Earnings Call
Coty Inc. (COTY)
Earnings Call Transcript - COTY Q2 2021
Operator, Operator
Good morning, ladies and gentlemen. My name is Laurie and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2021 Results Conference Call. As a reminder, this conference call is being recorded today, February 9, 2021. On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC where the Company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the Company's release. I will now turn the call over to Ms. Nabi.
Sue Nabi, CEO
Ladies and gentlemen, having completed another quarter, I'm very pleased to share with you the substantial progress Coty has continued to make strategically, financially, and on its organization. This amplifies the improvements Coty made in the first quarter and confirms that Coty is emerging from the COVID-19 crisis much stronger, more nimble, and well positioned to capitalize on the eventual market recovery. Our Q2 profit and net debt came in well ahead of expectations. First, our adjusted operating income and EBITDA grew high single digits versus last year as we continued executing on our cost reduction program with approximately $80 million of savings delivered in the quarter consistent with the first quarter. The strong savings delivery in the first half of '21 coupled with the acceleration of certain projects into the year give us confidence to raise our savings target for the year to approximately $300 million compared to the previous target of over $200 million. At the same time, the successful closing of the Wella transaction and strong free cash flow drove our financial debt down to $4.8 billion with an economic net debt of $3.6 billion when taking into account the value of our retained Wella stake. At the same time despite the resurgence of COVID and related lockdowns in multiple parts of the world, we delivered Q2 revenues in line with expectations including a 1 percentage point improvement in like-for-like trends to minus 18%. Most importantly, we made tangible progress on our strategic priorities, which as you recall include one, moving our e-commerce business from a catch-up mode to a momentum mode; second, building out our presence in China; three, strengthening our foothold in white space opportunities including prestige cosmetics and skincare; four, building market-leading innovation and as a result, strengthening our core prestige fragrance business and stabilizing market share in our mass beauty business. Building on the progress last quarter, we continued to strengthen our executive leadership team in recent months including Stefano Curti joining as Chief Brand Officer for Consumer Beauty, Alexis Vaganay promoted Chief Commercial Officer for Consumer Beauty, Laurent Mercier elevated to Coty CFO, and Stephane Delbos promoted to Chief Procurement Officer. The new Coty team is now in place bringing strong beauty and business experience, deep knowledge of Coty, and relevant knowledge of new areas like skincare. At the same time, we are supported by a strong and female majority Board of Directors, including the recent addition of two new directors, Anna Adeola Makanju and Mariasun Aramburuzabala Larregui. So, let me now spend some time reviewing our recent revenue trends as well as provide more details on our strategic progress. Our second quarter sales came in in line with expectations even as the environment was disrupted in many parts of the world by a resurgence of COVID-19. This resurgence and the lockdowns announced in early November had been a key reason why we had suggested that sales trends would improve moderately in the second quarter and this played out as expected with like-for-like sales down minus 18% compared to minus 19% in the first quarter. Within this framework, we saw diverging trends across our channels. Our prestige business, which accounts for approximately 60% of our overall sales, declined minus 16% like-for-like in Q2 which was a meaningful sequential improvement of 9 percentage points versus quarter one. Excluding Travel Retail, which remains heavily impacted by COVID, our prestige business declined minus 9%. During Q2 we continued to see the trend of resurging prestige fragrance demand in several markets, particularly in the US where luxury fragrances once again outperformed luxury skincare and luxury cosmetics as well as many parts of Asia including China, Australia, Singapore, and Thailand. This improvement in the prestige fragrance category coupled with the growing contribution from our Gucci and Burberry cosmetics line, which are becoming the second leg of our prestige portfolio, helped drive this sequential improvement in our prestige business. At the same time, our mass business decelerated in Q2 to minus 22% like-for-like. With the uptick of COVID cases and shutdowns coinciding with the holiday season and usual social occasions, there was a pronounced deceleration in mass cosmetics category trends in most markets. This coupled with some trade restocking benefit in Q1 drove the deceleration in our mass business. From a regional perspective now. The Americas, which account for 40% of our revenues, continue their relative outperformance. I'm excited to share that our US prestige business returned to growth and this helped partially offset the mass beauty weakness resulting in a 7% like-for-like decline in the overall Americas. EMEA, which account for nearly half of our business, remained heavily pressured by COVID and multiple lockdowns driving a mid 20%s decline in our like-for-like sales. In Asia Pacific, half of the minus 17% like-for-like decline was driven by the pressure in Travel Retail. And while our sell-in for the region was negatively impacted by our continued cuts in low quality distribution, the sell-out of our prestige brands across the Asia Pacific region was very strong in many cases outperforming the market. While the headline number showed some improvement in sales trends, I'm pleased to say that we have continued to make very tangible progress on the strategic priorities we shared with you on the past two earnings calls. One of these priorities centered on accelerating our digital and e-commerce capabilities with a strategic focus on direct to consumer. Building on the momentum in Q1, our second quarter e-commerce sales grew 40% year-over-year with e-commerce penetration reaching 19% and helping overall margins. This growth was broad based with over 50% online revenue growth in the Americas, 30% growth in Europe, 45% growth in prestige, and 20% growth in mass. The US was the fastest growing market with over 60% e-commerce revenue growth fiscal year-to-date. EMEA is our largest e-commerce region and the Number 1 contributor to growth. While in APAC, we continue to reduce low quality sales and distribution. And finally, Travel Retail e-commerce is beginning to accelerate. At the brand level, our e-commerce powerhouses include Hugo Boss in luxury and Rimmel in mass with booming e-commerce businesses from Sally Hansen and Chloe Fragrances. Underpinning this e-commerce momentum were multiple initiatives and of course digital activations. As one of only 15 companies globally to be admitted to Amazon's Global Vendor Management Program, we have been working very closely with Amazon to share data, improve service levels, and trial new programs. One of these initiatives was Vendor Flex warehousing where Amazon setup a fulfillment operation inside a Coty warehouse in the UK. This drove down the delivery time from seven days to three days, which is a critical driver for consumer purchases. In the US, we have also initiated our first Spanish language Amazon media campaign resulting in an uptick in consumers in this critical demographic with 70% of them new to our brands. These initiatives amongst many others have let Coty double our market share of Amazon's mass beauty business with brands like CoverGirl consistently outperforming its peers at this critical customer. We also work closely with Snapchat on best-in-class activations including snap ads for CoverGirl Clean Fresh make-up line, Marc Jacobs Perfect fragrance, as well as Sally Hansen nailpolish Try-On Lens. The efforts resulted in sales across these product lines significantly over-indexing to Gen Z consumers. Finally, our creative TikTok campaigns for Marc Jacobs Perfect fragrance and CoverGirl Clean Fresh make-up have each garnered close to 10 billion views further cementing both launches with younger consumers. In fact, the Marc Jacobs campaign surpassed TikTok beauty averages in video views, engagements, and engagement rates for the entire first half of calendar '20. Now our second strategic priority, which is expanding our footprint in China. We have continued to drive this effort with two powerful and beautiful brands in our prestige portfolio, Gucci and Burberry, both of which are highly desired by Chinese consumers. We are laser-focused on building out the beauty franchises of both brands by expanding the cosmetic assortment, engaging key opinion leaders, and building excitement through in-store and of course digital activations. And in Q2 and entering Q3, we saw the momentum accelerate. Even as sell-out for our overall prestige business in China grew strongly, sell-out for Gucci Beauty and Burberry Beauty grew strong double digits. Other prestige brands driving strong sell-out in China include Calvin Klein on genie.com, Chloe, as well as year-to-date performance in Tiffany. As we discussed on the last call, at the end of Q2 we launched Gucci's first liquid foundation formulated specifically for Chinese consumers. The excitement is also evident on social media with Gucci make-up ranked Number 3 amongst all beauty brands and Number 2 amongst make-up brands in social buzz. And this week we are adding a key pillar in Gucci's China strategy with the opening of the Gucci Beauty flagship store on Tmall, overnight bringing Gucci Beauty to over 700 million Chinese consumers. While this is a soft opening with the grand opening and full support planned for March-April, we see tremendous potential for Gucci on Tmall in the coming years. At the same time, we have been moving quickly to capitalize on the moving tourist activity and luxury purchases in Hainan, Sanya Island. We have opened three doors in Hainan with three more planned in the second half of this fiscal year. As sales have continued to build up in these doors, Gucci make-up is already accounting for over 50% of our sell-out. Our third strategic priority is expanding into white space opportunities including prestige cosmetics and of course skincare. I've already discussed the strong momentum we have seen in Gucci make-up in China. However, this success is mirrored in many parts of the world. In the second quarter, Gucci make-up retail sales grew by five times in China, doubled in the US, and tripled in Thailand and Singapore. In the first month of launch, the Gucci liquids foundation sold over 35,000 units globally. Burberry make-up sell-out likewise grew by close to plus 50% in China. On the skincare side, our US-centric Philosophy brand grew in Q2 thanks to strong momentum in particular on direct-to-consumer and e-commerce. As for Kylie Beauty, the business continues to perform consistently with Q2 revenues in line with Q1. It's evident that consumer engagement with Kylie and her products remains very strong. The Kylie Skin Advent Calendar and skincare fridges each priced at over $100, both sold out in roughly five minutes. Harnessing the social listening capabilities on Kylie's direct-to-consumer side and tapping into the current consumer desire for self-care, we launched Kylie's rose scented Bath Collection during the quarter which reached over $1 million in sales in one day. The incredibly fast sell-out on these launches confirms that we continue to strengthen the drop model, which is critical to a personality-driven direct-to-consumer brand like Kylie Beauty. At the same time, we are strengthening the fundamentals and building the brand for long-term growth. This is evident in skincare where we continue to see good momentum with the Kylie skincare direct-to-consumer website with revenues up versus the first quarter and versus the prior year. And as COVID-related lockdowns begin to lift, we are optimistic about the potential of Kylie Skin in retailers across the US, Europe, and Australia supported by our unique brand installations. Looking forward, it's important to note that Kylie's prior manufacturing arrangement for its color cosmetics line with the third-party manufacturer recently expired. We are working with Kylie on a new cosmetics line to be launched this coming summer 2021, which will also be a great opportunity to significantly improve the consumer experience with one website portal developed and supported by Coty offering the full collection of Kylie's beauty products across cosmetics and skincare. In the meantime, we continue to focus on building the Kylie skincare business with new launches and activations planned for the coming months. Altogether, we have continued to make progress in expanding into the white space opportunities of prestige cosmetics and skincare with these two categories already accounting for 8% of our revenues in the first half of '21, up from 6% in fiscal '20. Our fourth strategic priority and a key to making Coty a product-centric company is to continue building market-leading innovation that builds on the universality and deep equity of our brand portfolio. With the conclusion of calendar '20, I am thrilled that Marc Jacobs Perfect fragrance has ended the year as the Number 1 fragrance launched across the US, UK, Canada, and Australia. In fact, Perfect is tracking to be the largest Coty fragrance launched in the US for the past 15 years. This speaks not only to the appeal of its messaging celebrating self-expression, authenticity, individuality; but also to the quality of its reduced packaging and very, very unique media activation. Another fragrance this year has been Hugo Boss Alive. Launched at the start of the calendar year, this has been the Number 1 fragrance launch in Germany and has also underpinned 30% growth for Hugo Boss female fragrance business in the UK. On the mass side now, we have continued to build on the success of the first clean beauty lines we introduced under the CoverGirl brand with the recent launch of CoverGirl Lash Blast Clean mascara, part of our effort to concentrate on the two leading categories of CoverGirl eyes and face make-up. Building on the iconic Lash Blast franchise, this new volumizing mascara has a clean vegan formula free from contested ingredients. It's also certified cruelty-free, a key pillar for CoverGirl. While still in early stages of the launch, this new mascara is seeing strong success. Already a Top 3 CoverGirl SKU at the key retailers and providing a halo effect on Amazon with a 10% lift to the total Lash Blast franchise. The launch is also over-indexing with Gen Z and Hispanic consumers, a key part of the market we were missing previously. In conjunction with the launch of Lash Blast Clean mascara in the coming days, we will begin airing the first part of the new CoverGirl image and positioning that has been fine-tuned during Q2. The new campaign reinforces our strategic work over the past year to steadily build CoverGirl's Clean pillar, which began with Clean Fresh foundation last spring, followed by Clean Fresh pressed powder, and now the Lash Blast Clean mascara. Finally, on Rimmel, we recently revamped a core pillar, the Lasting Finish 25-hour foundation. Boasting full coverage, a long-lasting, and of course mass-friendly transfer-proof formula with hydrating ingredients; this revamp has helped Rimmel regain its spot as the Number 1 foundation in the UK market. It also nearly doubled sales for the franchise in Australia. Our final strategic priority is accelerating our core prestige fragrance portfolio and stabilizing market share in our mass beauty portfolio. Building on the recovery emerging in the first quarter, we are happy to report that the prestige fragrance category is back to growth in several markets including in the US, China, Australia, Singapore, and Thailand; in many cases outperforming prestige skincare and prestige make-up. This outperformance appears to be driven by consumers redirecting their discretionary spending to mood-boosting categories with a higher emotional appeal while also indulging in self-gifting. And against this backdrop, Coty brands such as Gucci, Burberry, and Marc Jacobs have seen strong sell-out growth ranging from high single digits to double digits depending on the markets. And noting the strong momentum behind artisanal fragrances in many parts of the world, this is an area where we intend to expand quite quickly with several projects underway for several of our brands. On the mass beauty side now. While much work remains to be done, we are making progress towards our objective of stabilizing our market share. Broadly the North American and European mass beauty market, particularly cosmetics, remained pressured by a resurgence of COVID and this is driving weakness in our mass beauty portfolio. At the same time, though, we are progressing on the market share side. While Coty's portfolio globally lost an average of 100 basis points of market share in the first nine months of calendar '20, in the last quarter, the market share decline narrowed to approximately 80 basis points. Central to this share stabilization is the tremendous growth that our mass brands are seeing online, particularly on Amazon even as performance in brick and mortar is more pressured. Also underpinning the improvement are multiple brand country combinations. Sally Hansen continues being strong in the US, UK, Canada, Australia, and Italy driven by franchises such as Miracle Gel or the clean Good, Kind, Pure line and nail treatment products. Rimmel continues to strengthen its position as the UK's Number 1 make-up brand seeing no less than 18 months of market share growth while also winning in Italy and Poland. Bruno Banani fragrances continue to win in its core German markets. And in Brazil, sell-out of our portfolio of local brands has been growing in the double digits in recent months, two times the level of the market led by brands such as Monange in deodorants and Risque in nails. Broadly on a brand and strategy level, we have finalized our brand equity and geographic mapping for each of our core color cosmetic brands as well as Adidas, which we intend to share in the coming months. And the progress in stabilizing our mass market share confirms that we are starting to see results from our dual strategy of making each and every brand position on Coty's key drivers of sales expression on the one side and healthy clean alternatives on the other side. Let me now turn it over to Laurent to comment on our financial results and of course outlook.
Laurent Mercier, CFO
Thank you, Sue. Having been with Coty for the three years in different capacities, I had the pleasure to work closely with Pierre Andre for the past two years. I am excited to continue building on what we started together and lead as CFO this next phase of growth and transformation. Before I go into our profit delivery for the quarter, let me first touch on how we will be measuring and discussing our performance going forward. First, we will now use adjusted EBITDA as our main KPI for profits with EBITDA based on adjusted operating income plus depreciation and non-cash stock compensation in order to moderately drive and highlight our focus on cash flow and deleveraging, which remain key priorities. Second, we have decided to recognize our retained 40% Wella stake on a fair value basis going forward recording only the changes in fair value in the P&L. With this in mind, let's turn to the shape of the P&L in Q2. Our Q2 gross margin of 58.7% was stable with Q1'21 and in line with fiscal year '20 average. The adjusted operating income of $188 million for continuing operations was well ahead of consensus expectations of approximately $160 million. This translated to adjusted EBITDA of $284 million for continuing operations with a margin of 20.1%, up 400 basis points year-over-year. Including our Wella cost reimbursement, the adjusted EBITDA totaled $294 million or a 20.8% margin. The achievement of 6% profit growth despite double-digit sales decline and stranded cost was supported by the combination of a, very focused marketing investment at approximately 20% of net revenues and in line with Q1 as we continued our pay as we go marketing deployment strategy; and b, strong fixed cost reduction as part of our broader cost reduction program. Looking at our cost reduction progress in more detail. In Q2 our fixed cost decreased by 12% year-over-year. We achieved approximately $80 million of savings in Q2, a level consistent with Q1. As a result, we have achieved $160 million of savings year-to-date. The biggest component of the savings delivered in H1 '21 has been headcount reduction accounting for close to 30%. Beyond that, the biggest contributors have been significant cuts in business services including consultants, recruiters, IT, real estate, and facility management cost followed by direct and indirect procurement savings across cost of goods and A&CP. And while not impacting fiscal year '21 savings delivery, we recently announced the consolidation of our fragrance manufacturing footprint with the closing of our German plant to be completed by summer 2022. This was a difficult decision to take but a necessary one to address the overcapacity in our supply network. This consolidates our fragrance manufacturing to two remaining plants in Spain and France. The strong delivery in H1 '21 coupled with the acceleration of certain projects into the year are driving an increase to the savings target for fiscal year '21 now expected to be approximately $300 million compared to the previous target of over $200 million and we remain on track of our saving target of $600 million by the end of fiscal year '23. Turning now to EPS. With adjusted EBITDA for the quarter of $284 million, less $96 million in depreciation and non-cash stock compensation, close to $60 million of interest expense, an 8.5% adjusted effective tax rate, and two months of net income contribution from Wella; the Q2 diluted adjusted EPS for total Coty ended at $0.17. For H1 '21 based on $450 million of adjusted EBITDA, $180 million of depreciation and stock compensation, roughly $120 million of interest expense, and an adjusted effective tax rate of 12.5%; the diluted adjusted EPS for total Coty ended at $0.28. In the same period, the reported EPS came in at a negative $0.10 impacted by the Wella transaction cost and restructuring accruals under the cost reduction program. To help frame the various puts and takes in EPS going forward, there are a few things to keep in mind. First, it's worth noting that while depreciation is likely to stay fairly steady, the stock compensation component will step up beginning in Q3. Second, on the tax line, we've had a few positive discrete items in H1 '21; but for the year, we continue to expect an adjusted effective tax rate in the low 20%s. Third, as stated earlier beginning in Q3 we will not show the earnings of Wella in our P&L, but we'd instead record any changes in Wella's fair market value. And finally, on the convertible preferred stock, so far we have been opting to include a coupon resulting in incremental dilution. However, going forward we intend to pay the coupon in cash allowing the diluted share count to stabilize. Looking now at free cash flow for the quarter, which came in very strong at approximately $390 million, up $26 million versus the prior year. Underpinning this solid performance was strong operating income and EBITDA for the quarter coupled with two months of contribution from Wella. We also continued our strong working capital and CapEx management in the quarter, including material reduction in overdues. At the same time, it's important to point out that the completion of the Wella transaction within the quarter and the finalized working capital transfers resulted in $200 million of positive working capital benefit in Q2, which will reverse next quarter. Turning now to our capital structure, I'm happy to report that with the successful completion of the Wella transaction with gross proceeds of $2.9 billion and our strong free cash flow of $389 million, our net debt at the end of Q2 stood at $4.8 billion. This in fact included over $300 million of negative impact on our debt from foreign exchange. And factoring in our retained stake in Wella valued at quarter-end at approximately $1.2 billion, our economic net debt fell to approximately $3.6 billion. We also maintain comfortable headroom under our financial debt covenants. Our capital structure remains very attractive with key maturities in 2023 and 2025 and the cost of debt below 4%. It is important to highlight that with our net debt closing below $5 billion, this is a true milestone for Coty and sets up for continued improvement in the coming years. Turning now to our fiscal year '21 outlook. Despite continued disruption to sales channels and short-term orders related to the COVID-19 pandemic, we remain focused on our strategic priorities. With cost savings expected to reach approximately $300 million for this fiscal year and having in mind revenue trends and our intention to step up investment, we now expect adjusted EBITDA of $750 million for fiscal year '21. With the financial net debt that has now crossed below $5 billion, we will continue to drive our leverage ratio towards 5 times by the end of calendar year '21, in line with our prior guidance. Let me now turn it over to Sue for some concluding remarks.
Sue Nabi, CEO
Thank you very much, Laurent. With the new Coty team now in place, it's clear to me that a stronger Coty is continuing to emerge. In the current volatile context, our focus is on optimizing short-term revenues and of course sell-outs. Yet as we continue to control our costs and debt, we are shifting our focus now to accelerating our topline guided by our strategic pillars. One, digital and e-commerce acceleration; second, building out our presence in China; three, expanding into white space opportunities including prestige cosmetics and skincare; and of course strengthening our core fragrance and cosmetic businesses through leading innovation and improved execution. The additional fiscal '21 cost savings will enable the profit delivery we have guided to while at the same time increasing our commercial investment in the second half of fiscal '21. In fact we are like a boat setting sail now and letting go all of excess weight. The lighter we emerge from this crisis, the faster we will go knowing how desirable many of our brands are. As we have finalized our strategic review including new growth opportunities, brand equity mapping, and a repositioning plan for our core mass brands; we plan to share our strategic priorities around accelerating growth in mid-April with a full Investor Day planned for fall 2021. I'm really excited by the tremendous opportunities and exciting journey ahead for Coty and look forward to sharing this vision in the coming months. Thank you very much for your time and we are now pleased to take any questions.
Operator, Operator
Thank you. Our first question comes from Olivia Tong of Bank of America.
Olivia Tong, Analyst
Thanks. Good morning. First wanted to ask about cost and then wanted to ask about China. First on costs, can you just talk about what drove the incremental savings? Is it additional headcount reductions, more manufacturing consolidation, advertising media efficiencies? And then can you talk about the redeployment of that investment toward investment to drive growth in key markets or channels like e-commerce? And now that you have four months left in the year, what's your view in terms of getting back to margins more in line with 2019? And then I have a follow up. Thank you.
Laurent Mercier, CFO
Okay. Hello, Olivia. So on costs or incremental savings, as I explained, is really across all initiatives. So we really continue to intensify on headcount reductions, but also on all non-people cost. So, we continue the journey and we really accelerate all the actions we initiated in H1. So it's not one specific bucket or another, it's really all across the board. So, now to answer your question on margins. Definitely what we are aiming at is a high single digit and you see the result in H1 which confirms this trajectory.
Olivia Tong, Analyst
Great. Thanks. And then I wanted to talk a little bit about the expansion of Gucci Beauty onto Tmall and your view on the opportunity there. If there are other brands in your portfolio that you think could resonate particularly well in China and how much investment you think that would necessitate in your view. And then just also what about the social media brands like Kylie and KKW? How do you think about their potential in China and then overarchingly how do you think about the opportunity for profitability long term in China? Thank you.
Sue Nabi, CEO
Hello, Olivia. This is Sue speaking. To address your first question regarding China and the Tmall shop opening, I’m pleased to share that we now offer a complete range under the Gucci Beauty brand as well as the Burberry brand. However, with Gucci, we have a more extensive selection now. Previously, we were limited to products like lipsticks, powders, pencils, and mascara, which represent a small segment of the market. With the launch of our new foundation, 3D Beauty, in January, we have expanded into a larger market share. The results from January, the inaugural month, have been exceptional. We sold 35,000 units across a limited number of locations globally, particularly in APAC and China, and the feedback on the product has been overwhelmingly positive. We are thrilled about the new opportunities this presents because Gucci Beauty's desirable image and product line are now connected to Tmall, which has over 700 million users in China. The combination of a highly desirable brand with top-quality products entering this vast marketplace showcases significant potential for both Gucci and Burberry, and for our luxury business overall. Our next steps involve exploring how we can expand into skincare in this region, particularly on Tmall. Regarding Kylie and Kim, Kylie Jenner's line has been performing steadily since the first quarter. Skincare sales are increasing from the first to the second quarter globally compared to last year. We are currently modifying Kylie's products to cater to the specific needs of the Asian market, ensuring we enter with the right offerings for customers in this region. As for Kim Kardashian's line, set to launch in fiscal '22, the skincare line is expected to include everything necessary to compete in the Chinese and Asian markets.
Operator, Operator
Your next question comes from the line of Wendy Nicholson of Citi.
Wendy Nicholson, Analyst
Hi, good morning. My first question, Sue, maybe just has to do with the level of internal controls at the Company because I think historically one thing that made the story so frustrating was that often there was guidance given or there were targets for certain launches or expectations, but then the Company failed to deliver upon and they were saying it's like massive SKU assortment that the Company just didn't have any ability to manage. So I'm wondering just as you come in with your new management team, do you think you need to make investments in IT or infrastructure just so that when you're putting a lot of money behind something like CoverGirl, you have an accurate read on how that launch is doing just so that you can adapt and pivot and shift as need be?
Sue Nabi, CEO
Hi Wendy, thank you for your question. Since the pandemic began, we have been reevaluating everything we do at Coty, starting with our product creation process. We ensure that nothing is released unless it is new, better, and different, which was not always prioritized in the past. A good strategy to avoid overstock is to focus on products that sell, which seems basic but hasn't always been followed. Additionally, we conduct monthly "pay as we go" sessions, which I believe is unique at this level in our industry. This approach ensures that we are investing in products that we all believe in and that have been tested and validated to confirm their potential for success. Sometimes, I have had to postpone launches because they were not ready in terms of formulation, sustainability, or effective advertising. We are implementing this approach company-wide, reaching up to the CEO level, which I think is unprecedented.
Wendy Nicholson, Analyst
That's all fair and that sounds great and hopefully that works better than it has in the past. But my second question is kind of the biggest bare thesis on the stock right now is that you are cutting advertising to sort of make the numbers and show higher EBITDA growth in the short term, but that's not actually going to be good for the business. So, can you talk about kind of a target level of advertising? I know you said you expect to increase that. But in terms of your overall spending, do you think you have the right approach to investing in the business while at the same time managing to show EBITDA growth and that it's not going to be a trade-off between the two? Thanks so much.
Sue Nabi, CEO
Thank you, Wendy. As mentioned earlier in our results presentation, our primary areas for cost savings involved reducing headcount and business services. We are committed to protecting what we refer to as A&CP, particularly in relation to working media. As Laurent pointed out, working media for the second quarter was consistent with the first quarter, maintaining around 20% of A&CP overall, which we aim to preserve as much as possible. The positive news is that in Q3, we are aiming to match our spending levels on working media to those of 2019, which is before the pandemic. This change is crucial for us, as it will allow us to invest in larger, more impactful initiatives, utilizing the amounts we would typically spend in regular years. It’s important to note that we are not reducing working media. On the other hand, we are renegotiating non-working media and other A&CP, which typically includes business activities and initiatives in stores. We are adjusting to the varying circumstances across different regions, demonstrating flexibility to reduce expenditures in areas like Travel Retail, especially where stores are currently closed. We are applying the same adaptive approach in other regions where adjustments to A&CP can be made easily.
Operator, Operator
Your next question comes from the line of Andrea Teixeira of JP Morgan.
Andrea Teixeira, Analyst
Hi, thank you and good morning. Sue, I appreciate your comments about Kylie. Could you share more details about the upcoming plans and the integration of Kim Kardashian's skincare products in your future outlook, as well as the timing of those launches? Additionally, could you clarify what percentage of fragrance sales typically occurs in December? I understand that it's around 50% on a normalized basis, so you seem optimistic about the momentum with Gucci. How confident are you in offsetting the declines in mass makeup over the next few quarters despite the seasonally slower performance and possible inventory adjustments? Thank you.
Sue Nabi, CEO
To address the first question, I will tackle each question individually. The first inquiry relates to the beauty businesses of Kylie and Kim Kardashian-West. Regarding Kylie, our recent manufacturing agreement has just expired. We plan to unveil a new cosmetics line under Kylie Jenner Beauty around next summer, which is the next logical step for this brand. We will continue with our successful drop model, a concept pioneered by the Kardashians and Kylie Jenner, which significantly drives traffic and sales on our direct-to-consumer websites. We are maintaining our focus in this area, and the new cosmetics line is set to arrive next summer. Regarding Kim Kardashian, we are distinctly positioning these two brands. Kylie will serve as a primary destination for beauty needs among Gen Z and millennials, and we plan to expand Kylie across various categories instead of confining it to specific ones. For Kim, we are making excellent progress in developing a skincare line that aims to be innovative and different, catering to her vast follower base by delivering the latest trends in skin health that they are looking for. As for the fragrance business, we believe the strength of the prestige fragrance category in certain markets will continue, particularly in the U.S. and China, which are performing well through January. One significant reason for my confidence is our key launch at Coty, Perfect by Marc Jacobs. As mentioned earlier, this is likely Coty’s largest fragrance launch in the past 15 years, occurring even during a pandemic. What made this launch remarkable is our complete shift in approach to how we conduct launches. Instead of traditional advertising featuring a single spokesperson, we utilized 40 individuals from diverse backgrounds to promote the fragrance online. This strategy effectively compensates for reduced store visits where customers can smell the fragrance. These individuals shared their personal experiences and reasons for loving the scent with their audiences. This method has effectively redefined fragrance testing. I genuinely believe this approach will endure. The campaign on TikTok generated over 10 billion views, significantly exceeding standard metrics on the platform. This demonstrates a new method of selling fragrances that is not hindered by traditional challenges associated with fragrance launches. I am quite optimistic about the future in this area.
Operator, Operator
Your next question comes from the line of Steph Wissink of Jefferies.
Stephanie Wissink, Analyst
Thank you. Good morning, everyone. Our question is twofolded. First on gross margins, we're wondering, Laurent, if you can spend a little time just sharing with us where gross margins landed relative to your expectations? They came in a bit below where we were expecting and I just wanted to reconcile if that's partly related to the cost restructuring and where that's located within the P&L. And then secondly, on your EBITDA guidance for the year. I think you mentioned in your press release that the current quarter is pacing on trend in terms of where your sales expectations are. But could you help us think through again the body of the P&L and where we should expect some of the puts and takes between gross margin and OpEx as we look at the back half versus the first half? Thank you.
Laurent Mercier, CFO
Hello, Steph. Thanks for your question. The significant impact on gross margin is definitely related to the COVID pandemic. Lower volumes are affecting fixed cost absorption, which we had anticipated in our Q2 projections. This situation is also causing some challenges with gross to net margins and, to some extent, product mix. As Sue mentioned, Europe is experiencing lockdowns, which are affecting major markets and brands, all tied to COVID-19. Regarding productivity, we are seeing some positive contributions from supply chain and procurement that are helping to counteract some of the negative effects of COVID. Looking ahead, we believe that these negative impacts will gradually diminish, while at the same time, productivity gains and a portion of the $300 million in savings will begin to improve our gross margin. This overview should provide some context for the gross margin situation, and we are aligned with our Q1 projections. For our EBITDA guidance, we are indeed on track to achieve the $300 million in savings, having delivered $80 million in both Q1 and Q2. Currently, we are working with Sue and the Executive Committee on reallocating these savings in a targeted manner through initiatives focused on working media, which is essential for us. This strategy ties together savings, targeted investments, and the EBITDA that we are sharing with you today.
Operator, Operator
Your next question comes from the line of Rob Ottenstein of Evercore.
Robert Ottenstein, Analyst
Thank you very much. You mentioned digital initiatives as a strategic priority, which makes a lot of sense. Can you discuss your position regarding your investment curve? This area requires significant technology, workforce upskilling, and an overall shift in how you conduct business. Could you share your current status in this progression and how much more investment is needed to reach your goals? Thank you.
Sue Nabi, CEO
Hello. Good morning, Rob. This is Sue speaking. You're correct that e-commerce net revenues at Coty are experiencing significant growth, up by 40%. Our penetration has reached 19%, largely driven by our luxury segment, but our mass segment is also performing well, particularly with e-retailers like Amazon. In regions such as the Americas, we're seeing over 50% growth, while EMEA is up by more than 30%. As I previously mentioned, prestige is contributing to this growth at 45%, and mass is up by 20%. To advance further, we've recently announced the appointment of our first Chief Digital Officer, Jean-Denis Mariani, who joined in November. He is making significant progress with his teams globally to establish the necessary components for this part of the business. This entails ensuring we have the right content and investments in place. We are set to accelerate our efforts in the coming months and are considering the most effective way to organize these tasks internally at Coty. Clearly, we have momentum in this area. Our brands have a substantial following on Instagram. When combining our brands, the fashion houses we collaborate with, and our partnered personalities, we can reach approximately 700 million people. With the new Tmall platform that we have launched recently, we have a direct avenue to engage with around 1.4 billion consumers globally. This presents a significant opportunity, and you're right that we will need to support this initiative financially. It is indeed one of our primary focuses. As Laurent has mentioned multiple times, our pay-as-you-go strategy isn't solely about allocating funds for advertising, as we have been heavily moving our media spend to digital, but also regarding CapEx and future investments we are currently pursuing.
Operator, Operator
Your next question comes from the line of Lauren Lieberman of Barclays.
Lauren Lieberman, Analyst
Thanks very much. Good morning. I was wondering if you could discuss the Singles Day shopping holiday and how much it contributed to the strong performance this quarter. I'm also interested in the activations, particularly with the Tmall launch for Gucci coming up this quarter. Additionally, I'd like to know about your plans for the Lunar New Year and how prepared the business is for that. Thank you.
Sue Nabi, CEO
Good morning, Lauren. You are correct that we are currently conducting a soft launch at Tmall. We are in the process of setting up various assets and products, so we have not yet entered the peak promotional periods occurring in China and throughout Asia. We hope to see the full potential of this launch at Tmall realized by the end of the third quarter or the beginning of the fourth quarter. Additionally, we need to navigate our participation in these highly promotional moments, as we represent desirable and luxury brands. We are working diligently to maintain the same level of excitement without compromising our brand image. We are also considering other brands that are actively participating in this space, like Adidas and Calvin Klein, which are performing very well, though they are not currently significant drivers of growth in China.
Operator, Operator
Your next question comes from the line of Faiza Alwy of Deutsche Bank.
Faiza Alwy, Analyst
Good morning, Sue. I have a couple of related questions for you. First, how do you see the make-up category evolving as we move past COVID? You've mentioned the trend of skinification in make-up, and it appears that many smaller make-up brands are now introducing skincare lines. Can you discuss how this trend affects your strategy for reinvestments? I know you’ve highlighted marketing and commercial investments, but when it comes to skincare, efficacy and performance seem crucial for retaining consumers. I would appreciate your insights on this. Do you agree with this perspective? How would you assess the Company's R&D capabilities and product quality? Is there a possibility for needing additional investments, or are you content with your current position?
Sue Nabi, CEO
Thank you for your question. I appreciate the opportunity to discuss R&D, which is a topic I'm very passionate about. As an engineer, I enjoy collaborating with our R&D teams, scientists, and factory personnel. What I've observed is that Coty R&D possesses remarkable intellectual properties. I’ve mentioned in previous calls that Coty holds significant IPs related to long-wear products. For instance, the success of brands like Outlast by CoverGirl and Lasting Finish 25 hours by Rimmel is fundamentally tied to the unique IPs we own. Additionally, we have substantial IPs focused on environmental protection, whether it’s against the sun, blue light, or pollution. This is an area where our Lancaster brand has been progressing, and we plan to expand this expertise across various skincare and makeup brands that are increasingly developing skin-friendly products. Moreover, we have IPs inspired by dermatology to enhance our formulations, particularly in areas where Lancaster and Coty R&D have years of experience. For instance, Lancaster pioneered the vectorization of retinal in skincare products two decades ago, which illustrates our expertise in this domain. We aim to leverage our key IPs to enhance the skinification of our makeup and broader business operations. In the makeup category, we’re seeing a strong market response to what we refer to as clean, healthy, and sustainable alternatives, with CoverGirl leading the way in the U.S. The Clean Fresh makeup line has seen robust success, including the top launch of a foundation in 2020 and the top powder shortly thereafter. We are now introducing Lash Blast Clean, the first mascara featuring a clean vegan and cruelty-free formula suitable for sensitive eyes. This segment not only appeals to a wide range of consumers but is especially popular among Gen Z and Hispanic demographics. We plan to further accelerate our efforts in this area, expanding beyond our color cosmetics brands to other Coty brands, such as Adidas, where we see significant potential in self-care and beauty related to fitness. I am confident in our ability to grow in these science-led, efficacy-driven product categories across our businesses, including mass beauty and prestige skincare with brands like Lancaster and Philosophy, as well as the future skincare initiatives from Kim and Kylie.
Operator, Operator
Thank you. We have reached the allotted time for questions and answers for today. We thank you for participating in Coty's earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.