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 first quarter fiscal 2021 results conference call. As a reminder, this conference call is being recorded today, November 6, 2020. On today's call are Susan Abbey, Chief Executive Officer, and Pierre-André Therese, Chief Operating and Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to 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. In addition, except where noted, the discussion of Cody's financial results and Cody's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release. I'll now turn the call over to this, Naby.

Ladies and gentlemen, good morning. Back in August, I spoke to you on Coty's fourth quarter earnings call and shared with you that I had considered Coty to be a jewel in the rough, and I continue more than ever to believe in this. After several months of leading as CEO, I can confirm that Coty is transforming and emerging from the COVID-19 crisis much stronger than and more nimble, and also better prepared to face any secure market disruptions. Our Q1 results are a clear testament to this. Across all metrics, both operational and financial, our results improved significantly from the low point of last quarter and came in at or ahead of our expectations. Month after month, we're seeing net revenues sequentially improving with solid orders in advance of the holiday season. Part of our improvement has been driven by an improving market backdrop. We have seen better sales trends across each of our regions and across both the prestige and mass channels, which reaffirms the validity of our dual channel model. And with retailers' inventories now at normalized levels, we are also seeing much closer alignment between sell-in and sell-out. In fact, in some areas, sell-out trends are stronger than expected. At the same time, we have made significant progress in improving the performance of our P&L and our portfolio. On the financial side, I'm extremely pleased to see that the organization has continued to adapt to the new normal, executing on our financial and operational priorities, including profit and cash flow protection. Our stringent cash control enabled over 20% growth in our adjusted operating income and over 50% of the total company EPS and stable net debt. We remain committed to diligent cost control and delivering on our fiscal 21 financial commitments, including being profitable on an adjusted operating income basis for continuing operations and being cash positive for the year, contributing to a decrease of our net debt. The Vela divestiture is expected to close as planned by the end of calendar 20, which together with positive cash flow in the second quarter 21, will lower the financial net debt from $7.9 billion today to around $5 billion, including the value of the remaining 40% Vela stake which Coty will retain, Valued at $1.3 billion, economic net debt will be reduced to below $4 billion. At the same time, we have seen good progress in the first quarter on our key priorities, including strong innovation performance in both prestige and mass channels, strengthened market share in our core markets, e-commerce moving from a catch-up mode to a momentum mode, while at the same time gradually strengthening our foothold in skincare and in China. As we progress through the year, we will continue to invest behind these key priorities, for example, through amplifying our skincare R&D and through smart organization changes, strengthening our brands and reinforcing their connections with consumers. Part of this investment includes strengthening our executive leadership team, and we've made two very high-quality hires recently. Isabelle Bonfanti, formerly at L'Oreal and Hermès, has joined as Chief Commercial Officer of the Prestige business to accelerate our growth in makeup, skincare, and in Asia, and to champion the Prestige distribution model and its unique characteristics. Second, Jean-Denis Mariani has joined in the newly created role as Chief Digital Officer to superdrive our digital transformation. First, to accelerate our e-commerce momentum, to put in place the right conversation, CRM, and virtual testing tools, to prioritize digital in our media mix consistent with consumer trends, and last but not least, catalyzing Coty's huge direct-to-consumer potential with Kim and Kylie Skincare, Philosophy Skincare, and all other digitally gifted Coty brands. Let me now turn it over to Pierre-André to discuss our financial overview.

Thank you, Sue, and good morning, all. I would like to start with a reminder that of how to read our figures, given the complexities generated by the change in its scope. Indeed, since the signing of the sale and purchase agreement with KKR for the disposal of 60% of Vela, we have been reporting our professional and retail hair business as available for sale and discontinue the pressures for U.S. purposes. Somebody seems to be not on mute. Could you please go on mute? Thank you. So this means in particular that we consolidate Vela net income on a separate P&L line, which is below operating income. As a result, our net revenues and most P&L metrics are presented on the basis of continuing operation, that is being the total equity less Vela. And to give you a better idea of what COTI will look like going forward, we also produce what is called ongoing COTI, which adds to continuing operations the cost recovery we are going to receive from Vela from closing as per some transitional services agreements. All KPIs relating to the P&L from net revenues to operating income relate to continuing operations and ongoing COTI. In the presentation here, as for the rest of the EPS and the cash flow, we do continue referring to total equity with a 100% contribution of Vela net income and cash flows. This being said, let me now move to slide 5 and our net revenue trends, which have been showing a strong recovery versus the previous quarter, both in mass and luxury. After a trough in Q4, and more specifically in April, our sales have been increasing month after month, throughout the period, with the month of September ahead of our average revenues for the third quarter. Compared to Q1 2020, our net revenues remained lower by 19% on a life-on-life basis, mass being at minus 10 and luxury at minus 25. This is very much in line with what we expected, minus 20%, as you remember we indicated during fiscal 20, full-year fiscal 20 earnings call. I would like to add a few comments to help you read these numbers. First, private retail remains by far the most impacted at minus 70% versus last year. This, given its weight, represents approximately five points, which implies that the rest of the business therefore declined by 15%. Second, e-commerce has been growing not only strongly, but ahead of the market, leading to market share gains for Coty. The percentage of our net revenue done through e-commerce and ETC has doubled versus where it stood at the beginning of COVID. And this is not only helping our net revenues, but it also makes us less vulnerable. Last and importantly, we are carefully managing sell-in and phasing it with sell-outs, thus limiting the inventories in the trade and our exposure to the upcoming second wave. What about Q2 now? We just completed October with net revenues down high single digits, very close to minus 10% actually versus a year ago, reflecting strong pre-Christmas orders and confirming a very fast recovery of our net revenues. Of course, as we see lockdowns reinstated in several countries in Europe, we will get some impact on our net revenues for the rest of the quarter. But for all the reasons previously mentioned, and for the limited number of markets concerned, only some in Europe, we do not expect such impacts to be in any way close to what we suffered in the first wave. I will now turn to the operating income slide 6. While we suffered a very significant loss in the fourth quarter of last year, we are delivering for the quarter an operating income of $81 million, which is 93 if you add the revenues from the TSA, and that is up 24% versus our operating income in the first quarter of fiscal 20. This is a testimony of the actions taken by COTI since the beginning of COVID under the leadership of Pierre, Peter and Sue. All P&L lines have contributed. COGS first. After a weak Q4 marked by high excess and obsolete levels and a low level of fixed cost absorption, gross margin has come back to the average level of fiscal 2020 at 58.6%. This is still 150 bps lower than the same quarter last year and it shows that we still have room for improvement but the speed of the rebound has been particularly good. Second, we have operated a reset on ANCP with three objectives in mind. First, adjust the spending to our new sales site. We have spent 20% of our net revenue this quarter and adjusted to our new profile, specifically to geographies and channels, more online, less offline, less travel retail. Second objective, to adjust the support to the net revenue trends we have ahead of us. First, making sure we make the best possible use of our money and we protect our P&L. Third, this reset aims at helping us become more strategic and focused in our investment, leveraging through leadership and getting away from a fragmented allocation by market. To this effect, A pay-as-we-go process has been implemented where Sue and the leadership team review all initiatives and opportunities brought by the central and the in-market teams and actively free up spending on a fortnight basis in light of net revenue opportunities and upcoming initiatives. This is a deep change in our way of working and we expect will increasingly help our top line. The third element is fixed costs. and I will detail it, page seven. So you remember that we had concluded at the exit of COVID that we needed to reduce our fixed costs in a very sizable way, setting for ourselves a target of $600 million for RemainCo with the first $200 million in fiscal 21. Q1 has been remarkable on that side as we have already delivered 80 million dollar savings laying the ground for a delivery ahead of the objective for the year. Several world streams have contributed to it, including an acceleration in implementing our headcount reduction, substantially in line with that designed for the turnaround. But we have added to this many initiatives on the business service side, of course with a maintained freeze of expenses like T&E, but also with very strong and visible actions on third-party services. And the procurement team have, of course, added to it in many fields. $80 million, the delivery of the quarter, is approximately the size of our operating income in Q1, and it shows how critical this achievement is for COTI. Beyond the profit of the quarter, it makes us incomparably stronger to face what is likely to remain for some time a volatile environment. I'm now moving to total COTI and the EPS. The 24% increase over operating income has been the first source of a 57% growth over EPS. The second one has been Vela performance. Over the quarter, net revenues have grown by 7% as salons start reopening after the lockdown and retail hair and nails remain strong. Like COTI, Vela has seen a strong rebound of its gross margin and has benefited as well from a tight control of its fixed costs. To this have added some temporary effects with a pause of depreciation linked to the discontinued oppression accounting treatments and with a gradual stand-up of the new teams over Q1. The sum of these effects have fueled a doubling of Vela operating income and a contribution to Coty EPS north of £90 million. The performance of the two businesses has boosted their EPS, right, or share counts, increased under the effect of the $1 billion convertible preferred subscribed by KKR, which are treated as equity for the purpose of a diluted EPS in the red cap. To end with this, upon closing of the Vela deal, our EPS structure will remain similar, but Vela contribution will be recognized for 40% only, and our net interest, will be reflecting a significantly reduced net debt. I'm turning to page 9 now, and cash flow. So the profit delivery has translated into a free cash flow, which is ahead of our expectation, and almost stable for the quarter at minus $28 million. Beyond profits, we've made progressives in many fields, and in particular, too, the one-off, which we have reduced, and you know that these have been one of expenses, have been a big cause of leakage in the past, and we have now put that under control, under tight control. And secondly, we have been, the teams have been doing an incredible job in managing the overdues with a very high intensity, bringing them to a two-year slow. And so these efforts have upset the impact of the restart on the working capital, with in particular a reduction of payables from the fourth quarter of 2020. Our net debt as a result has remained stable at $6,864,000,000 at the end of the quarter, with a negative $200,000,000 foreign exchange conversion impact, and on the other hand, the payment of $250,000,000 of convertible preferred by KKR. Our debt, however, and this is slide 10, is going to deeply change in the coming weeks as we are about to close the sale of 60% of Vela to KKR for a net proceed of 2.5 billion dollars. Together with a positive free cash flow expected in Q2, we expect the financial net debt post-closing to land close to 5 billion dollars and our financial net debt to EBITDA to get close to five times within one year at the end of calendar 21. Another important factor in this respect is, as mentioned by Sue, the 40% stake which we keep having in Vela, which has a value at inception of $1.3 billion, and you have seen the performance of Vela. This is very likely to grow in a meaningful manner. Since this Vela stake is known for Cotia Financial Holdings, We think it is important to take it into account when looking at our capital structure, and we will be following what we call the economic net debt, that is our debt net of the Vela stake. This ratio will land post-closing below $4 billion, and by the end of calendar 21 should translate into 3.5 times of economic net debt to EBITDA, not far from our medium-term objective, which is to bring back Coty leverage below three times. Together with a cost reduction, this is a very important element as the more solid COTI is also about capital structure. With $5 billion financial net debt, a $1.3 billion financial stake in a performing VELA, and attractive debt conditions with three and five years maturity, that represents a key improvement of our capital structure. And it is a fundamental building block to bring COTI back to growth and competitiveness. And with that, I hand over to you, Sue.

Thank you very much, Pierre-André. So as I discussed it on the last call, I strongly believe that Coty has a beautiful portfolio of brands, brands that are universal and deeply rooted. In this past quarter, we have begun to see this universality, together with a strong commercial execution, translate into exceptional innovation performance across a number of brands and regions. Early in the quarter, we launched the latest women's fragrance under the Marc Jacob brand called Perfect. The fragrance and campaign celebrates self-love, authenticity, self-expression, with an inclusive cast of 42 individuals partly scouted through an open social media casting call. The idea behind Perfect has never been more relevant than at this moment, and they have clearly resonated with Gen Z consumers all over the world. Marc Jacobs' Perfect has quickly become the number one fragrance launch in both the US and the UK. The success An incrementality of this new pillar has propelled Marc Jacobs' fragrances overall from the 10th rank to the 4th rank in the US and from the number 7 position to the 4th position in the UK. Similarly, in September, we launched the latest extension under the Gucci Bloom pillar called Profumo di Fiore. The campaign represents the connection between the mystical world of female sensibility and the idea of nature. The ethereal social media-driven campaign, unique packaging, floral tuberose scent has attracted global consumers, especially in America and China. At the same time, we have also seen very strong success with the expansion of the Gucci makeup range. In Sephora, across North America, Gucci lipsticks reached the number one spot and Gucci bronzer the third spot. and we continue to build on a similar success in China with the upcoming launch of Gucci's first foundation custom-designed for China. As a result, we have seen double-digit sell-out growth for the overall Gucci brand in both the U.S. and China. Our growing success with Gucci in both fragrances and cosmetics has reaffirmed our stronger relationship with the Gucci fashion house going forward. On the mass beauty side, we have seen key U.S. retailers' share of spells stabilize for the rest of fiscal 21, which is a first in five years. In fact, on Sally Hansen, we have been increasing our distribution based on its strong performance. Remail is positively booming in the U.K., continuing to build on its number one market share position. Likewise, we've seen our Brazilian consumer beauty business growing very significantly. Moreover, we have continued to build on the success of the first two masks clean beauty lines. We had introduced it under the CoverGirl and Sally Hansen brands in the spring. CoverGirl Clean Fresh Makeup line was the first face makeup from an established mask brand with a clean formulation free of many contested ingredients. The line was the number one foundation launch in spring 2020. and still remains in the top two for the year with significant appeal amongst Gen Z consumers. The renewed momentum and consumer relevance is reflected also in the wave of CoverGirl's earned media impressions now ahead of its peers. We have built on this success in recent months, launching CoverGirl's first clean, fresh concealer, clean powder, and clean mascara. Similarly, Sally Hansen's new launch called Good Kind Pure was the first nail polish from an established mass brand to boast a clean formulation that is free from 16 contested ingredients. The launch was the number one launch across all U.S. mass cosmetics in spring 2020 and to date remains in the top two. The new line has supported over 100 basis points, sorry, of market share for the Sally Hansen brand. The success of Cutter Girl Clean Fresh and Sally Hansen Good Kind Pure confirmed that Coty is one of the first corporations at this level that understood this consumer shift towards cleaner formulation, launching both product lines ahead of the pandemic, and will continue to launch clean, healthy launches across all our other brands in the coming months. In fact, Coty is leading the way in the areas that consumers are looking for in the new normal. Cleanliness, healthy alternatives, inclusivity, and self-expression. The second of our key strategic priorities is strengthening our positions in our core markets. We made good progress on this front in Q1, and Coty's iconic brands are showing strong, very strong resilience. We have best-in-class performance for prestige in the U.S. with retail sales growth three times, I repeat, three times greater than the market. We are strengthening in Europe, and we are well-positioned to drive profitable and strong growth in Asia and in China. In the U.S., we're seeing increased consumer spend on the wider prestige category, including Coty brands. We're extremely pleased to see not only that the prestige fragrance market in America has recovered from the June Q lows, but that, in fact, the market is back to growth since August, with the strength continuing through October. It's important to note that the prestige fragrance category was the only U.S. prestige beauty category that grew in the quarter, significantly outperforming both skincare and makeup, as consumers redirected their discretionary spending to what we call mood-boosting and self-care categories. Against this backdrop, our prestige business has been growing double digits since September and strongly gaining share. we now have two out of the top four prestige brands in the market. This is supported by the strengths of Marc Jacobs Perfect, also Burberry London Dream, Gucci Bloom Profumo di Fiori, and Gucci Guilty for Men, which is gaining two ranks and ranking now at number four, as well as a strong growth of Gucci cosmetics. The mass cosmetics market, on the other hand, remains under pressure, with continued declines in the mid-teens. While we are focused on helping to improve the performance of the category, we are pleased to say that our mass color cosmetics business is now tracking in line with the category and holding share after many years of decline. Also within the US mass business, we continue to streamline our SKUs and create a more focused portfolio, including this morning announcement of the Stetson license moving to a new licensure. This will have an integral impact on ourselves. In the UK now, the prestige fragrance market has been volatile, with monthly declines in the single digits to the teens. The resurgence of COVID in-country is further elevating the volatility and uncertainty. However, in the midst of this uncertain environment, our portfolio has been gaining share in the UK prestige fragrance market, fueled by Marc Jacobs Perfect and Hugo Boss Alive, our latest successful female launch under the brand Hugo Boss. On the mass cosmetic side, similar to the US, the UK market has been declining in the meetings. Here again, we continue to drive the performance of the market leading brand, Rimmel, through strong execution and incremental launches, with Rimmel continuing to gain over 100 base points of market share, several quarters in a row, confirming its number one market share position. In Germany, the prestige fragrance market trends have improved and are now declining in the mid-single digits. Here again, Coty is gaining share, driven by Hugo Boss Allied in the female area, Hugo Boss bottled in male fragrances, and also with Jill Sanderson eau de parfum. Finally, in China, which I will discuss in more detail shortly, our prestige brands have seen retail sales growth over 20%, fueled by both fragrances, and this is new by cosmetics for the first time. While much work remains to be done to further strengthen our prestige and mass beauty positions across each of these markets, we have already made good and strong progress, and my goal is to build and amplify these successes. Our third strategic priority is accelerating our digital and e-commerce capabilities with a strategic focus on direct to consumers. With the appointment of Jean-Denis Mariani as Coty's first chief digital officer, this is clearly a top focus for me and for Coty. Coty began building out its e-commerce capabilities. Yes, later than leading beauty peers, and we are therefore not as advanced as some in terms of e-commerce penetration, yet at the same time, we have been making very strong strides here as we work hard to close quickly the gap. Our e-commerce penetration in first quarter doubled year over year to over 13%, which has had a positive, very positive impact on the P&L industry, given the business is nicely accretive to Coty's corporate margin average. While DTC is a small portion of our business, this is a strategic area we are focused on growing substantially with Kylie's general DTC business as a key learning opportunity and also a springboard for Coty. As we have invested in building a DTC backbone within Coty, which encompasses today order acceptance, processing, and fulfillment, we have rolled out the Kylie Skincare direct-to-consumer websites across a number of international markets, including the UK, Germany, France, and recently Australia. The initial results have been very positive, with international traffic from this market to Kylie Skincare websites doubling, and in market sales up seven times. In prestige, E-commerce sellout grew double to triple digits in most markets, and our e-commerce penetration doubled to 19%, and all the while we kept full control of how our brands are presented. The success has been driven by strong momentum on retailers.com websites, as well as luxury e-retailers like Notino and Faconi. In China, Burberry has performed strongly on Tmall, with Gucci due to launch on the online mall in early 2021. We are continuing to capture new white space opportunities in this fast-growing channel, including recently finding a distribution agreement with Zalando, Europe's leading online fashion platform, with over 31 million active users across 17 countries. In consumer beauty, we likewise saw double to triple-digit e-commerce sell-out in most markets, with e-commerce penetration doubling to more than 7%. The growth has been fueled by strong execution on retailer.com websites, as well as e-retailers like Amazon. In fact, Coty's brands gained 140 BPS share on Amazon across our core markets, U.S., U.K., Germany, including 112% sales growth over Prime Day. To further drive penetration, we'll be accelerating our deployment of virtual beauty services, especially on makeup in Q2 and Q3. Our fourth strategic priority is leveraging the potential of our skincare brands, formulating top-quality products with a portfolio that spans from accessible price points to the very high end. It's clear to me that we own advanced skin care technology and capabilities in-house. And we will build on this expertise and key capabilities. Coty's IPs encompasses full light protection technologies, including blue light protection, environmental and biological repair, or mastering dermatological grade actives such as retinol, all of which are the key areas of growth in the skin care of today and tomorrow. And we are seeing some positive signals and green shots already. In Q1, Kylie's skincare sales tripled year over year. Some of that has to do with her incredible reach with hundreds of millions of followers. This is comparable with brands like Nike and Starbucks, as well as continued growth in followers on her specific beauty channels. And it's important to note that close to 50%, 5-0, of Kylie's skin DTC orders are from returning customers, which is in line with the average for skincare brands. Similarly, our philosophy skincare brand, which for now remains predominantly in the U.S., is back to growth. We have begun to more actively move the brand in the direction of clean and green beauty. This began with the launch of the Nature in a Jar product line earlier this year. More recently, we have reformulated philosophy's purity, which is the number one facial cleanser in America, to remove numerous contested ingredients, so we intend to broaden this approach to the full philosophy range in the coming two years. As we do this, we will be tapping into philosophy's unbelievably loyal customer base, as we have seen that over two-thirds of philosophy DTC orders are from returning customers. With both Silosophy and Kylie Skincare boasting a loyal customer base in a beauty category already known for loyalty, we will continue to build on this success and expand our skincare footprint worldwide. These two examples of Kylie and Silosophy Skincare perfectly encompass some of the key trends underpinning consumer demand today, namely a desire for clean and healthy products and direct connection with consumers to DTC. Last but not least, and as we mentioned on the last call, we are ready in the process of developing the King Kardashian West skincare line and expect to launch it in fiscal 22. The final strategic priority is expanding our business in China. Amidst the widest economic trends, we see great potential from the increase in domestic travel, which sees our brands overperform in luxury tourist destinations such as Sanya Island. We already have many brands within our portfolio that are highly, highly desired by Chinese customers, including Gucci, Burberry, Chloé, Tiffany, Calvin Klein, to name a few. The big hurdle for Coty in the past to expand in China had been our category exposure, with fragrances at the heart of our prestige portfolio, yet the Chinese beauty market dominated by skincare and cosmetics. There was clearly a limit to Coty's in-market potential. However, we have begun to address, to clearly address this category mix challenge with the successful launch of Gucci and Burberry cosmetics makeup in China. and the continued expansion of Lancaster and Philosophy Skincare, with Lancaster already the number one sun protection brand in Sephora in China. As I mentioned before, our recent launch of Burberry makeup on Tmall is performing very well, and we are on track to launch Gucci Beauty on Tmall in early 2021. The combination of these efforts has resulted in our prestige cosmetics and prestige skincare retail sales in China growing over 40% in this four quarter, four zero. Now accounting for close to 20% of our prestige business there. And this is just the beginning. In fact, despite their more limited assortment, our Gucci two axis counters selling both Gucci fragrances and Gucci cosmetics have generated monthly sales which are on par with the leading prestige multi-axis beauty brands. The good news is that the Gucci makeup line will be soon fully comprehensive with the upcoming launch of its first liquid foundation formulated specifically for Chinese consumers. Last but not least, the appeal of Gucci Beauty has been further boosted with the recent announcement of Gucci Beauty's first Chinese brand ambassador, Lu Han, who is a leading influencer and singer in the country with over 60 million followers. The announcement has seen breakthrough results with over 100 million digital conversations about the announcement. And this drove results within only two hours, the whole stock of lipstick that Lujan promoted completely sold out on Gucci.com. Time for conclusion altogether. It's clear to me that a stronger Coty has emerged in the past quarter. We, of course, remain committed to diligent cost control and delivering on our fiscal 21 financial commitments. This includes being profitable and cash positive for the year and further deleveraging upon Vela closing. After several months in the CEO role, I am as convinced as ever that we've put in place the right foundation to unleash Coty's huge potential. I want to take this moment to thank our executive chairman, Peter Haaf, for all his absolutely exceptional work in putting Coty back on track. Coty is now ready to grow in all core regions, categories, and price positionings across the different markets. Let me remind you of the priorities. More than ever, we are committed to reigniting our mass color cosmetics business, especially for the girls. Likewise, we will accelerate Coty's prestige business growth through makeup by leveraging our designer brand portfolio, of course, Gucci and Burberry, especially in Asia and in China. And we will continue building two new growth engines, leveraging the potential of our skincare brands powered by our new DTC capabilities, starting already with Kylie Skincare. The sum of these lay the foundation for Coty's sustainable growth in our new normal. Thank you very much for your time, and we are now pleased to receive any questions.

Thank you. The floor is now open for questions. If you wish to ask a question at this time, simply press star, then 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 Seth Wissick of Jefferies.

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

Thank you, Cecil. To answer on your first question, we are meeting all together, as Pierre-André has been describing it on almost a daily basis, to really think about what are the areas where we need to focus our work in media investment. Clearly, the results we are having at the moment in the U.S., for example, on the luxury side of the business, show that when we concentrate and focus our investments on key bits, on products such as clean, fresh makeup by CoverGirl, Perfect by Mike Jacobs, which are the products that are currently resonating with the needs of customers, especially investing online. the results are there. So this is really a lesson in a way versus what the industry probably in general and COTI in particular has been doing in the past, which is maybe to invest on a very wide range of launches and bets. This is really something that we are going to continue to do and probably after hopefully this crisis is over, we'll continue to put more money on bigger and fewer initiatives. And the second part of your question was about?

Well, the mixed effect on the makeup and skin. Obviously, in margin terms, we expect that to be accurate.

Thank you. Thank you.

Our next question comes from Monastasia Alway of Deutsche Bank.

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

Thank you, Faiza, for your question. This brand is very dear to my heart, again, and – Because, again, I've been looking at this brand in the past years, as you can imagine, a lot, and admiring this brand, to be very honest with you. Today, CoverGirl is the most loved brand in America in the makeup area. It's still the most loved brand. This is a great asset to build on. The second thing is that it's not a surprise that clean, fresh makeup is so successful. I don't know if people are aware of this, but clean makeup has been invented by CoverGirl in 1961. So we are talking about, you know, 60 years ago, CoverGirl invented the first medicated foundation using Noxzema ingredients. And today, this is exactly what we call the skinification of makeup. So CoverGirl, in a way, was a precursor 60 years ago of what we call the skinification of makeup. So there is no other brand that can own this territory than CoverGirl. That explains a lot the success of clean, fresh makeup. which, by the way, we are expanding into concealers, into powders, into mascaras, and also expanding in other brands of our portfolio very, very soon. So this is really something that, for me, is going to take back CoverGirl to the position where it had been very few years ago. And the other great news that I can share with you is that these launches are attracting to CoverGirl, but also to our retailers in America, younger, much younger consumers. Gen Z consumers are those who made the success of clean, fresh and stabilized, in a way, overall clean makeup market share in America and CoverGirl. The good news is that for the first time in five years, the shelf space of CoverGirl is not reduced anymore. And this is also another green shot I wanted to share with you. When it comes to what's next, of course, we are working on something let's say, quite strong in terms of what CoverGirl stands for and who stands for in the near future. And I think this brand has a huge opportunity to lead the game in America about what should be a mass cosmetics makeup brand, starting and building on the success of clean, fresh makeup. To answer your question about the previous relaunches, I had a quick look, to be honest with you, at these. And I think, you know, again, The big mistake a lot of people do is to look at what's happening in the market around you and try to mimic trends. You know, I saw that on other brands I've been taking care of. in the past years and looking at competition is, you know, always a problem because the tendency is to do what the others are doing and probably CoverGirl should have never moved from its story of being the inventor of clean makeup, being the most loved brand in America, being the brightest brand in terms of colors and the most luminous, I would say breathable brand in other words. So there is a story there that has nothing to do with what has been done in the past, but hopefully is going to take back CoverGirl into its leadership position.

And when should we expect sort of new news on that? Is it, again, is it sort of incremental, or should we, are you going to announce, you know, sort of a big relaunch, you know, in the next year?

Working hard at this right now. Working hard on this. We're making a lot of progress since September on, you know, the news story and everything. So hopefully we'll be able to, you know, tell the news internally, tell the news externally to our retailers, of course, and build with them the new CoverGirl. Hopefully next year.

Yeah. All right. Great. Thank you so much, Sue.

As quickly as possible, to be honest with you.

Thank you.

Thank you, Fraser.

Our next question comes from one of Rob Armstrong of Evercore.

Great. Thank you very much, and congratulations on such an exciting start. Two questions, one shorter term and one maybe slightly longer term. So, you know, could you just give us a little bit more granularity on the holiday season? You said solid orders. How are things looking in terms of 11-11 and your pre-orders there? And, you know, any other sort of color you can give us in terms of prestige versus mass? Is it still for the holiday season very much prestige, and how are you playing to that? So that would be the shorter-term question. And then the, you know, slightly longer-term question or more strategic question, you know, a lot of your main competitors – are obviously adjusting their channel strategy in the U.S., moving away from department stores, own freestanding stores, and really become very dependent on e-commerce. And obviously you're also pushing hard in e-commerce for all the obvious reasons. But the question is, are any of their moves in the brick-and-mortar area actually opening up opportunities for you? So those would be my two questions. Thank you.

Okay, I'll try to give you some sense of what we are seeing ahead of the early death seasons. Actually, starting with what you said about prestige versus mass, we see very good traction on the prestige side and in particular in the U.S. and all together in America, but in particular in the U.S. And that's been one of the elements fueling actually a pretty good performance in the on October. And if you have a look at the product more specifically, Sue mentioned them. So Marc Jacobs is a clear one. Gucci is another one. Sorry? Makeup. Makeup, absolutely, from Gucci is another one. So in Q1, you see that luxury is still behind mass. at the moment and ahead of the holiday season, this is not true anymore, the trend as we know. So again, very encouraging signs, in particular in America. That's a bit less the case in Europe, and now there is a lockdown coming in addition. But altogether, it's clear to me that we should expect a Q2 improving versus Q1. a lot or less than a lot depending on the effect of the lockdown, but there will be improvements. So that's for the short-term question. I don't know, Sue, if you want to add something on that? No? And on the channels, I mean, the only thing I can say is that on e-commerce, we are definitely changing scale, and we are changing scale twice. A, we have penetration, which is twice the one we had a year ago. You know, it just changed completely things. And two, we are adding resources with Jean-Denis Mariani coming and the development of the DTC platform, which is going very well and very fast. So that's definitely going to be one of the key elements of our strategy going forward in Americas, but not only in Americas. Okay.

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

Great. Thanks. Good morning. How are you? Hi. How are you? The first question for Sue, I'm curious on your view on your opportunity in cosmetics and prestige fashion brands, Gucci, now Burberry, because so far it seems fairly measured. I mean, great growth. But fairly measured so far insofar as first lipstick, now foundation, and, of course, realizing that the current backdrop is somewhat challenging with respect to the makeup category. I thought it was really refreshing to hear your perspective on CoverGirl and your views on the brand direction. So I was wondering if you could do sort of a similar exercise in terms of the long-term potential for some of the prestige cosmetics brands in your portfolio. Thank you.

Thank you, Olivia. Yeah, I think that's a very important question. We see clearly that the sales of brands such as Gucci, because you named this brand, that are really booming both in the US but also in China. In France, we just started at Sephora, and the figures were very, very good, including lipsticks, which was a surprise. But again, there is a strong appeal towards products that are going to be on one side, you know, very well positioned versus what the customer, the consumers are looking for. And I think the success of clean, fresh makeup, but also, I didn't mention it in my previous answer, the success of good, kind, pure name enabled from Sally Hansen, but also the success of many other things we've been doing in the fragrance arena with Calving, CK Everyone, fragrance that the crowd took out of certified fragrance. All this shows us that there is no issue on the mid to long term with cosmetics is just the question of putting on the market the right offer that answers consumer needs. And consumers are all about give me something that's good for my skin, give me something that will make me look good, either on Zoom or if I still go to the office, give me something that I will not feel guilty consuming because it's good for the planet and good for the society we're living on, etc. So this is clearly a direction and it gives us a lot of clues about where to take all our brands, especially this one. On the prestige side, you know, there is huge, huge, huge potential of brands such as Gucci and Burberry in the makeup arena, assuming that these brands, and this is exactly what we are doing, are launching products that are, of course, clean, vegan, using ideally reusable packaging, et cetera. So I really don't see any reason why this category would be challenged more than after, you know, this current crisis is with us. So makeup is going to be back, but not the same makeup.

Got it. That's helpful. And then you obviously outlined a lot of initiatives. So can you just talk a little bit about how you're going to prioritize all of these and what incremental investments you have to make to get there, whether it's a personnel system, et cetera. I've got my skincare, China, greater e-commerce and BPC. So just kind of curious on the timing on when you think those will come to fruition. If I could just sneak one more in is on the other side, you mentioned a small brand of furniture. What's your view on the likelihood of potentially more exits? And are there brands that you – Maybe I haven't really pushed in recent years that as you look upon, as you do a further review, you think could be more interesting areas. Thanks.

Yeah, thank you for your question. Again, we are committed to reigniting our mass color cosmetics business, especially CoverGirl. So we're going really to focus a lot on CoverGirl. Continue, of course, the fabulous story of Rimmel in the UK and of all our other brands, Sally Hansen in the US, our makeup business in Brazil, too. But we're going to focus strongly on CoverGirl, too, because there is huge potential under CoverGirl for all the regions I've been mentioning in the past. To come to your question about are there other assets that you're going to leverage, yeah, I can give you one in the mass business that, you know, not a lot of people talk about to me, which is Adidas. Adidas is probably the brand that has the biggest potential in terms of taking care of your body, cleansing your body, taking care of your body, boosting your mood before you go into practice sports or whatever. So there is a huge potential there. We started to work on this. So this is typically the kind of answer I can give you on this area. In the area of the prestige business, clearly consolidating our number one luxury fragrances makers in the world and successes transperfect are really adding to this and accelerating in the luxury makeup arena especially in Asia and in China and the brands we are going of course to focus on when it comes to luxury makeup at Gucci and Burberry. And last but not least, investing on DTC, this can benefit all of our brands, including Kylie Skincare, also Kim Kardashian West Skincare launching in fiscal 22, but also benefiting from all the other brands that we think are digitally gifted. So, in fact, the choice will be a mix of bets where we have a clear return on investment but also brands that are advanced in terms of digital conversations or brands that are highly desirable.

And Olivia, sorry, Pierre-André, just to complement on the very technical point, what we said about Stetson is not a divestiture. It's just a license which has not been renewed. We have, since this summer, decided to take a more realistic view concerning the licenses and to focus on the one which we think has a big potential. So we may not be renewing all of them to be sure that we focus on the right one.

Thanks so much. Appreciate it. Thank you.

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

Great. Thanks. Good morning, everyone. Two questions. First was just about fixed cost reduction. I was just curious if you could any soon mentioned or mentioned headcount reductions and accelerating that. But I was curious about Anything you could share on the bigger bucket, the fixed cost reduction, because Cody has been attempting to reduce costs for so many years, and this was a part of the prior plan. So curious for a little bit more color there. And then closer in, I was just curious as to the decision to launch Gucci on Tmall in early 21 rather than being there for 11-11 and moving more quickly. I understand, Sue, you've been in seat for only a few weeks, but We're still just curious on the timing decision there. Thanks.

Okay. I think the fixed cost. Well, it's really a good blend between people cost and indeed 600 people have left the company since Q4 and non-people cost. And in non-people cost, I can tell you we have been reviewing everything, taking advantage of the... of what we went through during COVID time, which in a number of cases meant no spending anymore, and leveraging on that. One thing which I mentioned, which is not necessarily very noticeable, because these were expenses not in the P&L, but the so-called normalized costs, has been precisely the fact that we have tightened a lot the rules to normalize, making it very exceptional and That's really creating a mentality of we need to look at the cost and we need to make sure that every euro, every dollar, in fact, which is spent is spent because it's necessary to the company. And I think the change of mentality, the change of speed as well in implementation, and Gordon has been helpful in that with the teams coming from Capstone, This change has made for the first time, as far as I know, COTI delivers such a magnitude of fixed cost reduction. And so people cost, non-people cost are the two main buckets. Of course, on top of that, you have some others in COTS and distribution in particular. But yeah, the sense of urgency is completely different. There's no leakage anymore. And therefore, we are going ahead with that. And I think that's pretty key. I mean, what I mentioned during my speech, and I'm sorry to repeat it, but to me that's very important. When you look at the savings, 80 million, and the operating income, 81 million, I mean, you see that this is a game changer for us. Because then this is going to make it possible for Sue and the team to invest behind the brands. So it's going to make it possible for us to build supply to accelerate supply. So that's really on the fixed cost. On Tmall, I don't think we can enter into the detail of the discussion we had. We had to choose a timing. We chose this one. I think the important thing is to do it well rather than to do it soon. That's, again, going to be one of the game changers for us in China. China is a priority. China luxury is a priority. It's going well. We need to accelerate and deal on that, and clearly this T-Mobile agreement is key.

Great. Thanks so much.

Thank you.

Our next question comes from one of Wendy Nicholson of Citi.

Hi. That actually is a good lead-in to my question, which is just more about the China marketplace. You talked about China now being more balanced in terms of makeup and skin care, but it actually looks like there's been a surprising degree of growth in the fragrance market in China. So how focused are you on expanding some of your luxury fragrance brands or investing heavily behind them? And then second, just in terms of distribution in China, are you focused on brick-and-mortar department stores in addition to Sephora, or are you really focusing on Tmall as a primary distribution channel? Thanks.

No, no, it's a bit of an outlet to elaborate on that, I'm sure, but it's clearly – So, A, fragrance is the base, and it's the base of the brand, because when we talk about makeup, we talk about makeup for Gucci and for Burberry, which are as well fragrance brands, so it's not one or the other, it's together, and that's what makes it strong. So, fragrance is definitely something we keep working on, and on top of these two brands, by the way, there are others, like Chloé, for instance, or Tiffany, which are really doing well, and makeup is coming on top, but it's true that on the Chinese market, the makeup partition is bigger than the is bigger than the fragrance partition and is lower or smaller than the skincare partition. So it's definitely an important one. In terms of channel distribution, clearly the own store are an important part. They've been the base of our development in the case of the two brands I've mentioned. So Brick and Mortar is absolutely the base. We have been able to build a strong franchise there, although not very big, but a strong franchise there without the help of e-commerce. We were not in Tmall until last summer. We started with Burberry and now we're doing that with Gucci. When you look at the rest of the competition, there's been a lot relying on e-commerce. Why do we have not? So that makes, in fact, that gives us a solid foundation to not accelerate with e-commerce. But definitely it has to be a game of the two. It cannot be one or the other. If we are in China, it's also to be present in China physically.

I agree with what Pierre-André just said. To complement, I would say that the fact that, to take the example of Gucci and Burberry, they are brands, that are in flagship counters. And on the flagship counters, you can really expose your two categories, which are makeup and fragrances, and therefore doing joint sales. You know, selling the latest Gucci powder, soon the first foundation made, the custom-made for the Chinese market, and the latest Profumo Diori, which is doing very well in China. And I see it as a mix of, on one side, the huge opportunities on e-commerce, but also choosing flagship places where the brand can show their expression. And I don't know if you went recently into a store, if you see the way our brands, Gucci and Burberry to name the two ones in the makeup arena are presented, they really stand out from the crowd. And this is something that is non-replaceable, you know. So flagship distribution where we can have people interacting with other people and at the same time being where people are shopping on a daily basis, I think the two of them are really complementary with this idea to keep, you know, these two hands of – the two hands in maneuvering in this Chinese market.

And one thing we've heard increasingly about the Chinese market is just an elevated level of promotional activity from both, you know, Western brands but also Japanese brands and whatnot. So can you talk about what you're seeing and what you're expecting and – is China going to be a profitable business for you or maybe take some time to invest as you ramp up the revenue side of things?

I mean, we're not seeing that at all, maybe because we are in a specific place, but we are not seeing that at all. And, yes, we expect this market to be profitable and, in fact, to be very profitable. So we don't have any concern of that time.

Thank you.

Thank you.

Thank you.

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

Thank you, and good morning, everyone. So I was hoping if you can talk about the shipping and consumption trends in October and not to take away from the impressive sequential progress, how much for you to continue operation life-for-life in the first quarter benefits from the replenishing of inventory, which I think is something that the industry has talked about. And the second part is just a clarification from your presentation. You mentioned the cost recovery from the KKR agreement of about $12 million in the first quarter. Is that recurring in approximately the same amount going forward? That's just for modeling purpose. Thank you.

Yeah, sure. Well, I'll start with the second one. So this is going to take place as soon as we close, so in a few weeks. We have to keep in place certain costs to make the separation with Bella occur over a period of time of one year in terms of actual logistics and logistic terms and operational terms. These costs represent about 12 million and we are going to to Vela for as long as the agreement is needed, which is likely to be between 12 and 18 months. I mean not likely, it will be between 12 and 18 months for the most of it. Once this is finished, we will stop re-invoicing but we will also dismantle the costs which were necessary for that reason. The costs being today present in Coty because they were in Coty and now we have dedicated them to the Vela agreement. they will be unnecessary after the end of the TSA. On the first one, you're right. In fact, when you look at the life-on-life trends in July, August, September, you see clearly that July was helped by some which can be either because there's been some movement from June to July, or because the base in July a year ago was very weak, or because indeed there is some deloading. And we see that, by the way, both in Remainco and Divesco. Now, since then, we've had the benefit of seeing August, September, and October. And October, for instance, is completely clean of that kind of element, clean of the element of restocking, which I could not quantify, but they both are one of the reasons why the performance in Q1 is better than in the previous quarter. But they are just not, you know, they are not the trend. The trend is there, and October definitely shows that.

Our last question comes from one of Joe Lasky of Wells Fargo Securities.

Hi, thanks. I just wanted to hit Asia Pacific and China specifically from a little bit of a different angle than what you guys have discussed before. Obviously, the performance in that business is weaker than peers and You mentioned in your press release, you know, weakness in travel retail in Asia. And so in that channel, there's been commentary from others, you know, that domestic duty-free market is on fire. And, you know, there's been positive impacts from, you know, more rapid reopening of travel corridors within Asia. So maybe if you could unpack the travel retail channel a little bit and then And then you mentioned a number of initiatives you're doing in China, but obviously, you know, you're lagging with your exposure to the skincare category. So I'm curious what it will take, you know, longer term to improve your presence in that category. I mean, will it be new brands, additional acquisitions, launching Kylie, you know, kind of if you could explain more of a long-term perspective on skincare in China. Thanks.

Yeah, I mean, simply you said that. The travel retail in Asia we have is international and there is no international sites anymore in Asia. So our travel retail business is deeply impacted. We don't have a sizable by any means sizable business in domestic travel retail and therefore we don't benefit from that. And obviously, we don't have for travel retail purposes an offer in skincare, and we don't benefit from that either. So you're right that some of our competitors have shown numbers on travel retail in Asia, which are definitely... far away from ours, but we just don't have the same portfolio. Sorry.

To complement what Pierre-André is saying, I would say that this is precisely the reason why we are accelerating strongly, strongly on first makeup, again, and face makeup, which today is a part of skincare, in other words, with the launch of Gucci, first foundation custom-made for the Chinese customer, soon the same thing with Burberry, So this is one way for us to expose our brands wider than with fragrances. And again, fragrances are doing very well today, as you said, as somebody else said it previously. In Sanya Island, our sales are three triple digit growth. And we are opening new stores, by the way, very, very soon. And second, we are working like crazy to build a skincare portfolio. And the great news is that in terms of skincare capabilities, expertise, patents, and IPs, Coty owns, I think, a portfolio of technologies that's unique today on the market with a lot of know-how coming from the Lancaster brand that's, by the way, number one in sun protection at Sephora in China. around light and environmental aging protection. We're going to build all our brands into this area. Second, around the vectorization of dermatological grade actives. Again, Lancaster is the inventor of putting retinol the right way on the face. Every brand of skincare knows that retinol is the most coveted ingredient for now and for the future. We have also patents in regenerative medicine-inspired repair technologies. in the long wear area, obviously, from the makeup side. And we're going to add in new expertise. We will have probably four or five skincare expertise so that we can build a portfolio brand going from the least expensive to the most super premium brand to really own all these areas since we know that skincare is today happening at every size of the market, especially growing in premium and premium piece arena.

And just to maybe to add to Sue coming back on the travel retail. Travel retail is obviously, we are not saying arms crossed. It's obviously being shocked by the COVID in our case. We are reacting in two directions. One is adjusting the cost structure because definitely this business has to be improved. has to be resized, considering the fact that some of the trends are going to be here for some time. And B, we are redirecting Copsam and Initiative in the places where we think there is potential. So the great thing is that I think we have a good chance to reshape this business and to make it much better, much more useful, much more contributive in the new environment. And talking about scheme, I just want to add as well that there is one brand we have not mentioned which is going to be very important going forward. We are finalizing now with the integration of Orveda as a top premium brand in the portfolio and that's going to be one of the tools we are going to use. You know, all together and maybe to conclude and leverage on this question on the Q&A, we are really actively working on the one hand on cost. And I can tell you that this is not the end. This is not an exceptional thing. We are pushing and we are going to continue pushing and we are going to continue delivering. And on the other hand, on the rebuilding of the portfolio and net revenues, and frankly speaking, what we see in October is good. We have to obviously cope with the environment, but we are much, much more solid. And, well, the best is definitely yet to come. I think we'll end the Q&A now. Thank you all, and we look forward to Zooming you, seeing you, not on the road, but on the network. Thank you.

Thank you, everyone. Thank you. Very nice day.

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