momentum we are driving on Amazon, our U.S. cosmetic sell-out is over 100 basis points better than what is captured in the Nielsen data. Complementing the gradual improvement of our performance in store is the continuing strong growth in our e-commerce sales. In the first half of our fiscal ‘20, Luxury e-commerce revenues grew by approximately 20% year-on-year. E-commerce now accounts for a low double-digit percentage of our Luxury business, which is relatively consistent with the Luxury fragrance market. This momentum was achieved despite the currently limited presence on Tmall. However, our conversations with our leading licenses about launching on Tmall are progressing well, and we are optimistic about the long-term opportunity for our Luxury business with this leading e-retailer. In Consumer Beauty, while e-commerce penetration is still relatively low, we continue to make great strides globally. Our first half e-commerce revenue grew by approximately 20% fueled by strength on Amazon. Our cyber weekend sales on Amazon in the U.S. and in the U.K. nearly doubled versus the prior year. In fact, in our core markets, including the U.S., U.K., and Germany, we are gaining market share on Amazon, speaking to the strength of our color cosmetics brand when combined with disciplined focus on e-commerce fundamentals. While we continue to strengthen our base business, I’m pleased to announce the expansion of some of our leading brands into the clean beauty segment. It is evident that consumers are increasingly focused on wellness, both their own and of the world around them. This is driving rapid growth for products and brands that serve these dual needs, and we will seize this opportunity. After an initial move in our Professional Business with the WeDo launch, and as we have chosen to focus on our core categories of fragrances, cosmetics, and skin care in the last couple of months, we have launched a clean label product line in each of these categories, Philosophy’s Nature In A Jar, Sally Hansen’s Good. Kind. Pure., Calvin Klein, CK Everyone, and COVERGIRL’s Clean Fresh are each vegan, cruelty-free, based on naturally derived ingredients and free of many contested ingredients. Nature In A Jar and CK Everyone are also packaged in recyclable packaging composed of post-consumer recycled material. We are very proud of the teams who are driving these efforts and capitalizing on the growing trend while building Coty’s reputation as a company that aims to do great by doing good. With that, let me turn over to Pierre-André.

Thank you, Pierre, and good morning, everyone. About sustainability. Sustainability is about, as Pierre just mentioned, consumer and innovation, but it’s also about more than that. For the past few years, the Coty teams have been working in a number of areas to try and catch up with the industry. And while a lot of things remain to be done, the many progresses that we have made so far have made it possible for us to elaborate the first Coty sustainability platform and to make it public today. So I will not go into the many details present on the chart, but I would just say that we have chosen to call it Beauty that Lasts and that it encompasses initiatives in the area of products, environmental protection, and people and diversity. For each of them, we have defined priority initiatives and set targets for ourselves which we will monitor transversally. So for instance, we will, by 2022, source 100% of our Indian mica from responsible sources. Or we will, by 2030, reduce our carbon emissions across our entire value chain by 30%. And there are more on the page. This platform will further build our credibility as we deliver against these targets. It will also increasingly give us the ability to take initiative in a market segment that will be one of the growth drivers of beauty in the coming years, and therefore, this is a major step for us. But now let’s zoom again to the short term and let me turn to the earnings of the quarters. As said by Pierre, this was a quarter in line with the strategic plan. And this is the fifth time in a row that this has been the case since Pierre and I have started this exercise more than a year ago, evidencing, I believe, an improved control over our business. On revenues more specifically, Q2 was modestly down at 1.4% with noticeable sequential improvement in Consumer Beauty. Beyond the percentage change, the evolution of our top line has been of quality, with strong improvements on that front evidenced by the increase of our gross margin. So turning to the divisions and to start with Luxury. In Q2, we launched the second pillar under Tiffany fragrances called Tiffany & Love, which you have on the left side of the chart. It performed incredibly well in the market. This launch confirmed the appeal of the Tiffany brand for both males and females and has driven market share gains for the overall Tiffany brand across the U.S., U.K., Germany, Canada, and Italy. Our continued support and activation behind Marc Jacobs Daisy has now firmly placed the iconic fragrance pillar into the top 4 fragrances in the U.S., U.K., and Canada, and we continue to drive growth across our focus brands, Burberry and Hugo Boss. Moving to Slide 11. On the performance side, Luxury delivered solid growth at 1.3% on a high comparison base. I remind you that the same quarter last year was plus 10%. This was helped by the previously mentioned innovations but also by the strong performance of our Gucci makeup. While the traction of our brands remains strong, we are, as we have been doing in Consumer Beauty, working to improve the quality of the top line. This has already led us to reduce the level of promotions and discounts. We will, in Q3, take advantage of our new go-to-market, by region common to Consumer and Luxury, to accelerate our work and cut low-value sales, decrease value distribution, and better control the gray market amongst other initiatives. This will temporarily drive our sell-in into low single-digit negative in Q3 specifically. At the same time, our sell-out will be supported by a strong innovation pipe with CK Everyone coming in Q3, which is coming today, I believe; as well as Hugo Boss Alive, both fragrances for women, and later in the year, the expansion of the Gucci makeup range; and other innovations, including Burberry, Marc Jacobs, or Hugo Boss. So, Luxury definitely remains a key growth engine for our company. Let’s now turn to Consumer Beauty, Page 12. The launch of Rimmel Lasting Matte foundation has been off to a great start. This is on the left. In core markets like the U.K., we have been supporting this launch with a strong uplift in media and in-store activation, which have driven growth for the entire Rimmel Lasting sub-brand and contributed to Rimmel market share gains in the U.K. over the last five months. Consistent with our focus on high-value business, we have been activating support behind our premium Sally Hansen Miracle Gel line, including major investments and innovative try-on features in select retailers. This has driven mid-single-digit revenue growth for Miracle Gel in the U.S. in Q2, supporting the overall brand. And finally, on the right, for Max Factor, we are continuing to strengthen the product range with a Miracle Touch Second Skin hybrid foundation, which contains pre and probiotics to support skin renewal and is capitalizing on the growing consumer demand for skincare-like cosmetic products. Performance-wise, going to Slide 13, Consumer Beauty continued to show progress as illustrated by Pierre a few minutes ago. While North America continued to show mixed performance with a solid delivery from Sally Hansen but continued weakness of COVERGIRL, Europe kept strengthening with Rimmel in the U.K. or Max Factor in Germany. And in ALMEA, we kept being selective in our efforts in an attempt to continue improving the quality of our sales. Our priority combo, brands-country, evidence that their updates are delivering. And while the overall top line of the division remains below where we would like it to be, it is clearly showing sequential progress at minus 6.8%, more than one point versus last quarter, and the best performance of the past 18 months, and this is obviously to be continued. And turning to Professional Beauty, Slide 14. ghd continues to grow at a very strong pace, driven in part by the launch of the Glide hot-brush. In our leading Wella brand, we have strengthened the range with the launch of ColorMotion+, a hair care regimen that improves hair color quality. And last, OPI continues to invigorate the assortment with its latest Mexico City color collection, which you see on the right. And so moving to Slide 15, Professional Beauty continued growing in Q2 at 2.2% for the quarter, which means first half at 3.5%. All regions growing, Europe and the U.S. delivering steady performance while ghd continued delivering strong growth, helped by continued innovation. At the same time, the margins remain high in the 17s. These numbers speak to the health of the business and the quality of the Professional Beauty teams. At this time, we are working full speed in parallel on the strategic review, I’ll come back to it. So I will now get back to Coty overall, Slide 16. Looking at the profitability for the entire group, we are now well anchored in our virtuous equation. Gross margin was up 130 basis points to 63.4%, reflecting progress coming from mix, price, but also channel management. At the same time, we kept increasing the support behind our brands with working media up high single digits and key brands being advertised efficiently. In front of that, we continue to be more selective on promos. Together with a tight control of our fixed cost, this has fueled strong improvement of our operating margin to 13.9%, up 110 basis points, and this flowed down to the EPS, which is up $0.03 to $0.27, half of it driven by a one-time tax benefit. So we showed good progress on the earnings side, but even more so on the free cash flow side, Slide 17, with a $364 million free cash flow for the second quarter alone, almost double that of last year. This was driven by tight control in all lines with a specific contribution of receivables; we have been reducing the overdues; and the inventories, thanks to a better supply chain working, a better service level, and better S&OP processes. Our debt closed at $7.2 billion, down from $7.4 billion the previous quarter. And free cash flow continues, of course, to be very high on our agenda. To sum up, Slide 18. This was a quarter very much in line with expectations on all lines. It allows us to reaffirm our target for the year, with the delivery expected to be skewed towards Q4, like-for-like net revenue stable to slightly down year-on-year, adjusted OI growing 5% to 10% like-for-like, with strong working media reinvestment, and adjusted EPS growing mid-single-digit, along with improvements of our free cash flow. I’ll move to Slide 19 now and would like to give you some last comments regarding the change of scope we are currently driving to complement our turnaround plan and build a stronger Coty. On the strategic review first. We are very happy with the way things are going. First and foremost, as you have seen, the business keeps delivering well. This was the case in Q1 and is very much the case in Q2 in Professional Beauty and across the businesses under review, and we expect this to continue going forward. It’s a clear testimony of the quality of the business under review as well as the quality and commitments of the teams running it. We continue running the process and have now moved into a more concrete phase. The information memoranda have been distributed to the interested parties, we continue seeing many strong marks of interest, and keep working with an unchanged time frame with a decision to be made by summer 2020. Moving to Slide 20. Kylie is a second topic. As you have seen, we have closed the deal on the 6th of January and soon appointed Christoph Honnefelder as the CEO. The business has continued delivering well in the last month of 2019, actually ahead of expectation, given strong skincare starts and strong Black Friday overall. We will consolidate Kylie globally as of the acquisition date, early January ‘20. However, we will report sales and margin for the scope change instead of as part of the like-for-like performance for the first 12 months. We will use this time to define the right sequence of initiatives to accelerate the brand starting from calendar ‘21. Our first interactions and thoughts confirm the potential we were seeing in the brand at the time of signing, and we will take the time to get things right before pushing and delivering our objective, which is, I remind you, to bring an additional one point of top line to the group. Finance wise, we will therefore just make sure in ‘20 that this transaction is EPS neutral for the calendar year. Moving to Slide 21, and this is going to be the last one, a few words of recap on this call before we move to Q&A. As detailed by Pierre, our turnaround is progressing well. Whether on the top line or OpEx, on the cost side, we start seeing the benefits come in. Part of the benefits, two KPIs are showing strong progress, and they are important: Gross margin, on the one hand, which speaks to the quality of our top line and business; and the free cash flow, which is a proxy for the comprehensive business delivery. We will continue focusing very much on these KPIs. As a result, we are confident in our ability to reach our target for the year, and we’re happy to reaffirm them. We are also happy with the progress made on shaping our portfolio and with each of the strategic reviews and the partnership with Kylie Jenner. As you may sense, we are dealing with a very intense value-creation and transformation agenda. If we manage to drive it and show so many progresses, this is thanks to the Coty teams who have been and keep showing talent, energy, courage, and resilience. On behalf of Pierre and myself, the two of us, I would like to conclude by thanking each and every Coty associate for this performance. And now we’ll be happy to take your questions.

Thank you. Our first question comes from Olivia Tong of Bank of America.

Good morning. First, just wanted a little bit more on the strategic review because there wasn’t a ton more information just like three months later. So just wondering if you could give a little bit more detail. And then, is this - is the planned move of professional hair in Brazil in any way influencing the timing of any projects you might embark on with respect to cost and efficiency improvements, free cash flow improvements that you plan to make? Thank you.

Hi. This is Pierre-André. I’m not sure I’m going to be able to give elements about the timing. So maybe just to - yes, just to repeat. We have started the process back in October. We took the time to prepare the information and to have everything we need to be able to run a smooth process. We are running the smooth process as of now. We took the time to make sure that we find the best possible solution for the business, but also for Coty shareholders. Obviously, we are very comfortable with the timing we gave as an indication at the beginning, which is by summer ‘20 in terms of decision. But of course, as you can imagine, to run this smooth process, we just have to do it in a quiet manner. So we’ll come back to you in due course with more elements. But for the moment, I just can tell you that things are proceeding really as we expected and well. On the impact on restructuring costs, well, there are two elements. We don’t foresee - I don’t foresee any change to what we have said so far. Because on the one hand, we will have - I mean Professional Beauty and Brazil, we’re carrying part of the cost, and they are going to leave, so these costs are not going to be incurred by us. But on the other one, we think we have to make some further adjustment to the business to reach the same level of profitability. We are working on that. And therefore, altogether, I expect the same $600 million figure to remain our envelope of restructuring cost as announced before.

Got it. That’s helpful. If I could follow up on the price contribution of 4%. That’s pretty healthy. Presumably it’s primarily in Consumer Beauty, but can you talk about your process of deciding what pricing levers to pull, and how much more you think there is to go there?

So I’ll take - this is Pierre speaking. Our - the contribution actually is pretty balanced between Consumer Beauty and Luxury. Our objective is very clear. I mean, we do have a gross margin gap that we want to close, and price - and I mean, in that case, I actually talked mostly about net price is one of the key drivers to enable us to do that. So our objective is very clearly on that case. Yes, we do want to participate in promotion, but at an acceptable level and not necessarily at an over-intense level. Why? Because again, it needs to come back to - we need to drive fundamentally the penetration of our brand. And for that, we need the margin to invest. And therefore, we need to break this cycle. And so there are more to come. We will continue to refine all of that. There is more to come in the short term because we are deploying this strategy in more markets than we have been doing so far. So, so far, we have been focusing on four, five, six key markets. Now going forward, we’re expanding the strategy. And again, this requires a degree of granularity which is very fundamental. Taking a blanket approach is not very helpful in this situation because you have local competitive situations, the mix varies by market, and the point of departure is a bit different by market. So you exactly need the granularity of the market analysis. And so yes, there will be more to come. And I do not desire to disclose what it is, but clearly, we will continue on this agenda. Once we have started this first one, we will make sure we stay on it for the next years and don’t fall back.

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

Great. Thank you very much. Two questions on the U.S. business. First, can you talk a little bit about your exposure to Macy’s? There were obviously some announcements of closures there, 125 stores. And then tied to that, you spoke a lot about your progress in e-commerce. Maybe a little bit in terms of what you’re doing with the specialty stores? And then thirdly, we’re going through the resets now in terms of the mass market. Some of that data is going to start showing up. How does your shelf space look going forward? Thank you.

Okay. So on Macy’s, we do expect the exposure to be very limited. For us in Luxury, we don’t feel very - that the impact is going to be big. The question, the second question was?

On the specialty channel with Ulta and Sephora.

Yes. Well, I think we are - our share on Ulta and Sephora in the Luxury business is on the - is doing well. We are doing better than - we keep growing, and we keep growing on e-commerce, too. Also, we know that on Ulta, we have some good results with COVERGIRL. So again, we are taking our fair share of that market for the balance of the business that we have. We see that this is really a channel that we want to continue to push and we want to continue to develop.

And maybe on Ulta, before Pierre takes over on the shelves. As I was saying, Kylie has been doing spectacularly well at the end of ‘19, better than we expected. That’s been, for a part, with Ulta, of course. Both, by the way, in cosmetics and in skin care. And your next question was about the expectation on the reset of the shelf.

Well, I think we have been working very hard on managing the productivity and increasing the productivity of our shelf. I think our customers are happy with our results. The reset, we have nothing to add to what we have already said in August. We anticipate this is exactly in line with where we are today with a slight decline, an occasional slight decline. But basically speaking, we should start exiting at the end of Q3, the so-called major impact on distribution losses that we have experienced over the quarter last year.

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

Great, thanks. Good morning.

Morning, Lauren.

I was hoping you could talk a little bit about Luxury and that you’d specifically talked about the route-to-market changes. So if you could just elaborate on that, it’d be very interesting. And then more specifically, why the exit of the lower-value sales would only be an issue in Q3. Because I would - just the way that my head was thinking about it, it would be something that would sort of linger for a year. So if you can explain a little bit more about that, it would be great. Thanks.

Sure. I’ll take it - or Pierre, you want to?

No, I can take the Luxury and route-to-market changes and you can also...

Yes. So maybe I take it on your specific question on the timing. Actually - fundamentally, we have the same goal throughout the company and in particular businesses we are going to retain, which are Luxury and Consumer Beauty. We’ve been starting very much in Consumer Beauty to be more selective about some sales and cutting some sales. We’ve made mention of that in ALMEA in particular. And by doing so, we’ve been able to reduce the gray market. We believe that’s very important to drive up C1 to reduce the impact on our main markets and to make sure that we focus on the right particular top line. We’ve already done some things on Luxury, as shown by Pierre. But now we’re going in Q3 to go deeper in Luxury for one reason, which is that we have a common go-to-market, as you know, starting from Q3, between Luxury and Consumer Beauty. And therefore, it makes sense for us to do it now. And to do it now means just cutting low-value distribution sales, promotion going a bit deeper. Because we know that we have a big pipe of innovation coming, and we want to be able to focus on these innovations as opposed to others. So in Q3, we’ll accept that this has an impact on the sell-in, and it’s driving actually our sell-in into negative territories. But we believe this is what we need to do to continue strengthening Luxury and continue making it a strong engine of growth for the company.

And I will add another point on the Luxury route-to-market changes or Consumer Beauty route-to-market change. Actually, we are not touching the customer-facing personnel. We are still having a dedicated marketing team. We are still having dedicated sales teams at every market level. The thing that we are doing is that we are taking advantage of our relatively - or we are facing the fact that we need administrative scale and we need to support scale. And that’s what we are doing fundamentally from the route-to-market change. We are combining our back-office infrastructure. But we are not changing the customer-facing personnel and the structure of our marketing teams at the local level.

Okay. Okay. Thanks. And then just on the U.S. shelf space conversation. I understand that when we get to the end of 3Q, we start to cycle the losses, so just the comparisons will start to benefit. But do you have visibility into incremental shelf space? Or is this really more about just better productivity of what you have currently?

I think we will probably, hopefully, gain some incremental shelf space as we are working hard on our productivity, but I just can’t commit to that at this stage. And I think at the end of the day, as you say, our objective was to clearly regain the confidence of our customers through our strategies and our focus, and that’s what we are doing at this stage. All right? And so that’s job - we need to complete job number one. It’s very mission-critical for us that we, again - we gain confidence from our customers. And after that, we can start about expanding. And I think if we want to expand, we need to expand meaningfully through a combination of innovation of portfolio buildup and not only just continue to stretch the current business that we have.

Our next question comes from the line of Nik Modi of RBC.

Good morning, everyone. I guess just two quick questions for me. Just wanted to get an update on any progress that you’ve made in China. I know that’s been an area that has been of high interest in terms of generating better business there. The second question really is on the makeup side. I mean, it’s been several quarters now, and things seem to be getting worse. I mean, do you have a better handle on exactly what is driving the decline?

Hello? Okay. So I mean, on China, we are very happy with the momentum in Luxury, all right? And I’m sure you are still on, Nik. So - and so in our view, we keep progressing and we are happy. Particularly, the expansion into cosmetics has really driven incremental sales, which is, I think, a very good indication of the type of strategy that we want to do, partition coverage with the same brand. I think many of our brands have the right to play into more categories than they do today. We will - we have demonstrated that with cosmetics in Gucci. So that’s the big learning that we will capitalize on. On makeup, I think that the combination of makeup, and I assume that you are probably referring to the U.S. market makeup and the reason for the decline. Yes. Actually, there are many driving forces for that. I would say that the structural forces have been, first, an explosion of availability of new brands in a market where novelty is very important has probably driven a level of stock at the consumer level. So that’s one, probably, driver. The second driver is that I think many retailers have given - and we have some data that demonstrate this - have given particularly mass retailers a lot of shelf space to new brands that do not have the necessary productivity. Unfortunately, they have been subsidizing that space by taking away from big brands. So that has probably driven down the penetration of the mass cosmetic market. And three, I think there is a possibility - there is most likely a bit of a shift from makeup to skincare among consumers, and we have observed that around the world. I would say these are, in my view, the three fundamental drivers. Some of it, we need to capitalize on; some of these trends we need to have conversations with our customers about.

Thank you.

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

Thanks. So a couple of follow-ups. I guess first on Luxury. Given the negative growth in Q3, I understand you’re pulling back on lower-value products, probably lower-margin products. But how will that impact operating income growth in the third quarter? And then more broadly, when you think about the flow between the quarters in the back half, right, so overall, expecting pretty significant improvement in EPS growth. But Q3 is going to be pressured by the Luxury and not fully lapping distribution losses in Consumer Beauty. Should we expect operating income and EPS growth to be weighted more towards Q4 in the second half?

Yes. It’s Pierre-André. That’s correct. What I would say about - you’ve seen that we reiterate our guidance. Obviously, we still have the same objective for the EPS, full year. You’ve seen that we are a bit ahead of what we expected at the end Q2. For Q3, I would say that EPS is going to be broadly in line with that of last year. Therefore, you’re right to say that the EPS progress will be skewed toward Q4, which is not impossible - by the way, given the seasonality of the business and the fact that regularly Q2 and Q4 are our bigger halves.

Okay. And then just one quick follow-up on the strategic review. So do you - as you’re going through the deeper view of the businesses, do you have any more visibility on potential stranded overhead? And then also if you had any additional details on the tax basis of the assets and how much tax leakage we could expect to see in a sale? Thanks.

Yes. I mean, limited answers, but you will understand that I cannot go much more ahead at this time. On the stranded cost, maybe the two examples I can repeat on that. A, taking into account credit cost, the average margin or the ballpark margin of the divested business is in the mid-teens. So that’s one element. The second element is that we have, in the initial announcement, reiterated our margin guidance, which is 14% to 16% by 2023. Everything we see today confirms that we are working actually on strengthening further the plan to make sure that we have enough room to cover it, and for continuity, possibly to go further. But we definitely confirm the 14% to 16%. And then for the rest, I will get back to you when we have more elements, which depends, obviously, on the progress of the process. The second thing, about the tax rate. We’ve said that the tax rate would be the corporate tax rate, which is of Coty, which is in the low - sorry, we said that it would be below, and in fact, meaningfully below the corporate tax rate of Coty, which is in the low 20s.

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

This is actually Helen on for Steph Wissink. Thanks for taking our questions. Do you have any update on the travel retail channel quarter-to-date with the virus impacting travel itineraries? And then also if we could just get a little color on the softening of the Pro Beauty margins.

Sorry, a little color on the? Softening of the Professional Beauty margin. Well on that one, frankly speaking, I would not see this as material. Margins remain at a high level, in the 17%, which is not bad. That’s with the performance of the top line, which is good. Gross margin, good. So I would not read anything specific into it. The business keeps delivering. It’s going to be on track with its target. Actually, delivered against its target internally on the sales side, and we expect it to continue for the second half. On the travel retail, on the virus. One thing on the virus, first, is that obviously, we care about people. We have organized processes internally with a view to make sure that our people are protected at all times and in the best possible conditions. So we are extremely vigilant on that point, as I imagine, is everyone. Secondly, on the impact themselves, yes, there is, and there will be, an impact on the travel retail because the amount of traveling is decreasing. I think it’s far too early to quantify any impact. The only two things we are sure of is that there will be an impact, first; and secondly, that the impact for Coty is going to be pretty small relative to competition since China represents only 3% of our sales. And Asia, generally speaking, we are underweight. So this time is bad for good in this case. But we’ll get back to you once we have more visibility. For me today, it’s far too early.

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

Hi, good morning. So a couple of questions for me. Firstly, I just wanted to talk about Kylie. Thank you for giving the calendar ‘19 number, that’s really helpful. But you talked about preparing the company for rapid expansion, and I was hoping to get a little bit more color around that. Is it - I know you’ve talked about expansion previously, but sort of how should we think about the timing of that expansion?

Well again, a bit early to talk about that. Today, we are the 5th of February, so we closed less than a month ago. As you can imagine, these are not things you get into a rush to solve. The first thing we wanted to do was to set up the right sort of dialogue, having Christoph appointed, Christoph connecting with the teams locally. Then we need to understand within what we had defined, how do we operationally move from the current setup to broadening the number of markets; to accelerating the penetration of skin care in the U.S., elsewhere; to understand the way we are going to lead the innovation process with them? How Coty is going to be an asset to Kylie? This is very important. We don’t want to integrate Kylie; we really want to give Kylie the ability to develop and to grow for the benefit of the shareholders, and the primary shareholder is obviously Kylie. How do we want to sequence things? So I think we need a bit of time to make that and to come back to you. The focus this year is really on preparing the plan. We have high ambition. The ambition is to bring one point of growth to Coty overall between ‘21 and ‘23. This is ambitious. We may be able to do more. But for that, we need to get prepared and ready. This is what is going to be the priority of the coming 6 to 12 months.

Okay. Thanks...

Sorry. And the element, it’s as you rightly pointed out. The traction is good. In fact, the traction in the last part of the year was even better than when we expected.

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

Hi. Thank you. Good morning and afternoon, there. So I have one question and a follow-up. First, hoping to - you can talk more about how should we model travel retail. And if you can remind us the percentage of total sales coming from China and the contribution of travel retail globally, even excluding - and especially now, excluding professional going forward, if you have that number. And my follow-up is on life post Professional Beauty and Brazil divestitures. Can you please confirm? You just reaffirmed the 14% to 16% EBIT margin goal by fiscal 2023. I know it’s long - it’s a long-term guidance. But is it considered in stranded costs, both divestments? And how should we be thinking in 2021? I’m assuming that there is a timing to which you right-size the company to the new sales profile. So how long should we think about margins going down in the first moment in 2022 - in ‘21? Sorry. And then getting back to that goal by 2022 and 2023? Thank you.

Okay. I’ll take the second question. Maybe I’ll let Pierre answer the first one. On the second one...

Maybe I’ll do the first one anyway. So travel retail is about 15% of Luxury, all right? So that gives you a bit of the modeling. So that’s about, therefore, 7% of the company globally.

From a...

And travel retail - I’m sorry, travel retail globally, how much is it currently?

I said 15% of the Luxury business.

That’s global. And if you want specifics, Asia is about one-third of that.

One-third of that. Good to know.

And China overall is 3% of the company.

Okay. Thank you.

Yes. On the 14% to 16%, again, I repeat we’ve written, and I reiterate it. We are definitely very confident in our ability to deliver it. That was part of the turnaround plan. We have given - the part of the initiative we called, which is in the remaining perimeter, the additional opportunities we have. The pace of delivery of the plan, 14% to 16%, was and remains our objective for RemainCo for the margin by 2023. Now the real question is, what is the path to it? And that’s where I need a bit of time to be able to answer you. We’re working on it. We have two questions, which is what level of margin can we expect for ‘21? And what level of EPS can we expect for ‘21? There are a lot of moving parts and moving pieces, including the price, including as well the use of proceeds and the return to shareholders, including the structure. So we’re working on that. When we have enough visibility on all these elements, we’ll get back to you with an answer.

May I add that we are already anticipating, definitely, in our staffing, particularly at corporate headquarters level, that possibility. Therefore, we are taking already preventive action to avoid creating a future problem by rightsizing our future organization right now.

Our next question comes from the line of William Reuter of Bank of America.

Good morning. I just have two. The first is you didn’t talk about leverage at the end of the asset sale. Do you still expect to be at three times once that’s completed? And then you also talked about accelerating the growth of Kylie in calendar year ‘21. Do you expect that Kylie would be growing in calendar year ‘20 as well? That’s all.

Well, on Kylie, frankly, that’s not the topic. Given the current trends, it will be legitimate to expect growth. But at the same time, the priority will - is not going to be on growth in ‘20; it’s really going to be on setting up the growth for ‘21. We won’t be too much looking at that. But today, the asset is definitely growing. On the leverage, yes, we said to be accurate and precise that we would target a leverage, post-deal, of approximately three times. There is no reason for us at this stage to get away from that. This is our target and expectation.

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

Yeah, thanks. Good morning, everybody.

Morning.

I wanted to ask about pricing just sort of broadly. So is this something that is now implemented strategically? Is this something that we should be thinking about contributing on a yearly basis going forward? And obviously not specific to what brand or categories, but is this now kind of part of the fabric of the company going forward? And maybe if you could talk a bit about any thoughts on how you think about it just maybe across the categories of what will be left at the company, assuming the strategic review is complete, between Luxury and Consumer Beauty. And any sort of early learnings so far from key price thresholds? Thank you.

Yes. I think overall, Mark, in the - clearly, you can call it pricing, I can call it value, too. I mean, at the end of the day, there are many ways to take pricing. There are, first, the amount of business on the deal, the depth of the deal, and the free balance between mainstream portfolio and premium portfolio. Typically, for instance, we do see, to give a bit of flavor for instance, that in Luxury, we are substantially overplaying in eau de toilette and underplaying in eau de parfum. That is, basically speaking, one of the ways we will manage price or pricing. Therefore, yes, it is definitely part of our strategic agenda to continue to push the value of our product set. There is one systemic plan, and I would call it like the long-lasting trend in consumer goods in general, and in beauty, even more, it’s wealth. Markets up-trade systematically, and we have a little bit of a catch-up job to do. But it is definitely one of our vision for innovation going forward. Innovation for us going forward has two fundamental roles to play: one, it continues to enable us to premiumize the portfolio of the company; and two, enable us to increase the penetration of our brands. Sometimes we can do both; sometimes we do one; sometimes we do the other. But basically speaking, that’s the way we are going to look at our innovation pipeline going forward. Does it contribute to improve the value of what we sell? Or does it give us more consumers? Or does it do both? All right? So it is a big shift, and I believe it is one of the substantial shifts, or systemic shifts, which at the end of the day transforms, and energizes to do at the same time, better and bigger.

And we have time for one more question. Our final question will come from the line of Wendy Nicholson of Citi.

Hi. Thanks for squeezing me in. I guess my question is on your comments on Amazon, which I thought were really interesting in terms of the strength of your business there. Do you have a sense for why that is? I’m curious that your brands have been doing so much better online than they are in mass retail. I know you talked a little bit about some of the execution issues in mass retail. But are you doing anything different online? Are you paying for more visibility on Amazon, if you will? And also, do you have a sense for your market share trends on Amazon? I’m wondering if your sell-out in Amazon is better just because the category’s doing really well on Amazon, or whether you, yourself are outperforming your peers in a more notable way? Thanks.

On Luxury, we are. And on Consumer Beauty, we are gaining share in both categories, right? So we are happy with our development on e-retail. The main reason why we are gaining share, honestly speaking, on Amazon, and we are not gaining on Consumer Beauty mass is we are not losing distribution in Amazon. Fundamentally speaking, our brand is strong. They have the right to play and the right win in this channel. What we have done is that we have taken online as a very serious channel, which is here to last, and our capabilities have been increased and our effort has been increased. We are sharing our business plan with Amazon, and I think they are very happy with these plans because they see an opportunity for them to grow their own penetration whilst at the same time growing our own penetration. Coming back to one of the early questions of Nik about the trend of mass Consumer Beauty. There is also an element in the decline of Consumer Beauty that a lot of - some of the business is shifting to Amazon and is not picked up by Nielsen.

Okay. So thank you all for following the call and for your questions. We’ll be seeing you on the road. Thank you, and have a good day. Bye-bye.

Thank you so much.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.