Coty Inc. Q1 FY2021 Earnings Call

Good morning, ladies and gentlemen. My name is Maria, and I will be your conference Operator today. At this time, I would like to welcome everyone to Coty’s First Quarter Fiscal 2021 Results Conference Call. As a reminder, this conference call is being recorded today, November 6, 2020. On today’s call are Sue Nabi, Chief Executive Officer; and Pierre-André Terisse, Chief Operating and Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty’s earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially. In addition, except where noted, the discussion of Coty’s financial results and Coty’s expectations reflects certain adjustments as specified in the non-GAAP financial measures section of the Company’s release. I will now turn the call over to Mr. Nabi.

Ladies and gentlemen, good morning. Back in August, I spoke to you on Coty’s fourth-quarter earnings call and shared that I had considered Coty to be a jewel in the rough, and I continue to believe this more than ever. After several months of leading as CEO, I can confirm that Coty is transforming and emerging from the COVID-19 crisis much stronger and more nimble, and better prepared to face any future market disruptions. Our Q1 results are a clear testament to this. Across all metrics, both operational and financial, our results improved significantly from the low point of last quarter and came in at or ahead of our expectations. Month after month, we are seeing net revenues sequentially improving with solid orders in advance of the holiday season. Part of our improvement has been driven by an improving market backdrop. We have seen better sales trends across each of our regions and across both the Prestige and mass channels, reaffirming the validity of our dual-channel model. With retailers’ inventories now at normalized levels, we are also seeing a much closer alignment between sell-in and sell-out. In fact, in some areas, sell-out trends are stronger than expected. Simultaneously, we have made significant progress in improving the performance of our P&L and our portfolio. On the financial side, I’m extremely pleased to see that the organization has continued to adapt to the new normal, executing on our financial and operational priorities, including profit and cash flow protection. Our stringent cost control enabled over 20% growth in our adjusted operating income, over 50% of the total company EPS and stable net debt. We remain committed to diligent cost control and delivering on our fiscal 2021 financial commitments, including being profitable on an adjusted operating income basis for continuing operations and being cash positive for the year, contributing to a decrease in our net debt. The Wella divestiture is expected to close as planned by the end of calendar 2020, which, together with positive cash flow in the second quarter of 2021, will lower the financial net debt from $7.9 billion today to around $5 billion, including the value of the remaining 40% Wella stake that Coty will retain, valued at $1.3 billion; economic net debt will be reduced to below $4 billion. At the same time, we have seen good progress in the first quarter on our key priorities, including strong innovation performance in both Prestige and mass channels, strengthened market share in our core markets. E-commerce has moved from a catch-up mode to a momentum mode while gradually strengthening our foothold in skin care and in China. As we progress through the year, we will continue to invest behind these key priorities. For example, we will amplify our skin care R&D through smart organizational changes, strengthening our brands, and reinforcing their connections with consumers. Part of this investment includes strengthening our executive leadership team; we have made two very high-quality hires recently. Isabelle Bonfanti, formerly at L’Oréal and Hermes, has joined as Chief Commercial Officer of the Prestige business to accelerate our growth in makeup, skin care and in Asia and to champion the Prestige distribution model with its unique characteristics. Second, Jean-Denis Mariani has joined in the newly created role as Chief Digital Officer to supervise our digital transformation. First, this is to accelerate our e-commerce momentum by putting in place the right conversation, CRM and digital testing tools, prioritizing digital in our media mix consistent with consumer trends, and last but not least, catalyzing Coty’s huge direct-to-consumer potential with Kim and Kylie Skin Care, Philosophy skin care, and all other digitally gifted Coty brands. Let me now turn it over to Pierre-André to discuss our financial overview.

Thank you, Sue, and good morning all. I would like to start with a reminder of how to read our figures, given the complexities generated by the change in scope. Since the signing of the sale and purchase agreement with KKR for the disposal of 60% of Wella, we have been reporting our professional and retail hair business as available for sale and discontinued operations for U.S. GAAP purposes. So this means, in particular, that we consolidate Wella net income on a separate P&L line, which is below operating income. As a result, our net revenues and most P&L metrics are presented on the basis of continuing operation, which is the total Coty less Wella. To give you a better idea of what Coty will look like going forward, we also produced what is called ongoing Coty, which adds to continuing operations, the cost recovery we are going to receive from Wella from Coty as per some transitional services agreement. All KPIs relating to the P&L from net revenues to operating income relate to continuing operations and ongoing Coty. In the presentation here, as for the rest of the EPS and the cash flow, we do continue referring to total Coty with a 100% contribution of Wella net income and cash flows. That being said, let me now move to Slide 5 and our net revenue trends, which have been showing a strong recovery versus the previous quarter, both in mass and Luxury. After a trough in Q4 and specifically in April, our sales have been increasing month-after-month throughout the period, with the month of September ahead of our average revenues for the third quarter. Compared to Q1 2020, our net revenues remained lower by 19% on a like-for-like basis, Mass being at minus 10% and Luxury at minus 25%. This is very much in line with what we expected, minus 20%. As you remember, we indicated during our full-year fiscal 2020 earnings call. I would like to add a few comments to help you read these numbers. First, travel retail remains by far the most impacted at minus 70% versus last year. This, given its weight, represents approximately five points, which implies that the rest of the business has declined by mid-teens. Second, e-commerce has been growing strongly and ahead of the market, leading the market share gains for Coty. The percentage of our net revenue done through e-commerce and DTC has doubled versus where it stood at the beginning of COVID. This is not only helping our net revenues but also makes us less vulnerable. Last, we are carefully managing sell-in and phasing it with sell-outs, thus limiting the inventory and the trade under-exposure to the upcoming second wave. A word about Q2 now. We just completed October with net revenues down high single digits, very close to minus 10% actually, versus a year-ago, reflecting strong pre-Christmas orders and confirming a very fast recovery of our net revenues. Of course, as we see lockdown reinstated in several countries in Europe, we will get some impacts on our net revenues for the rest of the quarter. But for all the reasons previously mentioned and for the limited number of market concerns in Eastern Europe, we do not expect such impacts to be in any way close to what we suffered in the first wave. I will now turn to operating income, Slide 6. While we suffered a significant loss in the fourth quarter of last year, we are delivering an operating income of $81 million for the quarter, which is $93 million if you add the revenues from the TSA, and that is up 24% versus our operating income in the first quarter of fiscal 2020. This testifies to the actions taken by Coty since the beginning of COVID under the leadership of Pierre, Peter, and Sue. All P&L lines are contributing, with COGS first. After a weak Q4 marked by high excess and obsolete levels and a low level of fixed cost absorption, gross margin has come back to the average level of fiscal 2020 at 58.6%. So this is still 150 bps lower than the same quarter last year and shows that we still have room for improvement, but the speed of the rebound has been particularly good. Second, we have operated a reset on ACP with three objectives in mind. First, adjust the spending to our new sales side. We have spent 20% of our net revenue this quarter and adjusted to our new profile, specifically to geographies and channels, more online, less offline, and less travel retail. The second objective is to adjust the support of net revenue to the net revenue trends we have ahead of us. First, making sure we utilize our money wisely and protect our P&L. The third element is fixed costs. So you remember that we concluded that post-COVID we needed to reduce our fixed costs significantly, setting a target of $600 million for remainco, with the first $200 million for fiscal 2021. Q1 has been remarkable on that side, as we have already delivered $80 million in savings laying the groundwork for achieving the objective for the year. Several work streams have contributed to this, including an acceleration in implementing our headcount reduction, in line with the design for the turnaround, but we have also added many initiatives on the business service side. Of course, with a maintained freeze on expenses like T&E, we have also taken strong and visible actions on third-party services. The procurement team has contributed significantly in many fields. The $80 million delivery for the quarter is approximately the size of our operating income in Q1, and it shows how critical this achievement is for Coty. Beyond the profit for the quarter, it reinforces our strength to face what is likely to remain a volatile environment. Moving to total Coty and the EPS, the 24% increase in our operating income has been the first source of the 57% growth of our EPS. The second one has been Wella's performance. During the quarter, net revenues have grown by 7% as salons started reopening after the lockdown, and retail hair and nails remain strong. Like Coty, Wella has seen a strong rebound of its gross margin and has benefited from tight control of its fixed costs. These have added temporary effects with the pause of depreciation linked to the discontinued operation accounting treatment and the gradual stand-up of the new teams over Q1. These effects have fueled a doubling of Wella operating income and a contribution to Coty EPS north of $90 million. The performance of the two businesses, as we see, has written off our share counts, increased under the effect of the $1 billion convertible preferred subscribed by KKR, which is treated as equity for the purpose of diluted EPS in U.S. GAAP. Post Wella deal closing, our EPS structure will remain similar, but Wella's contribution will be recognized for only 40%, and our net interest will reflect significantly reduced net debt. Turning to Slide 9 on cash flow: The profit delivery has translated into a free cash flow that is ahead of our expectations and almost stable for the quarter at minus $28 million. Beyond profits, we have made progress in many fields. In particular, we have reduced one-off expenses, which have been a big cause of leakage in the past, and we have now put that under control. Additionally, the teams have done an incredible job managing overdue invoices with a very high intensity, bringing them to two years low. As a result, our net debt has remained stable at $6.864 billion at the end of the quarter with a negative $200 million foreign exchange conversion impact. Meanwhile, the payment of $250 million of convertible preferred by KKR will impact our debt. Our debt, however, is going to deeply change in the coming weeks as we are about to close the sale of 60% of Wella to KKR for net proceeds of $2.5 billion. Together with the positive free cash flow expected in Q2, we expect a financial net debt post-closing to land close to $5 billion, and our financial net debt-to-EBITDA to approach five times by the end of calendar 2021. An important factor in this respect is the 40% stake we will keep in Wella, which has a value of $1.3 billion. With Wella's performance likely to grow, this stake is crucial for Coty Financial Holding. This will change our capital structure, and we will focus on what we call the economic net debt, which is our total debt minus the Wella stake. This ratio will land post-closing below $4 billion, and by the end of calendar 2021, we expect it to translate into 3.5 times economic net debt to EBITDA, not far from our medium-term objective to bring Coty leverage below three times. Together with our cost reduction, this is an important element as a more solid Coty is also about capital structure with $5 billion in financial net debt and a $1.3 billion financial stake in Wella, alongside attractive debt conditions with three- and five-year maturities. This represents a key improvement in our capital structure and is a fundamental building block to return Coty to growth and competitiveness. With that, I hand over to you, Sue.

Thank you very much, Pierre-André. As I discussed on the last call, I strongly believe that Coty has a beautiful portfolio of brands, brands that are universal and deeply rooted. In this past quarter, we have begun to see this universality together with strong commercial execution translate into exceptional innovation performance across several brands and regions. Early in the quarter, we launched the latest women’s fragrance under the Marc Jacobs brand called Perfect. The fragrance and campaign celebrate self-love, authenticity, and self-expression with an inclusive cast of 42 individuals partly scouted through an open social media casting call. The ideas behind Perfect have never been more relevant than at this moment, and they have clearly resonated with Gen Z consumers worldwide. Marc Jacobs Perfect has quickly become the number one fragrance launch in both the U.S. and the U.K. The success and incrementality of this new pillar have propelled Marc Jacobs fragrances overall from the tenth rank to the fourth rank in the U.S. and from the seventh position to the fourth position in the U.K. Similarly, in September, we launched the latest extension under the Gucci Bloom Pillar called Profumo di Fiori. The campaign represents the mystical world of female sensibility and the idea of nature. The social media-driven campaign, unique packaging, floral scent has attracted global consumers, especially in America and China. At the same time, we have also seen very strong success with the expansion of the Gucci makeup range. In Sephora, across North America, Gucci lipsticks reached the number one spot and Gucci bronzer reached the third spot. We continue to build on similar success in China with the upcoming launch of Gucci’s first foundation custom-designed for China. As a result, we have seen double-digit sell-out growth for the overall Gucci brand in both the U.S. and China. Our growing success with Gucci in both fragrances and cosmetics has reaffirmed our stronger relationship with the Gucci Fashion House going forward. On the Mass Beauty side, we have seen key U.S. retailers share of spells stabilize for the rest of fiscal 2021, which is the first in five years. In fact, for Sally Hansen, we have been increasing our distribution based on its strong performance. Rimmel is positively booming in the U.K., continuing to build on its number one market share position. Likewise, we have seen our Brazilian consumer Beauty business grow significantly. Moreover, we have continued to build on the success of our first two mass clean beauty lines that we introduced under the COVERGIRL and Sally Hansen brands in the spring. The COVERGIRL Clean Fresh makeup line was the first face makeup from an established mass brand with a clean formulation free of many contested ingredients. The line was the number one foundation launch in spring 2020 and still remains in the top two for the year with significant appeal among Gen Z consumers. The renewed momentum and consumer relevance are also reflected in the wave of COVERGIRL's earned media impressions now ahead of its peers. We have built on this success in recent months, launching COVERGIRL’s first Clean Fresh concealer, clean powder and clean mascara. Similarly, Sally Hansen's new launch called good.kind.pure was the first nail polish from an established mass brand to boast a clean formulation that is free from 16 contested ingredients. This launch was the number one launch across all U.S. mass metrics in spring 2020 and remains in the top two to date. The new line has supported over 100 basis points of market share for the Sally Hansen brand. The success of COVERGIRL Clean Fresh and Sally Hansen good.kind.pure confirms that Coty is one of the first corporations at this level that understood this consumer shift toward cleaner formulation, launching both product lines ahead of the pandemic. We will continue to launch clean, healthy lines across all our other brands in the coming months. Coty is leading the way in areas that consumers are looking for in the new normal: cleanliness, healthy alternatives, inclusivity, and self-expression. The second of our key strategic priorities is strengthening our positions in our core markets. We made good progress on this front in Q1, and Coty’s iconic brands are showing very strong resilience. We have best-in-class performance for Prestige in the U.S., with retail sales growth three times, I repeat, three times greater than the market. We are strengthening in Europe, and we are well positioned to drive profitable and strong growth in Asia and in China. In the U.S., we are seeing increased consumer spending on the wider Prestige category, including Coty brands. We are extremely pleased to see that the Prestige fragrance market in America has recovered from the June quarter lows; in fact, the market has returned to growth since August, with the strength continuing through October. It is important to note that the Prestige fragrance category was the only U.S. Prestige beauty category that grew in the quarter, significantly outperforming both skin care and makeup as consumers redirected their discretionary spending to what we call mood-boosting and self-care categories. Against this backdrop, our Prestige business has been growing double digits since September and strongly gaining share. We now have two out of the top four Prestige brands in the market. This is supported by the strength of Marc Jacobs Perfect, Burberry London Dream, Gucci Bloom Profumo di Fiori, and Gucci Guilty for Men, which is gaining two ranks and now ranks as number four, along with strong growth in Gucci cosmetics. The mass cosmetics market, on the other hand, remains under pressure with continued declines in the mid-teens. While we are focused on helping to improve the category's performance, we are pleased to say that our mass color cosmetics business is now tracking in line with the category and holding share after many years of decline. Also within the U.S. mass business, we continue to streamline our SKUs and create a more focused portfolio, including this morning's announcement of the Stetson license moving to a new licensor; this will have a negligible impact on our sales. In the U.K., the Prestige fragrance market has been volatile with monthly declines in the single digits to the teens. The resurgence of COVID in the country is further elevating volatility and uncertainty. However, in the midst of this uncertain environment, our portfolio has been gaining share in the U.K. Prestige fragrance market fueled by Marc Jacobs Perfect and Hugo Boss Alive, our latest successful female launch under the brand Hugo Boss. On the mass cosmetics side, similar to the U.S., the U.K. market has been declining in the mid-teens. Here, again, we continue to drive the performance of the market-leading brand, Rimmel, through strong execution and incremental launches, with Rimmel continuing to gain over 100 basis points of market share several quarters in a row, confirming its number one market share position. In Germany, the Prestige fragrance market trends have improved and are now declining in the mid-single digits. Again, Coty is gaining share, driven by Hugo Boss Alive in the female area, Hugo Boss bottled in male fragrances, and with Jil Sander’s Eau de Parfum. Finally, in China, which I will discuss in more detail shortly, our Prestige brands have seen retail sales growth over 20%, fueled by both fragrances and, for the first time, cosmetics. While much work remains to be done to further strengthen our Prestige and mass beauty positions across each of these markets, we have already made good and strong progress, and my goal is to build and amplify these successes. Our third strategic priority is accelerating our digital and e-commerce capabilities with a focus on direct-to-consumer. With the appointment of Jean-Denis Mariani as Coty’s first Chief Digital Officer, this is clearly a top focus for me and for Coty. Coty began building out its e-commerce capabilities, yes, later than leading beauty peers. We are, therefore, not as advanced as some in terms of e-commerce penetration yet. Yet at the same time, we have been making very strong strides here as we work hard to quickly close the gap. Our e-commerce penetration in the first quarter doubled year-over-year to over 13%, which has positively impacted the P&L, given the business is nicely accretive to Coty’s corporate margin average. While DTC is a small portion of our business, this is a strategic area we are focused on growing substantially with Kylie Jenner's DTC business as a key learning opportunity and also a springboard for Coty. As we have invested in building a DTC backbone within Coty, which encompasses today's order acceptance, processing, and fulfillment, we have rolled out the Kylie Skin Care direct-to-consumer websites across a number of international markets, including the U.K., Germany, France, and recently, Australia. The initial results have been very positive, with international traffic from these markets to the Kylie Skin Care website doubling and in-market sales increasing seven-fold. In Prestige, e-commerce sell-out grew double to triple digits in most markets, and our e-commerce penetration doubled to 19%. Throughout this, we kept full control of how our brands are presented. The success has been driven by strong momentum on retailers’ websites as well as luxury e-retailers like Notino and Flaconi. In China, Burberry has performed strongly on Tmall, with Gucci set to launch on the online model in early 2021. We are continuing to capture new white space opportunities in this fast-growing channel, including a recently signed distribution agreement with Zalando, Europe's leading online fashion platform, with over 31 million active users across 17 countries. In Consumer Beauty, we likewise saw double to triple-digit e-commerce sell-out in most markets with e-commerce penetration doubling to more than 7%. The growth has been fueled by strong execution on retailer.com websites as well as e-retailers like Amazon. In fact, Coty’s brands gained 140 basis points share on Amazon across our core markets: U.S., U.K., Germany, including 112% sales growth over Prime Day. To further drive penetration, we will be accelerating our deployment of virtual beauty services, especially in makeup, in Q2 and Q3. Our fourth strategic priority is leveraging the potential of our skin care brands, formulating top-quality products with a portfolio that spans from accessible price points to high-end. It is clear to me that we own advanced skin care technology and capabilities in-house, and we will build on this expertise and key capabilities. Coty’s IP includes full light protection technologies, environmental and biological repair, or mastering dermatological-grade actives such as retinol, all of which are key areas of growth in the skin care sector today and tomorrow. We are seeing some positive signals and early success already. In Q1, Kylie Skin Care sales tripled year-over-year. Some of that has to do with her incredible reach with hundreds of millions of followers. This is comparable to brands like Nike and Starbucks, along with continued growth in followers on her specific beauty channels. It is important to note that close to 50% of Kylie’s skin DTC orders are from returning customers, which aligns with the average for skin care brands. Similarly, our Philosophy Skin Care brand, which for now remains predominantly in the U.S., is back to growth. We have actively moved the brand towards clean and green beauty. This began with the launch of the Nature In A Jar product line earlier this year. More recently, we have reformulated Philosophy’s purity, the number one facial cleanser in America, to remove numerous contested ingredients, broadening this approach to the full Philosophy range in the coming two years. With both Philosophy and Kylie Skin Care boasting a loyal customer base in the beauty category already known for loyalty, we will continue building on this success and expand our skin care footprint worldwide. These two examples of Kylie and Philosophy skin care perfectly encompass some key trends underpinning consumer demand today, namely a desire for clean and healthy products and direct connection with consumers through DTC. Last but not least, as we mentioned on the last call, we are already in the process of developing the Kim Kardashian West skin care line and expect to launch it in fiscal 2022. The final strategic priority is expanding our business in China. Amidst widescale economic trends, we see great potential from the increase in domestic travel, which sees our brands overperform in luxury tourist destinations such as Sanya Island. We have many brands within our portfolio that are highly desired by Chinese customers, including Gucci, Burberry, Chloe, and Tiffany. A significant hurdle for Coty in the past to expand in China has been our category exposure, with fragrances at the heart of our Prestige portfolio. The Chinese beauty market is dominated by skin care and cosmetics, limiting Coty’s in-market potential. However, we have begun to address this category mix challenge with the successful launch of Gucci and Burberry cosmetics in China and the continued expansion of Lancaster and Philosophy skin care, with Lancaster already the number one sun protection brand in Sephora in China. As I mentioned before, our recent launch of Burberry makeup on Tmall is performing very well, and we are on track to launch Gucci Beauty on Tmall in early 2021. These efforts have resulted in our Prestige cosmetics and skin care retail sales in China growing over 40% in this fourth quarter, now accounting for close to 20% of our Prestige business there. This is just the beginning. Despite a more limited assortment, our Gucci two-axis counters, selling both Gucci fragrances and Gucci cosmetics, have generated monthly sales on par with leading Prestige multi-access beauty brands. The good news is that the Gucci makeup line will soon be fully comprehensive with the upcoming launch of its first liquid foundation formulated specifically for Chinese consumers. Lastly, the appeal of Gucci Beauty has been amplified with the recent announcement of Gucci Beauty's first Chinese brand ambassador, Luhan, who is a leading influencer and singer in the country with over 60 million followers. This announcement has generated substantial interest with over 100 million digital conversations on the topic, leading to results where, within just two hours, the entire stock of lipstick promoted by Luhan sold out on gucci.com. In conclusion, it is clear to me that a stronger Coty has emerged in the past quarter. We remain committed to diligent cost control and delivering on our fiscal 2021 financial commitments. This includes being profitable and cash positive for the year and further deleveraging upon Wella's closing. After several months in the CEO role, I am as convinced as ever that we have laid the right foundation to unleash Coty’s huge potential. I want to take this moment to thank our Executive Chairman, Peter Harf, for his absolutely exceptional work in putting Coty back on track. Coty is now ready to grow in all core regions, categories, and price positioning across the different markets. Let me remind you of our priorities. More than ever, we are committed to reigniting our mass color cosmetics business, especially COVERGIRL. Likewise, we will accelerate Coty’s Prestige business growth through makeup by leveraging our designer brand portfolio—of course, Gucci and Burberry, especially in Asia and in China. We will continue building two new growth engines, leveraging the potential of our skin care brands powered by our new DTC capabilities starting already with Kylie Skin Care. The sum of these efforts lays the foundation for Coty’s sustainable growth in our new normal. Thank you very much for your time, and we are now pleased to receive any questions.

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

Good morning, everyone, and thank you for the comments. Our question relates to cost of sales and marketing expense. If you, Sue, could just talk about your change in marketing approach. I think Pierre talked about it as a pretty significant change in the process that you are using to allocate marketing dollars. If you could just share a little bit more about that process change. And then on the cost of sales, how should we think about the mix effects as you advance more into Prestige skin care and cosmetics? Should that be a net benefit to your overall gross profit margin?

Thank you, Steph. To answer your first question, we are meeting altogether, as Pierre-André has been describing it, on almost a daily basis to really focus on the areas where we need to concentrate our working media investments. Clearly, the results we are having at the moment in the U.S., for instance, on the luxury side of the business, show that when we concentrate and focus our investments on key products—on products such as Clean Fresh makeup by COVERGIRL and Perfect by Marc Jacobs—our investments are resonating with the needs of customers, especially when investing online—the results are there. This is a lesson, in a way, versus what the industry generally and Coty, in particular, has been doing in the past, which is to invest in a wide range of launches and bets. This is a strategy we will continue to implement, and hopefully, after this crisis ends, we will continue to allocate more money toward larger and fewer initiatives. The second part of your question was about...

Well, the mix effect on the Prestige makeup and skin. Obviously, in margin terms, we expect that to be accretive.

Thank you.

Thank you.

Thank you.

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

Yes, hi, good morning. I was hoping to talk a little bit about the COVERGIRL brand. I think you highlighted that as one where you would like to reignite growth, and I was hoping to hear from you how you are thinking about that. Is it more incremental, with smaller steps like the COVERGIRL Clean and Fresh, or are you thinking about it as a big splash or a relaunch like you did two years ago? I wonder if you have looked at that last relaunch of COVERGIRL and, from your perspective, what went wrong at that time. Was it the advertising plan, product quality, operational execution or something else? How do you intend to approach that brand this time around?

Thank you. Faiza, for your question. This brand is very dear to my heart. I've been looking at this brand over the past few years and have been admiring it. Today, COVERGIRL is the most loved brand in America in the makeup area; it remains the most loved brand. This is a great asset to build on. The second thing is that it is not surprising that Clean Fresh makeup is so successful; let me share that COVERGIRL invented clean makeup in 1961. We're talking about 60 years ago! COVERGIRL's first medicated foundation using Noxzema is an example of this. Today, we refer to it as the 'skinnification' of makeup. No other brand can own this territory like COVERGIRL does. That explains the success of Clean Fresh makeup, which, by the way, we are expanding into concealers, powders, and mascaras, as well as applying this concept across other brands in our portfolio very soon. This will be the strategy to bring BACK COVERGIRL to its previous position. Another great piece of news is that these launches are also attracting much younger consumers to COVERGIRL, including Gen Z, who made clean fresh a success, stabilizing the overall clean makeup market share in America. The good news is that for the first time in five years, the share of space for COVERGIRL is no longer reduced; it remains stable, which I wanted to share as another win. When it comes to what's next, of course, we are working hard on something substantial regarding what COVERGIRL stands for and will stand for in the near future. I believe this brand has huge potential to redefine the landscape in America regarding what a mass cosmetic makeup brand should embody, starting and building on the success of clean fresh makeup. To address your question about the previous relaunch, I examined it carefully. I believe the biggest mistake many people make is looking at the market trends around them and attempting to mimic them. Observing competitors often leads to problems. COVERGIRL should never have strayed from its narrative of being the makeup inventor, the most-loved brand in America, and the brand with the brightest colors and most luminous range. There is a compelling story that does not depend on what has been done in the past, and I hope it will take COVERGIRL back to its leadership status.

When should we expect some news on that? Is it incremental, or should we expect a big launch in the next year?

We're working quickly, making significant progress since September on the new story and everything. Hopefully, we will be able to communicate that news internally, externally to our retailers as well, and build the new COVERGIRL with them in the coming year.

Alright. Great, thank you so much, Sue.

As quickly as possible, to be honest with you.

Thank you.

Thank you, Faiza.

Thank you very much.

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

Great, thank you very much, and congratulations on such an exciting start. I have two questions: one shorter-term and the other slightly longer-term. Could you provide a little more granularity on the holiday season? You mentioned solid orders—how are things looking in terms of 11/11 and your preorders there, and can you provide any color regarding Prestige versus Mass? Is it still true that for the holiday season, Prestige is stronger for you? How are you playing into that? That would be the shorter question. Then for the longer-term strategic question, many of your main competitors are adjusting their channel strategy in the U.S. by moving away from department stores, relying more on their own freestanding stores, and becoming more dependent on e-commerce. You are also pushing hard in e-commerce. My question is, are any of their moves in the brick-and-mortar area opening up opportunities for you?

Okay, I will try to be succinct regarding what we are seeing ahead of the holiday season. To speak about what you mentioned regarding Prestige versus Mass: We see very good traction on the Prestige side, particularly in the U.S., especially in makeup. That has been one area of pretty good performance in October. If you look at more specific products, Marc Jacobs is one clear example, and Gucci is another one. In Q1, Prestige outperformed Mass. As we approach the holiday season, we do expect improvement compared to Q1, although this will depend on the effects of the lockdown. This is particularly true in Europe. So, encouraging signs in America continue to prevail.

No, that's all.

On the channels, I will mention that we are definitely changing scale. Our e-commerce sales volume has doubled compared to last year. We have completely transformed our operational approach; we are adding new resources, including improvements in the DTC platform. This change will certainly be a key element of our strategy going forward, particularly in America.

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

Great. Thanks, and good morning. My first question is for Sue. I’m curious about your view on opportunities in cosmetics and Prestige fashion brands like Gucci and Burberry. So far, the growth seems measurable. Great growth, but fairly measured. It is for lipstick, now foundation. Realizing that the current backdrop is somewhat challenging with respect to the makeup category, I thought it was refreshing to hear your perspective on COVERGIRL and your views on its brand direction. I was wondering if you could do a similar exercise in terms of the long-term potential for some of the Prestige cosmetics brands in your portfolio?

Thank you, Olivia. Yes, that is a very important question. We see clearly that the sales of brands such as Gucci, which you mentioned, are booming both in the U.S. and in China. In France, we just started at Sephora, and the figures were very good, particularly for lipsticks, which were unexpected. There is, however, a strong appeal for products that position well against consumer needs. I think the success of Clean Fresh makeup as well as a few others—like good.kind.pure from Sally Hansen and even fragrances that are Atacado-certified—show that we don’t expect any long-term challenges in that segment. It comes down to presenting the right offer that meets consumer needs. Consumers want products that are good for their skin, enhance their appearance either on Zoom or if they still go to the office, and are guilt-free because they are good for the planet and society. That gives us valuable insights into where we can take our brands, especially in the Prestige cosmetics segment like Gucci and Burberry. We're committed to ensuring that these brands launch clean makeup that is vegan and prioritizes sustainable practices. I see no reason why this category would not improve after this current crisis.

That is helpful. You outlined many initiatives. Could you discuss how you will prioritize them and what incremental investments you need to make to achieve your goals—personnel systems, etc.? Not only regarding skin care but also in China, e-commerce and DTC. When do you expect these to materialize? If I could sneak in one more: you mentioned a small brand divestiture. What’s your view on the likelihood of more exits? Are there brands that you haven’t really pushed in recent years that could be more interesting? Thanks.

Yes. Thank you for your question. We remain committed to reigniting our mass color cosmetics business, especially COVERGIRL. We will indeed focus substantial effort on COVERGIRL while continuing to support Rimmel in the U.K. and other brands, including Sally Hansen in the U.S. and our makeup business in Brazil. But there is huge potential for COVERGIRL for the reasons I mentioned. As for other assets we are aiming to leverage, I can mention Adidas in the mass business. Adidas has significant potential regarding body care products that can boost consumer mood before exercise or practice. That is something we are already beginning to explore. In the Prestige sector, we will focus on ranking among the best luxury fragrance makers worldwide and ensure that brands like Perfect continue to drive success in luxury makeup, especially in Asia and China. Ultimately, the choices will involve a mix of strategic initiatives and brands with high demand in the digital sphere.

Just to clarify about Stetson: it was not a divestiture but rather a license that has not been renewed. Since summer, we've opted for a more realistic view regarding licenses and focus on those we believe have significant potential. We may not renew all of them to ensure we concentrate on the right choices.

Thanks very much. I appreciate it.

Thank you, Olivia.

Thanks.

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

Great. Thanks. Good morning, everyone. Two questions. First was about fixed costs reduction. I’m curious if you could share anything about the larger buckets of fixed cost reduction since Coty has been attempting to reduce costs for several years, and this has been a focus of previous plans. So any color there would be appreciated. Second, I wanted to know about the decision to launch Gucci on Tmall in early 2021 rather than being there for 11/11 and moving more quickly. I understand you have only been in your role for a few weeks, but I’m still curious about the timing decision.

I will take the fixed cost question first. We have a good plan in place in terms of personnel costs. Indeed, around 600 people have left the company since Q4. The other part is non-personnel costs, which we are currently reviewing to take advantage of what we went through during the COVID period. This has, in many instances, resulted in no spending at all, which has fostered a mentality of ensuring every dollar spent is essential for the company's operation. The change of mindset and urgency around implementing these strategies has significantly improved the fixed cost reduction process. Overall, we would categorize these into people costs, non-people costs, plus other potential savings in COGS and distribution. It's impressive that we are delivering such fixed cost reductions. Regarding Tmall, we needed to determine the most opportune timing. While it's tempting to be quick to market, it's crucial we execute the launch effectively rather than rushing. We see Tmall as a game changer for us in China moving forward. China is a priority, and luxury performance is steadily progressing. We need to amplify our efforts through e-commerce as part of our overall strategy.

Thanks so much.

Thank you, Lauren.

Thank you.

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

Hi. This leads into my question about the China marketplace. You mentioned that the Chinese market is now more balanced in terms of makeup and skin care. There seems to be surprising growth in the fragrance market there as well. How focused are you on expanding some of your luxury fragrance brands and investing heavily behind them? Additionally, are you focusing more on brick-and-mortar department stores in conjunction with Sephora, or is Tmall your primary distribution channel?

Certainly, fragrance remains at the core of our brands. When we talk about makeup for Gucci and Burberry, they are also fragrance brands. Fragrance is something we continue to work on diligently. Beyond Gucci and Burberry, brands like Chloe and Tiffany are also performing well. Makeup is becoming a key focus, though the Chinese market prioritizes skincare and cosmetics over fragrances. We maintain a balanced approach concerning our channel distribution; brick-and-mortar stores play a critical role in our foundations. We’ve developed a strong franchise organically, but we're now moving into Tmall Sales, having launched Burberry, and soon, Gucci. We believe that physical presence is essential in addition to e-commerce.

I agree with what Pierre-André has just stated. To elaborate, flagship counters for Gucci and Burberry allow us to display both makeup and fragrances, facilitating joint sales and maximizing consumer interaction. Moreover, our brands present in flagship stores truly stand out and offer experiences that cannot be replicated online. It’s important to maintain both physical and on-line presence in the Chinese market.

One issue we have heard regarding the Chinese market is an elevated level of promotional activity from both western and Japanese brands. Can you discuss what you’re observing and expecting? Will China become a profitable business for you, or do you anticipate it will take time to invest in the revenue side?

We are not seeing any high promotional activities. We expect this market to be profitable, and in fact, we believe it can be very profitable.

Thank you.

Thank you.

Thank you.

And ladies and gentlemen, we do have time for two more questions. Our next question will come from the line of Andrea Teixeira of JPMorgan.

Thank you and good morning, everyone. I was hoping you could discuss your shipping and consumption trends in October. Not to negate impressive sequential progress, how much of your continued operation like-for-like in the first quarter benefited from the replenishing of inventory, which has been a frequent topic in the industry? The second part is just a clarification from your presentation: Pierre-André, you mentioned the cost recovery from the KKR agreement of about $12 million in the first quarter. Is that recurring and similar in amount going forward? This is just for modeling purposes.

Certainly. I will address your second question first. This will occur as soon as we close, which should be in a few weeks. We have to retain particular costs as we navigate the separation from Wella over a period of 12 to 18 months, which represent around $12 million in costs we will reimburse to Wella as per our agreements. Regarding the first question, you are correct. Reviewing our like-for-like trends in July, August, and September reveals that July was influenced by temporary effects, whether from movements from June to July or a weak base last year. Inventory replenishment has also been a factor, though I cannot quantify it. That said, both our keep going metrics in remainco and direct co show actual growth in October, which is free of the influence of restocking.

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

Hi, thanks. I wanted to address Asia Pacific and China from a different angle. The performance in that business appears weaker than others, plus there are comments from competitors indicating that the domestic duty-free market is thriving, driven by more rapid reopening of travel corridors across Asia. Could you unpack travel retail a bit? You mentioned various initiatives underway in China, but you’re lagging with your exposure to the skin care category—why will it take longer to improve your presence in that category? Is it about new brands? Additional acquisitions or launching Kylie skin products?

Yes, the travel retail is indeed international for us, and that business has been predominantly impacted; we don't have a notable domestic travel retail presence. Thus, we do not benefit from related growth. We also don't have skin care products in that segment, which restricts our opportunities. You're correct that some competitors are showcasing improvements within domestic travel retail due to their broader portfolio, which we simply lack.

Complementing what Pierre said, we are strongly focused on makeup as it relates to our launch of Gucci and Burberry cosmetics in China. We are also ensuring that we introduce makeup that is fully tailored to Chinese audiences. Notably, fragrance sales have been strong, particularly in Sanya Island, where our sales have seen triple-digit growth. We are soon opening new stores there. While we still need skin care expertise, Coty has extensive experience and unique capabilities within the skin care technology field. Our expertise, patents, and intellectual property give us a significant opportunity to grow our portfolio in skin care, and we are actively investing in this area.

Regarding travel retail, we're not considering it as an unfathomable market. While some trends may be enduring, we hope to reshape operations and improve it in alignment with the new environment. In skin care, we're finalizing the integration of Orveda as a premium brand in our portfolio. This combination of actions to reduce costs and grow our revenue base makes us optimistic regarding Coty’s future. To conclude: we are actively working on reducing costs while strategically building revenue streams. The positive trends I've seen so far in October are encouraging, although challenges remain. We're more solid than before, and I believe our best days are yet to come. I think we will conclude the Q&A now. Thank you all, and we look forward to connecting with you again, not on the road but through the network.

Thank you, everyone. Have a nice day.

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