Coty - Earnings Call - Q3 2020

Transcript

Operator (participant)

Good morning, ladies and gentlemen. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's third quarter fiscal 2020 results conference call. As a reminder, this conference is being recorded today, May 11th, 2020. On today's call are Pierre-André Terisse, Chief Operating and Chief Financial Officer, and Pierre Laubies, Chief Executive Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. All commentary on like-for-like net revenue reflects the comparison of the business at constant currency in the current and prior year, excluding the impact of acquisitions and divestitures. In addition, excepts were noted.

The discussion of our financial results and our expectations reflects certain adjustments as specified in the non-GAAP financial measures section of the 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. Terisse.

Pierre-André Terisse (COO and CFO)

Thank you, Maria, and good morning, everyone. Welcome to the third quarter conference call of Coty for fiscal 2020. I'm together with Pierre, who is in Amsterdam, Olga in New York, and I am myself in London, and we're very happy to host this exciting conference call. Before we start and we go in the middle of the topic, I just would like to thank Coty teams for what they have done and what they have demonstrated for the past few weeks and months now. Beyond their hard work to handle the situation from a business standpoint, this crisis has been the opportunity for many associates at Coty to take or contribute to many initiatives which illustrate the role we want and we try to have in this environment.

We have been producing hydroalcoholic hand sanitizer in 12 of our plants in 10 different countries, including in France, in the U.K., in Germany, in Monaco, and in the U.S., and we have donated it to frontline. Our brands, on the other hand, have been donating gloves and caps or shampoo to local hospitals and everywhere in the group. Numerous relief funds have been established throughout Coty to contribute to what has been a huge solidarity. My main takeaway, in fact, over the past few weeks is the great commitment, the energy, and the solidarity which has been shown by your associates. Before we talk of what we are going through and what we are building, I just wanted to publicly thank all of them and each of them for this. Now, moving to the following page, this is the summary of the upcoming call and release.

As you have seen with the press release we've posted, we're announcing something which is far more than just earnings today, but rather important initiatives which are going to accelerate the transformation of Coty. The first of them is obviously the announcement of a strategic partnership with KKR. That's a major step with a $750 million convertible preferred share subscribed by KKR, improving immediately our liquidity in a strong way. At the same time, the signature of an MoU for exclusive talks to be held with KKR on a 60/40 partnership on professional beauty and retail hair for an enterprise value which is basically reflecting pre-COVID conditions at $4.3 billion, or 12.3 times fiscal 2019 EBITDA for a scope which does not include Brazil, importantly.

The second element is the delivery of like-for-like net revenues which are down in Q3 by 20%, and I think that was—I admit that's clear a few weeks ago—but with a strong operating delivery. We'll come back on that, and that's been for us very much a call to action, and we are announcing today a comprehensive plan to reduce our fixed cost base by $700 million or 25% to make sure, in fact, we have the right cost structure and we adapt to the new environment fast enough. The last element is important as well is the preparation of the restart which we are going through at the moment with a focus on what are the most relevant platforms of Coty in this environment. Here, we've mentioned three—we'll come back on that: e-commerce, Kylie Beauty, and Mass Beauty.

Let me come back maybe on these different elements, and then we'll have a look at the earnings. On the strategic review first, the third bullet is an important element. We have concluded that Brazil Mass Beauty operations would remain fully in Coty. They are one of the key assets of our consumer beauty brand unit, and we are very happy that they will stay within this unit and keep contributing and helping us build consumer beauty brands. The second element is that the circumstances have, in fact, created opportunity and a creative option which is a 60/40 partnership on professional beauty and retail hair which we call VELA. That's a creative because that's basically building things which otherwise would have been difficult in the current context, i.e., building continuity.

I think this element of continuity is very important for the business and very important for the partners, and it creates an element of sharing value, i.e., Coty will continue being exposed and benefit from the value creation agenda of this 60/40 partnership. The valuation, as I mentioned, alluded to, reflects the strategic nature and the resilience of this business at more than 12 times 2019 EBITDA, which, given the current circumstances, is a real sign of strong confidence. We expect that this is going to bring to Coty incremental cash proceeds of $3 billion, so just this part, the 60/40 JV, and that will come in addition with the next part which we are going to see afterward, i.e., the 750-1 billion preferred stock investments. We have discussed and agreed the main terms, but obviously, that kind of agreement is complex.

Beyond the main terms which have been formalized with an MoU, we now need to complete the work and agree on everything. That is a work which is going to be taking place in the coming days and months with what we had said from the very beginning by summer. We expect a closing of this transaction to take place within six to nine months post-signing, so that should be at the very end of 2020 or beginning of 2021. That is the conclusion somehow of the strategic review, but the strategic review has carried a second important element which is the issuance of convertible preferred shares for $750 million, which are expandable to $1 billion upon signing of the VELA deal. This $1 billion, 750 plus 250, comes on top of the $3 billion I was referring to before.

The preferred shares will carry a coupon of 9% and have a conversion price which is 20% above Friday close, and therefore is set at $6.24. Beyond the strengthening of Coty balance sheet in a very meaningful manner, this formalized a broader partnership, and Coty will benefit from the presence of two representatives of KKR at its board. That is the obviously key element in the strengthening of our liquidity. Before that and ahead of that, we had announced a few days ago that we had been reaching, concluding an amendment of our credit agreement with our lenders and a one-year holiday of our covenants to reflect the fact that the covenants will be distorted by the crisis.

We had also, at the same time, a bit ahead of that, in fact, decided to suspend the cash dividend until we come back to what we believe is a proper leverage below four times net debt to EBITDA. As a result of all that, obviously, liquidity is strong. It was strong at the beginning of Q4 with $1.3 billion in cash on hand at the beginning of the quarter, and we expect it to remain even stronger, in fact, to be even stronger at the exit of the quarter with $1.5 billion-$2 billion at the exit of this quarter and the exit of the fiscal year. That is really what I wanted to say about the transaction we announced today and the strategic partnership with KKR.

The other very important element, next page, thank you, is the amplification of our turnaround and the reduction of our fixed costs. Altogether, we have designed a plan which aims at reducing our fixed costs by $700 million by 2023. That's going to represent 25% of a base of $3 billion of fixed costs in fiscal 2019, and we are taking fundamentally three initiatives to do so. The first is going to be a revisiting of our end-to-end supply with a view to adapt to the change of demand to increase our flexibility, extremely important, but also to improve the efficiency and to reduce our costs by an amount of $100 million. I'll come back to that in a minute.

The second element is the acceleration of the procurement initiative in two areas: in the area of business services first, but also in the area of commercial expenses where we have not, in fact, leveraged or scaled to large the cost, and we are going to do so. We have started to do so, and we are going to complete it and to amplify it. At the same time, our intention is that part of the savings narrative are going to be used to increase the level of support behind our brands and the productive support. The third element is about the completion and the expansion of our O2 program. O2 is the change of organization and the program to get a leaner organization which was designed as part of the turnaround. We have been, during the past few months, finalizing the negotiation with the unions.

We are now in a position to implement that. We are not only going to implement that, but we are going to see the way we can further simplify the organization by leveraging our processes, reviewing our network. We have many, many sites and locations around the world, and at the same time, we will be adding compensation. Between the various projects I'm mentioning here, in fact, we have a pool of $850 million, an ambition of $700 million because we know that we need to take some headroom. A number of them are quite advanced, and we expect to deliver in fiscal 2021 more than a third of the savings. It is not a program which is going to be back-ended. It is a program which is going to start delivering as soon as the coming fiscal year.

The goal we have is really to make Coty more efficient, to make it simpler, and to make it fit for growth. The deployment of this fixed cost reduction program, in fact, allows us to confirm or meet operating margin target by fiscal 2023 on a scope which is a scope post-strategic review, so without the 60/40 partnership in professional and hair return. I'll now very quickly go on each of the streams to give you a bit more color on what it is. On the supply side first, our manufacturing footprint consists of 13 factories which are running at an average utilization which is below 40% with a number of complexity over 30,000 product flow combinations. We have a big complexity of portfolio with more than 50,000 SKUs.

In all that, we have a speed-to-market which is, in our view, suboptimal, and we estimate we need to accelerate that by 20% or more. Altogether, given the downsizing of our business, we estimate that we need to go for a fixed cost reduction of 20%. The base of the cost of supply is higher than $1 billion. 50% of it is fixed, so it means that a reduction of 20% would mean that we are going to target cost savings by $100 million. There is a number of projects which have been visited in the past. Some of them are relevant. Some of them are less. The supply team led by Richard is going to put everything together and to design a roadmap which is going to be ready by the end of August for an implementation which will start shortly after, depending on the topics.

That's the first element. The second one is about procurement. Again, the fragmentation of Coty has prevented us to reduce costs on two important fronts. On the right side of the screen first, our network remains too exploded with many offices around the globe, high travels, high IS costs. We will capitalize on the moves which we have initiated in the past 18 months. For instance, some of you know that we have been—we are downsizing our presence in the Empire State Building, or we are going to close our office in Paddington, and we are going to reduce the cost linked to the network to continue that movement. In the same way, we are going to reduce the recourse to external services which are obviously costly by themselves.

On top of that, I've been in the past generating an inflation of projects with often a level of delivery which was not high enough. We expect these various measures to help us save 30% of our non-people costs. That would be, by the way, putting us in the median of comparable companies in terms of cost to revenue, not in the top quartile and in the best in class, but in the median. The possible measures, the possible improvement, as well as benchmark, are clearly showing us that this is possible. On the left-hand side, ANCP. I just want to be clear here. We are not looking to cut ANCP. What we are looking at is rather to increase their impact.

Pascal, our procurement head, and the teams have already progressed on the organization of media and concluded global negotiation already for a part. They will start delivering in fiscal 2021. The second element is that we yet have to platform our marketing materials, furniture, tester, etc. We are very often fragmented and taking initiative at different costs and generating complexity everywhere. We are starting the project of platforming, and here, the saving at stake are very, very sizable. We will, in addition, increase the spend accountability and make sure that every expense goes direct to P&L and is not flowing in a different manner starting from the 1st of July. Now, as I said, we do not want only to get efficiency, but we want as well to increase our impact.

Therefore, we are going in this program to reinvest 50% of our savings immediately in productive ANCP and in working media in priority. The third bucket is about making Coty simpler. We have much to do to make this organization simpler and more effective. You remember that we have initiated a downsizing of our organization a year ago with a target of $180 million. Now that the negotiation has been concluded with the work partners during the third quarter, we are ready to deploy it. Our new HQ, by the way, in Amsterdam has opened last week, and teams are progressively migrating, although obviously, COVID has made it slower than planned. One of the elements of—I mean, one of the elements of this downsizing has been really the writing of a Coty operating system, which is basically the description of accountabilities and interdependency.

This work has evidenced massive opportunities for process simplification and transversal efficiency, and that's going to help us further decreasing our structural costs in the future. In addition to this, we'll be revisiting our compensation system and HR policy with a view to better leverage and grow Coty talents. To monitor all the above, I mean, the three pages and the $700 million program, we are setting today a dedicated governance. I, in my function as COO, am going to lead the program with a subset of the EC, which is going to be made of people from supply, from procurement, from HR, from finance, from IS, but also the head of the two regions we have, EMEA and AMAPAC. We have appointed our head of ISIT, Jérôme Auvinet, Chief Transformation Officer, and he will coordinate the various aspects of the transformation.

That is, in a nutshell, the program on which we are going full speed right now and which I just want to repeat is an expansion of the turnaround, an acceleration of the turnaround, and is the right level of savings we need to be able to address the size of Coty right now and give us flexibility in our growth. I will now turn to the third quarter result with a first snapshot before I hand over to Pierre. As expected and shared with you earlier in April, our net revenues have declined over the quarter by 20% on a line-for-line basis. While January and February were showing progresses, in particular on the performance of our brands in consumer beauty, COVID-19 already had impacted our performance in Asia then in January-February.

Obviously, the big turn happened in March with the first lockdowns in Europe, which started in Italy, expanded to other markets pretty quickly. Not only our net revenues were impacted, but the operating income was impacted even more deeply by this loss of revenue and margin, as well as by some one-off item. I will come back on that. Obviously, our EPS was impacted as well as a result of this, and our cash flow was negative, as is, by the way, usually the case in the third quarter, but obviously significantly more here given the drop of profit. For the first nine months, on a cumulative basis, our net revenues are now declining by 7% line-for-line. Our operating income remains in line with that of the first half at $480 million, and our cash flow is broadly stable.

I'll come back at the end of the presentation on the main profit elements, but I will hand over to Pierre to talk about the top-line trends we have observed, both on the impact of COVID but also on our performance in terms of sell-out and launch. Pierre, over to you.

Pierre Laubies (CEO)

Thank you, Pierre-André. As this is my last earnings call with Coty, I want to take a moment to thank everyone on this call for accompanying us on this journey, which continues, of course, as Pierre-André has just indicated. Especially, I want to thank the Coty teams for the tremendous achievement of work and effort that they have put in over the past two years to lay down the foundations for a stronger company.

The Coty associates have demonstrated both in our first phase together and now in these testing times, resilience, as well as an inspiring ability to learn and adopt new ways of working. The aim of this approach, as you may remember, was and is to strike the right balance between creativity and discipline, and we are beginning to see the results of this work materialize across several brands, markets, and initiatives. As you can see on this slide, we had a number of strong innovation successes this quarter, even as COVID began to disrupt the demand picture. Starting with Covergirl, we continued our laser focus on improving e-commerce fundamentals. As a result, Covergirl recently surpassed a competitive digitally native brand to become number three mass cosmetics brand on Amazon US.

The brand's improved performance both online and offline was in part fueled by the launch of Clean Fresh earlier in the quarter. This was the first clean label product line across established mass cosmetics brands and quickly became the number one foundation launch in mass. Similarly, Rimmel maintained the momentum we have seen in recent quarters, fueled by media support and strong in-store execution, and supported by the recent launch of Scandalized Volume on Demand mascara. Rimmel has now reached its highest market share in the U.K. in over five years at 31%. Sally Hansen continues to fire on all cylinders. The brand has continued to build on its leading market position, reaching its highest U.S. market share in several years at 45%. This is in part due to the launch of clean label line Good Kind Pure, which has already reached close to 3% of the main market.

In prestige fragrances, we had a number of great launches. Only a few weeks after launch, Boss Alive became the number one female fragrance in Germany. Similarly, CK Everyone, our first clean label mainstream fragrance, was seeing strong momentum in multiple markets as a top three launch at Macy's and top five in markets like the U.S., Canada, and Germany. While the lockdowns are impacting consumer demand and access, these launches, amongst others, have clearly resonated with consumers and will fuel our recovery once retailers begin to open. Moving to our performance by segment, in the Americas, like-for-like revenues declined 18.8% as a result of the lockdowns at the end of the quarter. This resultant operating deleverage pushed operating margins lower to 2.6%. However, building on the progress outlined already last quarter, we continue to see green shoots in the region.

Many years, Covergirl's market share in brick-and-mortar retail stabilized and actually expanded even as the mass cosmetics market has been impacted. Sally Hansen, which was already expanding market share, further accelerated this gain with share up 100 basis points. While Clairol also continues to see improvement in share trends. As the COVID pandemic spreads to the Americas, leading to store closure and stay-at-home orders, we line. Our e-commerce sales accelerated beginning in March and remained very robust through April. We saw particularly outsized e-commerce growth within our mass business, which, as you can see on the slide, grew in the US 164%. While not quite as strong, we were also very pleased with the strong sell-out growth within US prestige, which accelerated meaningfully in April. In the EMEA region, like-for-like revenues fell 20.1% due to the COVID situation and resulting lockdowns that were put in place.

This like-for-like decline led to an operating deleverage pressuring the margin to minus 2.5%. Despite the COVID-related pressure, we do see evidence of our turnarounds taking hold. Within the mass business, some of our key brands were able to take market share to end Q3. Rimmel, Max Factor, and Bruno Banani all grew market share by 50 or more basis points in brick-and-mortar during March. On the e-commerce side of our business, we have seen sell-out trends accelerate as store closure and lockdowns were implemented. Similar to the Americas, we have seen particular e-commerce trends within the mass beauty category with some regions, such as the U.K. and MEA, growing in excess of 100%. Our prestige e-commerce sales growth was not quite as strong. However, we have seen sell-out trends accelerate through the month of April as many consumers returned to purchasing prestige beauty after weeks of being locked down.

In the APAC region, like-for-like revenue fell 34.8% as the region was one of the earliest hit by COVID during the quarter. Both China and travel retail were hit particularly in Q3. Encouragingly, we are starting to see trends improving in China, though many markets continue to have lockdowns in place. Overall, the like. Respectively of market share in Australia during March. In addition, we also grew market share within the China prestige makeup market. Although our overall market share remains quite small today, we continue to believe the prestige makeup market, particularly within China, will be an important long-term growth driver. Moving to e-commerce, we have experienced very strong growth in recent months, similar to other regions as consumers shifted more spending online. Just to highlight a couple of markets, Australia and Japan, with both experienced e-commerce sell-out in excess of 100% during the March and April period.

For our professional beauty business, like-for-like revenue declined 11.9%. This decline was due to the COVID-19 pandemic, which forced many salons to close, particularly during March. Moreover, the like-for-like decline led to operating margins being pressured, falling to 5.4%. However, we continue to be very pleased with the e-commerce trend for the professional beauty business, including GHD, which delivered another quarter of very solid growth. As I just mentioned, many salons were forced to close during the quarter and still remain closed to these days. Despite this, demand for salon services such as coloring remains very strong. Based on a survey we conducted in the U.S. and the U.K., the majority of respondents want a salon appointment within the first two weeks of salon reopening. We view this as a very encouraging sign that the difficulties many salons are facing are likely to be temporary.

Before returning the line back to Pierre-André, I would like to reiterate my thanks to all the Coty associates for the journey achieved, accomplished together. They all have been truthful in their action and attitude to our vision that to build a bigger business, we needed first to build a better one. I have just shared with you a few of our green shots. There are many others growing currently in the company and many more to come. I know that the current times are very testing, having lived myself through some of these events in the past. Yet, I know also that our people have the skills and the drive to get through this crisis while staying the course of strengthening our fundamentals.

I have absolute confidence that the Coty people will not waste this crisis, that they will use it to individually and collectively learn and grow, and that our company will come out of it stronger than ever. Pierre-André, I'm turning the mic back to you.

Pierre-André Terisse (COO and CFO)

Thank you, Pierre. Thank you, Pierre. It's good to have had you and to have you. Now, I'm turning back to the result of the third quarter, taking over on the minus 20% like-for-like net revenues, which in dollar terms meant a decrease of net revenues like-for-like by $370 million. Given that the impact was late in the quarter and that we did not really have the necessary time to react, there was no evolution of our fixed costs, which remained broadly flat versus the previous year.

The loss of revenues was only mitigated by variable costs and went for almost half of it straight to the operating income for a loss of OI of $174 million. On top of these $174 million were recorded several non-recurring charges for a total of $53 million. First, the depreciation of the ruble and the Brazilian real led to some reevaluation of intercompany receivables and resulted in foreign exchange losses. Secondly, our excess and obsolete provision was boosted by COVID as, obviously, mechanically, our expected sales in the coming 12 months decreased. As a result of that, we made some provision on the inventories beyond 12 months. Last, we could not incorporate to our costs certain factory to our COGS, sorry, certain factory costs as we had been slowing down or even stopping the production in those factories.

As a result of all the above, the operating income went to zero for the quarter, down by $227 million, and our EPS was negative given the fact that we have interest and tax charges below the operating income. Next slide, sorry. Our free cash flow is usually weak at this time of the year in the third quarter, but it was obviously amplified by the weakness of the EBITDA, which stood at $103 million. The working capital and the one-off costs were negative for $322 million, and we also closed at the very beginning of January the King Kylie deal, investing $600 million, and that together increased the debt to a level of $8.1 billion at the end of the quarter.

I will conclude by, after having talked of the cash, the liquidity, the reduction of our costs, I will conclude by just leveraging on what Pierre has been telling you on the performance of our brands in the middle of this crisis and this quarter, having a look at what we see as some of our key assets for growth at the outset of the recovery, and that's quite interesting. On luxury, our innovation pipe comprises many projects. Some of them are yet to come, and you see on the left of the chart the Daisy Petals by Marc Jacobs, and some of them have been very successful at launch, as mentioned by Pierre, although COVID had obviously interrupted the dynamic, and this is the case of Boss Alive and CK Everyone. This is obviously, as we reactivate our distribution, going to be an asset for us.

The mass beauty is increasingly so. The recent trends have definitely shown progress for three of our CB brands. You remember that in the last quarter, we had been talking of Sally Hansen and Rimmel, which continue performing well, but in addition to that, Covergirl, with the launch of Clean Fresh, sorry, has been clearly improving in terms of trend, and this is in a context where mass beauty is likely to benefit from a foreseeable switch to affordable beauty by consumer. The other element which is interesting is that the OpEx program we had been designing and the grow the head, cut the tail is going to have a very direct use in these circumstances because we have to prioritize, obviously, the restart.

We cannot restart everything at the same time, and we'll be restarting in priority the SKUs and the products, which we believe can grow faster and can build a stronger net revenue base. The following element is the e-commerce. You probably have heard that from many companies. We have, as many others, shifted resources and energy to this channel with some success, I must say. Sally Hansen and Covergirl gaining market share on Amazon in the US, and I believe Covergirl as well. Covergirl, in particular, became number three brands, so gained one position. It was number four. It became number three during this quarter, so we are progressing and progressing well. We also accelerated the preparation to expand Kylie. We'll be launching Kylie in Europe this month in May. I think on the 22nd of May, that's going to be done with Douglas.

At the same time, the performance of skin care for Kylie in direct-to-consumer has been strong, and we're working at widening and strengthening the platform. I'm mentioning these several examples because these are all the sets and platforms which are relevant in the current circumstances, and have been showing strong or improved trends, and we will be using them clearly in the context of the results, which we believe is going to be gradual and selective depending on the markets and which we, therefore, will be running in a very articulated and organized manner with a view to maximize our impact and to maximize our success with consumers. I will move now to conclusion and make sure we have some time for questions. I just want to say that we are very excited.

It's obvious that we are going through a time of uncertainties, but we have been getting equipped to face those and to not only face those but to leverage the uncertainties and the opportunities we are going to cross. We have now the right balance sheet. We have the right balance sheet now, and we have an even stronger balance sheet at the end of the year. We have the right program to adapt our cost and our mindset, and I think that's very, very fundamental with the $700 million cost reduction program. We have the relevant and, we believe, the right top-line levers, and therefore, we are all very excited of having all these assets in hand and be able to build something very attractive. That's all for this pretty long presentation, and we'll try to answer your questions now. Thank you.

Operator (participant)

Thank you. The floor is now open for questions. To ask a question at this time, please press star 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 the line of Nik Modi of RBC.

Nik Modi (Managing Director)

Yeah. Thank you. Good morning, everyone. And Pierre, great working with you. Good luck going forward. Just two questions on my end. One is on the taxes related to this transaction. Pierre-André, if you could just give us any perspective on how to think about that. The second question just gets down to your margin targets and what kind of assumed top line have you embedded in that assumption. Thank you.

Pierre-André Terisse (COO and CFO)

Okay. Thank you, Nik, and by the way, good to talk to you. On the taxes, we're talking of an amount which is going to be within $300 million. Obviously, we need to complete the calculation, but that's going to be within $300 million. On the margins, we have to assume that we don't know what the growth is going to be. The reality is that I think we have everything we need to capture it, but you and I see the environment. We see the lockdown stopping and then restarting. You see very well the social distanciation and its impact on the restart of the business. Therefore, I have, as a CFO and a COO, I have to assume that it's not going to get better soon. If it does, that's perfect because I will have the right cost structure, but if it doesn't, I need to get protected.

In building that, I have assumed in building this mid-teen margin, I've assumed that we would not come back to—or we needed to be equipped to face the case where we would not come back to 2019 net revenue level before the back end of the plan and even after that. It will take us time to do so. Even in this case, even in the case where that will happen, we will be delivering the mid-teen, sorry, OI margins I've been talking about.

Nik Modi (Managing Director)

Excellent. If I could just throw in one more, it seems pretty impressive, actually, you're ramping up your cost savings quite a bit without extra cash charges. I just wanted to see if you could provide any context around that because this is the first time, at least I've seen that happen.

Pierre-André Terisse (COO and CFO)

Sure. The reality is that in the progress we've made so far, we've seen a level of one-off costs which has been narrower than what we had indicated. We had been pretty careful at the outset of the turnaround because the history of the company was encouraging us to take some headroom. Now, the reality of what we have been managing for the past one year has been lower, and therefore, the envelope we had to deploy the turnaround is enough to cover the additional costs which we will incur. Having in mind two things: A, there's a lot in the plan which is not going to be—or not only going to be—about people and severance. There is a lot which will be done through method and discipline rather than through severance. The second one is that, yeah, we've improved.

I mean, for the past one year with the team, it's a silent work, but it's a work which we have done very methodically. We've been trying to make sure that we would minimize these one-off costs because we knew that they had been extremely harmful for the company. Yeah, I mean, with this $500 million net, by the way, because we believe in the recirculation, we can also have some capital gain which are going to finance some costs. We can do it with this envelope.

Operator (participant)

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

Robert Ottenstein (Senior Managing Director)

Great. Thank you very much, and congratulations on the transaction. A lot of moving pieces here, and I just want to make sure I heard this right. I think maybe I didn't, but you're talking about taking $700 million of fixed costs out, but I think I also heard that the total that you're going after is $850 million. Is the $150 million reinvestment in the business? I'm just trying to understand those parts again, and again, my apologies because I know you mentioned it. Then second, it looks like the working capital was pretty negative in the quarter. Can you talk a little bit more about that and what the working capital outlook looks like for the rest of the year? Thank you.

Pierre-André Terisse (COO and CFO)

Yeah. Hi. Thank you. No, indeed, let's be clear on that. What I said is that we have a total program, a total list of opportunities, if you wish, serious opportunities, obviously, not only ideas, which amounts to $850 million.

We feel sufficiently confident in these opportunities to be able to commit on $700 million, which means that we assume that some of them are not going to be realized or not realized fully. Every time you do that kind of program, that's what you have to assume. In the $700 million we are discussing, most of the elements are gross, but there is one element which is net, and it's the ANCP components, which, broadly speaking, is going to be, I mean, efficiencies. We expect efficiency to be in the region of $250 million-$300 million and half of that to be reinvested. In the $700 million, I'm counting only half of the saving I'm going to make on that side. There are two elements.

One is the fact that we have headroom, and the other one is the fact that we are counting only the net of what we save on the ANCP because we think it's important, in fact, to do an exercise of reallocation to what is working and what is going to be activating the demand. On the working capital side, I think the dynamics to have in mind are the following. We do not have much increase in inventories now. We had at the beginning of the quarter because at some moment, we saw demand going down, but obviously, production did not stop right away, but it stopped growing. The interesting element is about payables and receivables because we have seen, on top of the decline of net revenues, we have seen the situation of some of the customers being difficult.

Not many have come to serious difficulties to the point that they will become a risk for us, but many of them have been in difficulty, basically telling us that they needed help and support and that they will be postponing some payments. We have to take that on board, but obviously, we have to take that and share it with our environment. We have been adjusting the cash flow and the way we manage cash to make sure that we will be spreading and sharing this element of construction of liquidity which exists across the supply chain in our industry and in many industries at the same time.

I mean, all these details to maybe be a bit long, but to say that we'll see in Q4 another quarter of negative evolution of working capital, which we are controlling very tightly, balancing basically the need to control cash and, on the other end, the need to continue building some relationship with our partners. Our next question comes from the line of Vega Alway of Deutsche Bank. Yes. Hi. Thank you. My first question is just about the $700 million of reduction in fixed costs. How quickly do you think you can get there? I think it sounds like it's by fiscal 2023 where the program ends, but I'm wondering if you can give us some guideposts in terms of what type of savings we should expect in fiscal 2021 as a start. I mean, my answer is going to be simple.

It's not going to be backlogged. It's going to be more front-loaded. We expect savings in fiscal 2021 to be more than a third, between 35% and 40% in fiscal 2021, and then probably a third in fiscal 2022 and the remaining in fiscal 2023. The reason for that is that, again, I mean, some initiatives, first of all, are part of the turnaround, so only two-thirds of it is incremental. That's the first point. The second point is that some initiatives are going to be leveraging on the current circumstances and what we are going to do on travel, what we are going to do on consulting are clearly going to be the extension of the crisis management mode we've been in for the past few months, as many other companies.

The last element is that many things have been studied at Coty, many projects which had not been implemented because we had decided to pursue other priorities. Now we have put them together. They exist. They have a lot of strong foundation, and some of them can go pretty fast. That is the reason why we will go for the phasing I mentioned.

Operator (participant)

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

Olivia Tong (Senior Equity Analyst)

Great. Thanks. Good morning.

Pierre-André Terisse (COO and CFO)

Hi, Olivia.

Olivia Tong (Senior Equity Analyst)

Hi. How are you?

Pierre-André Terisse (COO and CFO)

I'm good.

Olivia Tong (Senior Equity Analyst)

Good. I guess first, just your businesses are very different. Some are significantly hurt by the pandemic and the recession that is going to come, like luxury. While one could argue that consumer beauty should hold up better given wider availability and channels that are open. Can you talk about your view and then maybe a little bit in terms of performance, beginning of quarter to end of quarter, and then April trends across your key businesses? Thanks.

Pierre-André Terisse (COO and CFO)

Yeah. As I said, the beginning of the quarter was showing, in reality, three different trends. A, remember that we've been going from divisions to segments, and there was some level of noise on that. B, more importantly, we had the beginning of COVID and the slowdown of travel retail following the Hong Kong issues. The performance of Asia and travel retail was weak.

At the same time, we have been seeing very successful launches, a pretty good performance of, yeah, of CK Everyone, of Boss Alive, and very interesting performance from Covergirl, Clean Fresh, and from Good Kind Pure, the two or three brands which we launched together with our sustainability platform. That was a mix of it with plus and minuses, but broadly speaking, in line with what we expected. Then March, and to be precise, from the second week of March became very much under pressure. I mean, it started in Italy, but it has been spreading to Europe very, very quickly. April, obviously, we expect is going to be—I mean, it is going to be significantly worse. May is likely to be in the same regions. The big question is going to be about June and our ability to recover.

I think it depends very much business by business and probably market by market among other reasons because the phasing of the pandemic and the lockdown is different depending on the countries. Business by business, people want to go back to hairdresser. I think that's fairly obvious for everyone. The opening of some luxury stores is going to take a bit more time. April and May will be difficult. We expect June to start showing some sign of recovery, and we expect Q1 to be showing as well some sign of recovery, but I think Q1 will not be, by any means, a return to a previous level and to normal.

Operator (participant)

Our next question comes from the line of [audio distortion] of Jefferies.

Thanks. Good morning, everyone. Just a follow-up question on your e-commerce comments. It seems to be the one thread that was pretty positive across all of the segments. I'm wondering if you can maybe break down for us across Mass, Pro, and Prestige what your strategies are to grow your online share and how that may transition or advance coming out of the crisis. Thank you.

Pierre-André Terisse (COO and CFO)

Pierre, you want to take that?

Pierre Laubies (CEO)

I'll take it up, Pierre-André. Yeah, sure. I think really where we decided to make a decisive effort in e-commerce has been really on consumer beauty, where we are really underplaying our fair share. In luxury and in professional, clearly, we continue to strengthen, and the growth has been solid aligned with the market growth, so that feels very good.

Where we have been really, as I said earlier, catching up has been on the consumer beauty, where we have, by and large, if I look at the last month, our business is growing globally by 75%. It is a very, very good result, at least for the place where we can get data. I am talking sell-out here, which is a very, very substantial acceleration for market on the same panel, which we measure to be in the mid-teens, so around 15%. That is a spectacular performance. What have we done that? I mean, to be honest with you, a lot of basics, right?

A lot of focus on conversion, a lot of focus on the basics of e-commerce, building our skill set into the organization, and really building a playbook, building a playbook, deploying the playbook, deploying the playbook in the key market, and after that, deploying the playbook from the key market to the smaller markets. I think that we have made a step here, and we have made a substantial step change, and I do not see why we would go backward going forward. That is really very pleasing. Again, in my view, it is very exemplary of the culture that we want to create, a culture of drive, but also a culture of discipline and distribution of playbooks so that makes sure that everybody catches on that. We feel very, very good about that.

In the same way, we feel very good about our general trend in consumer beauty overall. To give you a bit of data, I'm talking like a combination of brick and mortars and e-com. If we look at our business in consumer beauty, something like 12-18 months ago, we would have lost market shares in 80% of our market. Now, in the last period, we are stable or gaining share in 80% of our markets. Very often, the reason why we lose share is because we have made active decisions of withdrawing some brands from the market, for instance, from Bourjois in the U.K., right, where we knew we were not able to operate at scale. I'll be honest with you. I think we are working the plan, and the plan is working.

Okay, we have the crisis, but I really believe, and I said it earlier, I believe we will come out of this stronger because we now start to embed our OpEx program, our conversion-focused program on e-commerce, our advertising program, our marketing, our investment at scale behind a more limited number of brands, as well as, yes, we have experienced a bit of setback, but the focus on gross margin, lowering promotion, building working media, all this stuff works.

Operator (participant)

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

Pierre-André Terisse (COO and CFO)

Hi, Lauren.

Lauren Lieberman (Managing Director)

Good morning. Hi. I guess I want to go back and think about today versus last July and just thinking about strategic priorities from here versus what they may have been and how they may have changed since July. As you think about kind of the pro forma portfolio, would you say that you now have what you need to grow? I know you've made the comments on 2019 when it gets back to that, but let's try to pretend in a non-COVID world, right? Would the portfolio be better structured for growth now, or do you still need additional assets to kind of get towards those faster-growing subsectors within beauty?

Pierre-André Terisse (COO and CFO)

Yeah, yeah. I mean, I'll start, and we can play it together.

I think the fundamental difference is a year ago is exactly what we said we wanted to achieve with the opening of the strategic review, i.e., refocus the company, refocus the company on fragrance, on cosmetic, on skincare, give ourselves a number of categories on which we can make a difference, which are basically adapted to the level of human investment efforts we can have, and at the same time, resize the balance sheet to make sure that we have the means to develop these categories and to win in these categories. Yeah, I mean, my answer would be that we have achieved exactly what we said we will be achieving. We have, in luxury and in fragrance in particular, a number of assets which are evidenced by the new launches we are doing and by the success of some of our brands.

In consumer beauty, we have the OpEx simplification program and the program of reinvestment behind our brands which start working fundamentally. In skin, we need to accelerate. Now, we have one very, very strong and important element, which is playing both in skin and in direct consumer, and this is Kylie. I can promise you that this is going to be a real asset for the company. All that with, A, less debt, level of debt, which is, I believe, the right one to have financial flexibility to support that portfolio, and B, with a real intention and program to address the simplification of Coty and to make it not only lighter in terms of cost, but also, sorry, much more manageable. Yeah, I think strategically, we have resized the company, rescoped it to something in which or with which it can win.

Operator (participant)

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

Mark Astrachan (Managing Director)

Yeah. Thanks. And morning and afternoon, everyone. I guess just first, maybe a bit more detail on the deal announced. Can you maybe preliminarily talk about dilution when the deal closes in six to nine months? On the Brazil business, I recall your commentary about it having a fairly large hair component. I guess I'm curious how to think about that business now, given what has been announced and how to think about it competitively as well as whether any pieces of it or how much of the business gets sold as part of the deal. Thanks.

Pierre-André Terisse (COO and CFO)

Yeah. Thank you. In terms of dilution, we'll come up with precise numbers.

The stage at which we are is an important step, but do not forget that we are only talking of an MoU, and there is a number of parameters we need to fix, including the precise carve-out, the build-up of the stand-up of this new 60/40 company and the full way we are going to address the consequences on Coty. What is sure is that there are stranded costs, but the stranded costs are going to be addressed for a part by the—sorry—by the $700 million. Yes, you are right. It is more than that, but it is a part of that. Basically, that means that similar to what we do in luxury, and the platform we have with HyperMarcas is an extremely efficient platform in Brazil with not many equivalents in terms of its ability to produce, distribute at the right cost, and with efficiency and with reach.

My bet is that this is going to continue for a quite long period of time. Conversely, we are reorganizing our luxury business in Brazil, and we have decided that we will be leveraging the HyperMarcas platform to try and accelerate our penetration in the rest of our businesses.

Operator (participant)

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

Wendy Nicholson (Co-Head of Global Consumer Equity Research Sector)

Hi. Good morning. One of the things I know you talked about last July was a need or a desire to really pull back on your SKU assortment and really narrow your SKU count. And just in the context of what you mentioned in terms of the conversations with some of your retailers who are going through a difficult time right now, I'm just wondering, is that an opportunity to move faster on the SKU reduction? If you could update us, how much progress have you made? Is COVID-19 a particularly good opportunity to move faster, or what's your thinking on that SKU side? Thanks.

Pierre-André Terisse (COO and CFO)

Pierre, you want to take, or you want me to do?

Pierre Laubies (CEO)

Sure. I think, honestly speaking, I don't think that COVID makes a difference to our plan. We had the plan to focus on our power SKUs and to give them a disproportionate share of shelf and align, I would call it, our power SKUs across the line from a distribution, promotion, and advertising standpoint. This is exactly what we are doing, for instance, with Covergirl in the US. Our view is that clearly, yes, we can always accelerate, and we will because we have now, I would call it, refined our approach.

We started with a limited number of markets, and now we see that this plan is working. We are expanding, and we are accelerating. We are now at the second phase where we are looking at a combination between markets. We have not only looked at complexity within market, but now we are looking at complexity between markets, and that's the next stage of the rocket on that one. I mean, I'll be honest, I don't think COVID changes everything to the plan. We need to continue to push. We need to continue to push our core franchise. As I said earlier, to have a total activation through the line from distribution to promotion to advertising through our core franchise.

We know that it is also the way we build brand attribution for our advertising support to make sure that we advertise the core line, the core sub-franchise of the brand. We have seen it as a fantastic result in Covergirl in the US market, for instance, where our top six or seven franchises are really growing very fast.

Operator (participant)

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

Pierre-André Terisse (COO and CFO)

That's going to be online.

Joe Lackey (Analyst)

Thank you.

Pierre-André Terisse (COO and CFO)

Thank you. Hi.

Joe Lackey (Analyst)

Hi. I wanted to ask about Kylie and the trends you're seeing in that business as you're kind of navigating through this crisis. Obviously, their largest retailer partner experienced some disruption, closing stores and so forth. Obviously, Kylie has a pretty big e-comm presence. I just wanted to figure out the balances as you're working through there. If there's been any sort of manufacturing issues with that business, are you able to keep up with supply? If there were, are there any plans to move manufacturing in-house a little quicker than you had previously planned? Thanks.

Pierre-André Terisse (COO and CFO)

A lot of very good questions. Yeah, I mean, we are constrained on cosmetic. We've clearly been constrained by production. The third-party manufacturing we're using has been shutting down, and therefore, we've been out of stock for a lot of the cosmetic references, which is a pity, by the way, because direct-to-consumer still works and is very active. We're indeed looking at what are the options we are. In the short term, that's going to be, I think, the reopening, but in the more medium term, of course, because we need to be able to make sure that we have supply at all times.

We can't be in that kind of position again. The other side is skincare. Here, we have really seen a lot of traction, a lot of traction on the direct-to-consumer side in particular, beyond what we thought. It is really good because it means that we have confirmation that the skincare range of Kylie has a lot of future in front of her, and we need to develop that. Now, what we are also doing is take advantage of this period to, number one, accelerate on the building of the infrastructure we need and the frame we need to be able to leverage Coty network and size for the benefit of Kylie. We have been pretty active on that and will be, in fact, ahead of—we are ahead of the plan we had.

On the other end, we have accelerated the launch in Europe, as I said during the call, and on the 22nd of May, so it's in 11 days' time, we'll be launching Kylie products in skin in Europe. A lot of promising elements. We have to solve this question of the supply, but we have everything we need to do it. On the demand, the direct-to-consumer, what you call the e-commerce, is really an opportunity for both, by the way, Kylie, but also the rest of Coty. All right. Thank you again. Very happy to have been able to share these important news with you. I wish you all—we wish you all, Pierre, Olga, and I, to stay safe and to stay close to this incredible market, full of uncertainties, but also full of opportunities.Thank you, and we wish you a very good day.

Operator (participant)

Thank you, ladies and gentlemen.

Pierre Laubies (CEO)

Thank you very much.

Operator (participant)

This does conclude today's conference call. You may now disconnect.