Coty Inc. Class A

Good morning, ladies and gentlemen. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to Cody's second quarter fiscal 2020 results conference call. As a reminder, this conference call is being recorded today, February 5th, 2020. On today's call are Pierre Lubies, Chief Executive Officer, and Pierre-Andre Therese, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Cody's earnings release and the reports filed with the SEC where the company lists factors that could cause actual results to differ materially from these forward-looking statements. All commentary on like-for-like net revenue reflect the comparison of the business at constant currency in the current and prior year excluding the impact of acquisitions and divestitures. In addition, except where noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the non-GAAP financial measures section of our earnings release. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release. I will now turn the call over to Mr. Luis.

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

Thank you, Pierre, and good morning, everyone. So about sustainability, sustainability is about, as Pierre just mentioned, consumer innovation, but it's also about more than that. For the past few years, the COTI teams have been working in a number of areas to try and catch up with the industry. And while a lot of things remain to be done, the many progressives which we have made so far have made it possible for us to elaborate the first COTI sustainability platform and to make it public today. So I will not go into the many details present on the chart, but I will just say that we have chosen to call it beauty that lasts. and that it encompasses initiatives in the area of products, environment protection, and people and diversity. And for each of them, we have defined priority initiatives and set targets for ourselves, which we will monitor transversely. So, for instance, we will, by 2022, source 100% of our Indian mica from responsible sources. Or we will, by 2030, reduce our carbon emissions across our entire value chain by 30%, and there are more on the page. This platform will further build our credibility as we deliver against these targets. It will also increasingly give us the ability to take initiatives in a market segment which will be one of the growth drivers of beauty in the coming years, and therefore this is a major step for us. But now let's zoom again to short-term and let me turn to the earnings of the quarters. As said by Pierre, this was a quarter in line with its position, and this is the fifth time in a row it is the case since Pierre and I have started this exercise more than a year ago, evidencing, I believe, an improved control over our business. On revenues, more specifically, Q2 was modestly down at 1.4%. with noticeable sequential improvement in consumer beauty. Beyond the percentage change, the evolution of our top line has been on quality, with strong improvements on that front, evidenced by the increase of our growth margin. So turning to the divisions and to start with luxury, in Q2, we launched the second pillar under our Tiffany fragrances, called Tiffany & Love, which you have on the left side of the chart. It performed incredibly well in markets. This launch confirmed the appeal of the Tiffany brand for both males and females and has driven market share gains for the overall Tiffany brand across the U.S., the U.K., Germany, Canada, and Italy. Our continued support and activation behind Marc Jacobs Daisy has now firmly placed the iconic fragrance pillar into the top four fragrances in the U.S., in the U.K., and Canada. And we continue... to drive growth across our focus brands, Burberry and Hugo Boss. Moving to slide 11, on the performance side, luxury delivered a solid growth at 1.3% on a high comparison day. I remind you that the same quarter last year was plus 10%. This was helped by the previously mentioned innovations, but also by the strong performance of our Gucci makeup. While the traction of our brands remains strong, we are, as we have been doing in consumer beauty, working to improve the quality of the top line. This has already led us to reduce the level of promotions and discounts. We will, in Q3, take advantage of our new go-to market, Bar Region, common to consumer and luxury, to accelerate our work and cut low-value sales, decrease value distribution, better control the gray market, amongst other initiatives. This will temporarily drive our sell-in into low single-digit negative in Q3 specifically. At the same time, our sell-out will be supported by a strong innovation type with CK Everyone coming in Q3, coming today, I believe, as well as Hugo Boss Alive, a boss fragrance for women. And later in the year, the expansion of the Gucci makeup range and other innovations, including Burberry, Marc Jacobs, or Hugo Boss. So luxury definitely remains a key growth engine for our company. Let's now turn to consumer beauty, page 12. The launch of Rimmel Lasting Mate Foundation has been off to a great start. This is on the left. In core markets like the UK, we have been supporting this launch with a strong uplift in media and in star activation. which has driven growth for the entire Rimmel lasting sub-brand and contributed to Rimmel market share gains in the UK over the last five months. Consistent with our focus on high-value business, we have been activating support behind our premium Sally Hansen Miracle Gel line, including media investments and innovative try-on features in select retailers. This has driven mid-single-digit revenue growth for Miracle Gel in the US in Q2, supporting the overall brand. And finally, on the right, for Max Factor, we are continuing to strengthen the product range with a marigold-touch second skin hybrid foundation, which contains pre- and probiotics to support skin renewal, and is capitalizing on the growing consumer demand for skincare-like cosmetic products. Performance-wise, going to size 13, Consumer beauty continued showing progress as illustrated by Pierre a few minutes ago. While North America continued to show a mixed performance with a solid delivery from Sally Hansen but continued weakness of the cover girl, Europe kept strengthening with Rimmel in the UK or Max Factor in Germany. And in Almea, we kept being selective in our efforts in an attempt to continue improving the quality of ourselves. Our priority combo brands, country, evidence that Europex are delivering. And while the overall top line of the decision remains below where we would like it to be, it is clearly showing sequential progresses at minus 6.8%, more than one point versus last quarter, and the best performance for the past 18 months. And this is obviously to be continued. I'm turning to professional beauty, slide 14. GHD continues. to grow at a very strong pace, driven in part by the launch of the Glide hot brush. In our leading VEA brand, we have strengthened the range with the launch of Color Machine Plus, a hair care regimen that improves color of hair quality. And last, OPI continues in liberate the assortment with its latest Mexico City color collection, which you see on the right. Moving to 2015, professionals continued growing in Q2 at 2.2% for the quarter, which means first half at 3.5%. All regions growing, Europe and the U.S. delivering a steady performance, while GHD continued delivering strong growth, helped by continued innovation. At the same time, the margins remained high in the 70s – in the 70s, sorry. These numbers talk for the health of the business and the quality of the PB teams, the professional beauty teams, sorry, at the time we are working full speed in parallel on the strategic review. I'll come back to it. So I will now get back to Coty overall, slide 16. Looking at the profitability for the entire group, we are now well anchored in our virtuous equation. Gross margin was up 130 basis points to 63.4%, reflecting progressives coming from mix, price, but also channel management. At the same time, we kept increasing the support by our brands with working media up high single digits and key brands being advertised at sufficiency. In front of that, we continued being more selective on promos. Together with the tight control of our fixed costs, these assume strong improvement of our operating margin to 13.9%, up 110 basis points. And these flowed down to the EPS, which is up $0.03 to $0.27, half of it driven by a one-time tax benefit. So we showed good progress on the earnings side, but even more so on the free cash flow side, slide 17, a $364 million free cash flow for the second quarter alone, almost double that of last year. This was driven by time control in all lines with a specific contribution of receivable. We have been reducing the overdues and the inventories thanks to a better supply chain working, a better service level, and a better S&OP process. Our debt closed at $7.2 billion, down from $7.4 billion the previous quarter. And free cash flow continues, of course, to be very high on our agenda. So to sum up slide 18, this was a quarter very much in line with expectations on our line. It allowed us to reaffirm our target for the year, with a delivery expected to be due towards Q4. Like for like, net revenue stable too slightly down year on year. Adjusted ROI growing 5% to 10% like for like with a strong working media reinvestment. An adjusted EPS growing mid-single digit and improvements of our free cash flow. I'll move to slide 19 now and would like to give you some last comments regarding the change of scope we are currently driving to complement and build a stronger COTI. On the strategic review first, we are very happy with the way things are going. First and foremost, as you have seen, the business keeps delivering well. This was the case in Q1 and is very much the case in Q2 in professional beauty and across the businesses under review. And we expect this to continue going forward. It's a clear testimony of the quality of the business under review as well as the quality and commitment of the teams running it. We continue running the process and have now moved into a more concrete phase, the information memoranda having been distributed to the interested parties. We continue seeing many strong marks of interest and keep working with an unchanged timeframe with a decision to be made by summer 2020. Moving to slide 20, Kylie, is a second topic. As you have seen, We have closed the deal on the 6th of January and soon appoints Christophe Honfelder as the CEO. The business has continued delivering well in the last month of 2019, actually ahead of expectations with a strong skin scale start and a strong Black Friday overall. We will consolidate Kylie globally as of the acquisition date, early January 20. However, we will report sales and margin as a scope change, instead of as part of the like-for-like performance for the first 12 months. We will use this time to define the right sequence of initiatives to accelerate the brand, starting from calendar 21. Our first interactions and thoughts confirm the potential we were seeing in the brand at the time of signing, and we will take the time to get things right before pushing and delivering our objective, which is, I remind you, to bring an additional one point of top line to the group. Finance-wise, we will therefore just make sure in 2020 that this transaction is EPS neutral for the Canada year. Moving to slide 21, and this is going to be the last one, a few words of recap on the issue before we move to Q&A. As detailed by Pierre, our turnaround is progressing well. Whether on the top line or on the cost side, we start seeing the benefits coming. Out of the benefits, two KPIs are showing strong progressives and they are important. Growth margin on the one hand, which talks of the quality of our top line and business. and the free cash flow, which is a proxy for the comprehensive business delivery, we will continue focusing very much on these KPIs. As a result, we are confident in our ability to reach our targets for the year, and we are happy to reaffirm them. We are also happy with the progress made on the reshaping of our portfolio and with each of the strategic reviews and the partnership with Kinley General. As you may sense, we are dealing with a very intense value creation and transformation agenda. If we manage to drive it and show so many progresses, this is thanks to the COTI teams who have been and keep showing talent, energy, courage, and resilience. And on behalf of Pierre and myself, the two of us, I would like to conclude by thanking each and all of the COTI associates for this performance. And now, we'll be happy to take your questions.

Thank you. The floor is now open for questions. If you wish to ask a question at this time, simply press star and the number one on your telephone keypad. If at any point your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from one of Olivia Tong of Bank of America.

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

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

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

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

Our next question comes from one of Robert Ottenstein of Evercore ISI.

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

Okay, so on Macy's, we do expect the exposure to be very limited, and for us, it's luxury, so we don't feel that the impact is going to be big. The second question was?

On the specialty channel with Alta and Sephora.

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

And maybe on Ulta, before Pierre takes over on the shelf, as I was saying, Kylie has been doing specifically well at the end of 2019, better than we expected, and that's been for a part with Ulta, of course, both, by the way, in cosmetic and in skincare. And your next question was about the expectation on the reset of the shelf.

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

Our next question comes from one of Lauren Lieberman of Barclays.

Great, thanks. Good morning.

Good morning, Lauren. Good morning.

I was hoping you could talk a little bit about luxury and that you'd specifically talk about the route to market changes. So if you could just elaborate on that, it would be very interesting. And then more specifically, why the exit of the lower value sales would only be an issue in 3Q? Because just the way that my head was thinking about it, it would be something that would sort of linger for a year. So if you could explain a little bit more about that, it would be great. Thanks.

I can take the luxury and road-to-market challenges. Maybe I'll take it on your specific question on the timing.

Fundamentally, we have the same goal throughout the company and throughout, in particular, business we are going to retain, which are luxury and consumer beauty. We've been starting very much in consumer beauty to be more selective about some sales and cutting some sales. We've made mention of that in Almere in particular, and by doing so, we've been able to reduce the grey market, and we believe that's very important. to drive up C1, to reduce the impact on our main markets, and to make sure that we focus on the right quality of supply. We've done already some things on luxury, as shown by Pierre, but now we're going into free to go deeper in luxury for one reason, which is that we We have a common go-to-market, as you know, starting from Q3, between luxury and consumability, and therefore it makes sense for us to do it now. And do it now means just cutting low-value distribution sales, promotion, going a bit deeper, because we know that we have a big pipe of innovation coming and we want to be to focus on these innovations as opposed to these tests on the online. So in Q3, we'll accept that this has an impact on the selling and it's driving actually our selling into negative territories, but because we believe this is what we need to do to continue strengthening luxury and continue making it a strong engine of growth for the company.

And Pierre, you probably... I will add another point on the luxury route to market changes or consumability route to market changes. Actually, we are not touching the customer-facing personnel and we are still having dedicated marketing team. We are having dedicated sales team at every market level. The thing that we are doing is that We are taking advantage of our relatively or we are facing the fact that we are in some markets that we need administrative scale and we need support scale, and that's what we are doing fundamentally from the route to market change. We are combining our back office infrastructure, but we are not changing the customer-facing personnel and the structure of our marketing teams at the local level.

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

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

Our next question comes from Lionel McMody of RBC.

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

So, I mean, in China, we are very happy with our momentum and luxury, right? And I'm sure you're still on it. So, in our view, we keep progressing and we are happy, and particularly the expansion into cosmetics have really driven incremental sales, which is, I think, a very good indication of the type of strategies that we want to do, partition coverage or with the same brand. And I think many of our brands have the right to play into more categories than they do play today. And we have demonstrated that with cosmetics in Gucci. So that's a big learning that we will capitalize on. On makeup, I think the combination of makeup, and I assume that you are a bit probably driving talking about the US market makeup and the reason for the decline yes I think it is there are many driving forces for that and I would say that the structural forces I would say has been first an explosion of availability of new brands in a market which is very prone to novelty has probably driven a level of at the consumer level. So that's one probably driver. The second driver is that a thing that many retailers have given and we have some data which demonstrate that they've given, particularly mass retailers have given a lot of share space to new brands which do not have the necessary productivity and therefore unfortunately in and they have been subsidizing that space by taking away from big brands. So that is probably driving the penetration of the mass cosmetic market. And three, I think there is possibility, there is most likely a bit of a shift from make, a consumer shift from makeup to skincare, and we'll see that around the world. I would say these are, in my view, the three fundamental drivers. Some of these trends we need to capitalize on, and some of these trends we need to have conversations with our customers about.

Excellent. Thank you.

Thank you. Our next question comes from one of Joe Lackey of Wells Fargo Securities.

Hi. Thanks. So a couple follow-ups, I guess. First on luxury, given the negative growth in Q3, I understand – you know, you're pulling back on lower value products, probably lower margin products. But how will that impact operating income growth in the third quarter? And then more broadly, when you think about the flow between the quarters in the back half, right? So, you know, overall expecting pretty significant improvement in EPS growth. But, you know, Q3 is going to be pressured by the luxury and not fully lapping distribution losses in consumer beauty. So should we expect you know, operating income, EPS growth will be weighted more towards Q4 in the second half?

Yeah, it's Pierre-André. That's correct. What I would say about, so you've seen that we reiterate our guidance, so you see we still have the same objective for EPS for years. You've seen that we are a bit ahead of what we thought, what we expected to be at the end of Q2. For Q3, I would say that EPS is going to be broadly in line with that of last year. And therefore, you're right to say that the EPS progress are going to be skewed toward Q4. Okay, great. Given the seasonality of the business and the fact that regularly Q2 and Q4 are bigger and bigger.

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

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

Our next question comes from one of Stephanie Wissink of Jefferies.

This is Ashley Helgens on for Steph Wissink. Thanks for taking our question. Do you have any update on the travel retail channel according to date with the virus impacting travel itineraries? And then also if we could just get a little color on the softening of the pro-beauty margins.

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

Our next question comes from one of Asia Allway of Deutsche Bank.

Yes, hi, good morning. A couple questions for me. First, I just wanted to talk about Kylie. Thank you for giving the calendar 19 number. That's really helpful. But you talked about preparing the company for rapid expansion, and I was hoping to get a little bit more color around that. I know you've talked about expansion previously, but how should we think about the timing of that expansion?

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

Okay, thanks.

Sorry, and the element, as you rightly pointed, is that the traction is good. In fact, the traction in the last part of the year was even better than what we expected.

Our next question comes from one of Andrea Teixeira of JP Morgan.

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

Okay, I'll take the second question. Maybe I'll let Pierre answer the first one.

On the second one, we are doing the first one. So travel retail is about 15% of luxury. So that gives you a bit of a modeling. So that's about, therefore, 5% of, I would say 7% of the company globally. Okay.

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

I'd say 15% of the luxury business. That's global. And if you want to take Asia, Asia is about one-third of that.

On one-third of that.

China and China, the whole is 3% of the company.

Okay, perfect. Thank you.

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

May I add that we are already anticipating, definitely in our staffing, particularly at corporate headquarters level, that possibility and therefore are taking already preventive action to avoid us to create a future problem by right-sizing our future organization right now.

Our next question comes from one of William Rudder of Bank of America.

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

Well, on Kylie, frankly, that's not the topic given the – Given the current trends, it would be legitimate to expect growth. But at the same time, the priority is not going to be on the growth in 2020. It's really going to be on setting up the growth for 2021. So we won't be too much looking at that. But today, the asset is definitely growing. On the leverage, yeah, we said to be accurate and precise that we would target a leverage post-deal of approximately three times, and there is no reason for us at this stage to get away from that. This is our target and expectation.

Our next question comes from one of Mark Ashton of Stifel.

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

Yes, I think overall, Mark, in the clearly – You can call it pricing. I can call it value, too. I mean, at the end of the day, there are many ways to take pricing. There are first, amount of business on deal. Two, depth of the deal. Three, balance between mainstream portfolio, premium portfolio. Typically, for instance, we do see, to give a bit of flavor, for instance, that in luxury, we are substantially more overplaying in No Toilet and underplaying in Haute Parfum. That is basically speaking one of the ways we will manage price or pricing, and you can call it pricing, I call it value creation. And so yes, definitely it is part of our strategic agenda to continue to push the value of our products up. You know, there is one systemic trend, and I would call it like the long-lasting trend in consumer goods in general and in beauty even more. It's wealth. Markets uptrade systematically, and we have a bit of catch-up job to do, but it is definitely one of our vision of innovation going forward. Innovation for us going forward has two fundamental roles to play. One is It continues to enable us to premiumize the portfolio of the company. And two, it enables us to increase the penetration of our brands. And sometimes we can do both. Sometimes we do one. Sometimes we do the other. But basically speaking, that's the way we are going to look at our innovation pipeline going forward. Does it contribute to improve the value of what we sell? Or does it give us more consumer? Or does it do both? And so it is a big shift and I believe it is one of the substantial shifts or systemic shifts which at the end of the day transforms and allows you to do at the same time better and bigger.

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

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

Thanks. On luxury, we are, and on consumer beauty, we are getting share in both categories, right? So we are happy with our development on eRetail. The main reason why we are gaining share, honestly speaking, on Amazon and we are not gaining share on consumer beauty masks is we are not losing distribution in Amazon. And I think fundamentally speaking, our brands are strong. They have the right to play and the right to win in this channel. And what we have done is that we have clearly professionalized ourselves Now we have taken online as a very serious channel, which is here to last, and our capabilities have been increased, and our effort has been increased, and we are sharing our business plan with Amazon, and I think they are very happy with these plans because they see an opportunity for them to grow their own penetration, whilst at the same time growing our own penetration. And going back to one of the early questions of Nick, earlier over the trend of Amazon the trend of mass consumer beauty. There is also an element in the decline of consumer beauty that some of the business is shifting to Amazon and has not picked up by Nissan, too.

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

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