Q1 2021 Coty Inc Earnings Call
At this time I would like to welcome everyone to Codis first quarter fiscal 2021 results conference call.
As a reminder, this conference call is being recorded today November six 2020.
On today's call are soon Harvey Chief Executive Officer, and pending today, she felt breeding and chief financial Officer.
I would like to remind you that many of the comments today may contain forward looking statements. Please.
Please refer to Codis earnings release, and the reports filed with the FCC, 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 Cobiz financial results Encoders 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 the snobby.
Ladies and gentlemen, good morning back you know goes first spoke to you on cookies fourth quarter earnings call and should we view that they had to consider its good to be a jewel in the road and they come to you more than ever to believe after several months of needing to see you again.
From that cookies, transforming an emerging from the COVID-19 crisis, much stronger and more nimble and also better prepared to face any future market disruptions. Our Q1 results are clear to segments 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.
First of all what improvement has been driven by an improving market backdrop we.
We have seen better sales trends across each of our regions and across both the prestige and mass channels, which reaffirms the been there, but you did see off our dual channel modem and with the return of those inventories now at normalized levels. We are also seeing much closer alignment between sell in and sell.
In fact in some areas said, oh trends a stronger than expected at.
At the same time, we have made significant progress in improving the performance of our piano and our portfolio on.
On the financial side I'm extremely pleased to see that the organization has continued to adapt to the new normal exit you can go on our financial and operational priority, including profit and cash flow the section.
Our stringent cost control enabled over 20% growth in our adjusted operating income over 50% of the total company, yes, 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 be cash positive for the year contributing to a decrease of our net.
That's.
They're not divestiture is expected to close as planned by the end of calendar 20, which together with positive cash flow in the second quarter 21, we lower the financial net debt from $7.9 billion today to around $5 billion, including the value.
Of the remaining 40% Villa stake, which coty, we retain.
Did you read that $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 Mboes per season must turn those.
Strengthen that market share in our core markets.
Oh, that's moving from a catch up mode to a momentum bodes well at the same time gradually strengthening our who told 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 keep <unk> are in the <unk> through.
Through smart organization changes strengthening our brands and reinforcing the connections with consumers.
Part of this investment includes strengthening our executive leadership team and Weve made.
Two very high quality hires recently is available from T., Philadelphia Glory out an M.S. has joined as Chief commercial officer of the trustees business to accelerate our growth in makeup skincare and in Asia and to champion the prestige distribution model and its unique character.
Mistakes.
Second jump in your body and he has joined in the newly created role as Chief Digital Officer, two Super drive our digital transformation.
First to accelerate our eco nice momentum.
To put in place the right conversations CRM and just your testing tools.
To prioritize digital in our media mix consistent with consumer trends and last but not least catalyzing cookies huge direct to consumer potential with Kim and trade is key to feel as if he skincare and all other digitally gifted coty brands.
Let me now turn it over to Kevin today to discuss our financial overview.
Thank you Sue and good morning, or good morning, all.
I would like to start with a reminder.
Of Oh, threed or figures given the complexities generated by the changing the scope.
Indeed, since the signing of the.
Sit in purchase agreement with kick out for the disposal of 60% of EBITDA.
We have been reporting or professional and retail business as available for sale and discontinued operations for you.
This is.
Some somebody seems to be not only could you. Please go on mute.
Thank you.
So this means he did you know that we can say he did that and the team come on the separate line, which is below operating income.
The result on that revenue than most PNM metrics.
Presenting on the basis of continuing operation that TTB, the total cookie lets better.
And to give you a better idea of what could he will look like going forward. We also produce where do you schooled ongoing cookie, which adds to continuing operations. The cost recovery, we are going to receive from villa from Cody.
For some transitional services agreement.
Well keep your eyes relating to the piano from that revenue through a pretty income relates to continuing operations and on Green Coty in.
In the presentation he as for the rest of the peers and cash flow. We do continue referring to total liquidity with a 100% contribution a bit on that income and discrete.
This being said, let me know move to slide five and there were net revenue trends, which have been showing a.
Strong recovery versus the previous quarter, both in mass and military.
After a trough in Q4 and most specifically in April.
Sales have been increasing most after more who had the period, where the most of September ahead of <unk> average revenues for the third quarter.
Compared to Q1 20 on net revenues remained largely by 19% on the like for like basis.
It's been yet my understanding and victory at minus 25.
This is very much in line with what we expected minus 20% as you remember we indicated during fiscal 24 years. These groups and to you in school.
I would like to add a few comments to help you read these.
Numbers.
First trigger retail remains by far the most impact he that's minus 70% versus last year.
These given its weight represents approximately five points, which implies that the rest of the business. Therefore declined by mid teens.
Second E Commerce has been growing no Tony strongly but the head of the markets.
Leading to market share gains for Curtis the person tangible net revenue done weakness and DTC has doubled versus where it stood at the beginning of covered and this is not only helping on the Truman use but it also makes us less vulnerable.
Last and importantly, we are carefully managing setting and 15, yet each we've set out those limiting the inventories in the trade on their exposure to the upcoming second wave.
A word about Q2 now we just completed October with net revenue was down high single digits very close to minus 10% actually this is year ago, reflecting strong pre Christmas all others and concerning very fast recovery of on net revenues.
Of course, as we see look downstream said in several countries in Europe, we will get some impact on on X revenues for the rest of the butter, but for all the reasons previously mentioned and for the limited number of buckets concerned on the southern Europe, we do not expect such impacts to be and in any way close to what we said.
In the first wave.
I will now turn to the operating income side six.
Why do we suffered a very significant loss in the fourth quarter of last year, we are delivering for the quarter and operating income of $81 million, which is 90 free if you add the revenues from that you see and that is up 24% versus or operating income in the first quarter of <unk>.
Krwtwenty.
This is a testimony of the actions taken by could Tcs. The beginning is covered under the leadership of Peter and soon.
Okay, and then lines I've contributing.
So after.
After a weak Q4 marked by high excess and obsolete levels and their level of fixed cost absorption gross margin has come back to the average dilutive fiscal 20.
At 58.6%.
So this is Steve hundred 50, bips better 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 a pretty the resets on NCP read three objectives in line.
First just the spending to a new sales side, we spent 20% of all net revenue this quarter and I, just keep to our new profile, specifically to geographies and channels more online lesser flying less rather it though.
Second objective to adjust a support of net revenue to the net revenue trends. We have ahead of us first.
First making sure we make the best possible use of our money and we protect or PNM.
Good.
This reset aimed at helping us become more strategic unfocused in their investment leveraging soon leadership and getting away from a fragmented aggregation by bucket today.
Two decent sick.
A pay as we go process has been implemented with Sue and the leadership team review all the initiatives and opportunities brought by the central Andy in market teams and actively free up spending on it for quite busy in light of net revenue opportunities and upcoming initiatives.
This is a deep change in no way of working and we expect will increasingly help our top line.
That said that amount is six gross and I will detail the page seven.
So you remember that we.
We have concluded that the exit of cookie that we needed to reduce our fixed cost in a very sizable way setting process. The target of 600 million that off for Remainco. We the first 200 million that are in fiscal 2001.
Q1 has been remarkable on that side as we have already delivered 88 zero million that I'll say deane laying the ground for delivery or head of the objective for the year.
Several work streams of contributes suite, including an acceleration in implementing over head contradiction substantially in line with our design for that on our own but we have added to the many initiatives on the business side of course, we have to maintain freeze expenses like EBITDA also weve very.
Strong and visible actions on third party services.
And the procurement team of course retreating in many few.
$18 million the delivery of the quarter is approximately the size over operating income in Q1 and it shows how critical this achievement is focusing.
Beyond the profit of the clutter it makes us incomparably stronger to face what is likely to remain.
For some time overtime environment.
Now moving to total Coty and Dps, the 24% increase over a bridging income has been the first source of a 57% growth over areas.
The second one is being that our performance over the quarter and attribute have grown by 7% a set of constant reopening after go down and return here and there.
Remained strong.
Hi, Cookie they love seeing a strong rebound average gross margin and has benefited as well as from a tight control of its fixed cost.
To these have added some temporary effects, we dispose of depreciation links to the discontinued operations accounting treatments and with a gradual stand up of the new team so for Q1.
The sum of these effects of shoot a doubling of that operating income and a contribution to core TPS Nols as 90 million data. So the performance of the two businesses as we see the reviews right or shekels increased under the effect of the $1 billion convertible preferreds and spray by KKR, we try to treat.
He does equity for the purposes of her diluted EPS in Utica.
To end with this upon closing of the deal or EPS structure, we remain similar to our butts their contribution will be recognized for 40% Tony and on net interest will be reflecting a significantly reduced net debt.
And turning to page nine no and cash flow. So the the profit delivery is translated into a free cash flow, which is ahead of our expectation.
Almost stable for the quarter at minus $28 million.
Beyond profits, we've made progress in many fields and inputs you know too.
The windows.
Which we have reduce and you know that these have been running.
Right.
Expenses because of leakage in the past and we have now put that under control and tight from pool.
And secondly, we have been the teams have been doing an incredible job in managing yogurt news with a very high intensity, bringing them to a two years, though.
And so these are folks that have said the impact of the results on the working capital with in particular, a reduction of payables from the fourth quarter of 2000.
Our net debt as a result has remained stable at 6.864 billion that all at the end of the quarter, we the negative $200 million for an exchange conversion impact and on the other end the payment of 250 million, then oh convertible preferred by.
Kick out.
Oh, there forever and this is slide 10 is going to deplete change in the coming weeks as we are about to close the set of 60% of that add to kick it off for a net proceed of 2.5 billion that out.
Together with a positive free cash flow expected in Q2, we expect to finish with net Dept post closing to land close to $5 billion and are finding from net debt to EBITDA to get close to five times within one year at the end of cutting down 21.
Another important factor in this respect ease as mentioned by Sue the 40% stake, which we keep having in that area, which has a value at inception of 1.3 billion, though and you are seeing the performance is that this is very likely to grow in a meaningful manner.
Since these but I think he is no four could see a financial holding we think it is important to take into account when looking at our capital structure and we will be further we what we call. The economic net debt that is all debt net of divestitures.
These.
Ratio, we lend post closing below $4 billion and by the end of calendar two anyone should translate into 3.5 times are they going to meet that debt to EBITDA not far from our medium term objective, which is to bring back equity leverage.
Free time.
Together with the cost reduction disease, a very important element as a mostly cookie also about capital structure. We 5 billion, then I'll finish and that 1.3 billion that often actions taken in performing better and attractive the conditions, we free and soldiers maturity that represent a key improvements.
Our capital structure and he is a fundamental building block to brinker, t. back to growth and competitiveness and with that I hand over to you soon.
Thank you very much Kimberly so as I discussed on the last call I strongly believe that good. He has a beautiful portfolio of brands brands that are universal and deeply rooted in this past quarter. We have begun to see this universally team together with a strong commercial execution translate into exceptional innovation.
In performance across a number of brands and regions early in the quarter, we launched the latest women's fragrance under the Marc Jacobs brand called perfect. The fragrance and campaign celebrates its lub authenticity self expression with an inclusive cost of 42 individuals partly scouted through an open social media casting.
The ideas behind perfect has never been more relevant than at this moment and I have click 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. This.
The success and Incrementality of this new Peter has proposed Marc Jacobs fragrances overall from the 10th round to the fourth round in the U.S. I'm from the number seven position to the fourth position in the UK. Similarly in September we launched the latest extension under the good she bloom pillar called the Puma dish.
Sure.
The campaign represents the connection between the mystical world the female sensibility and the idea of nature, the stereo social media driven campaign unique packaging.
To be able to send has attracted global consumers, especially in America and China.
The same time, we have also seen very strong success with the expansion of the Gucci makeup French insofar across North America, Gucci Lipsticks, Richard 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 good cheese first foundation custom designed for China. As a result, we have seen double digit sell out gross for the overall Gucci brand in both the us and China.
Our growing success with good she 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 chair of spell 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 remarries positively booming in the UK continuing to build out 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 mous clean beauty lines, we had introduce it under the cover girl Sally Hansen brands in the spring.
Kinda girl clean Fresh makeup line was the first phase makeup from an establish at mass brand with a clean for mediation free of many contested ingredients. The line was the number one foundation launch in spring Twentytwenty.
And still remains in the top two for the year with significant appeal amongst genzyme consumers.
The revenue with momentum and consumer relevance is reflected also in the wave of couple of girls earned media impressions now ahead of its peers.
We have built on the success in recent months those launching couple ago first clean fresh concealer clean powder and clean mascara.
Similarly, Sally Hansen, new launch called the good kind of pure was the first nail Polish from an established roadmaster brand to boast a clean formulation that is free from 16 contested in regions. The launch was the number one launch across all U.S. mass cosmetics.
Spring Twentytwenty and to date remains in the top two.
The new line has supported over 100% hundred basis points, sorry, if market share for the Sally Hansen brand.
The success of kind of joke in fresh and Sally Hansen. Good can pure confirm that's good. He is one of the first corporations at this level. That's understood. This consumer shift towards cleaner formulation launching both product lines ahead of the pandemic and we've continued to launch clean healthy launches.
Across all our other brands in the coming month is in fact, but he is leading the way in the areas that consumers are looking for the new normal cleanliness.
Healthy alternatives inclusivity and self expression.
That kind of our key strategic priorities is strengthening our positions in our core markets.
We made good progress on this front in Q1 and cookies 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're 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 sogous with this trends 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 skin care and makeup as consumers re directed their discretionary spending to what we call mood boosting and says.
Gas categories.
Against this backdrop, our prestige business has been growing double digits since September and strongly gaining share. We now have two out of the top four prestige brands in the market.
This is supported by the strength of Marc Jacobs Perfect also Bell, Billy London Dream, Gucci Bloom pro forma Julie and good she guilty for men, which is gaining two ranks and ranking now at number four as well as the strong growth of Gucci cosmetics.
The mass cosmetics market on the other hand remains under pressure with continued declines in the mid teens.
What 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 is now tracking in line with the category and holding share. After many years of decline also.
Also within the U.S. mass business, we continue to streamline our skews and create a more focused portfolio, including this morning announcement of the Stetson license moving to a new license term. This will have a negligible impact on our sales in the UK.
In the UK now the prestige fragrance markets has been rather tied with monthly declines in the single digits to the teams the resurgence of Covidien countries 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 Mark.
That fueled by Marc Jacobs, perfect and Hugo Boss alive, our latest successful female launch under the brand you gave us.
On the Mascus metric side similar to the U.S. The UK market has been declining in the declining in the mid teens here again, we continue to drive the performance of the market leading brand remote.
Through strong execution and incremental launches with the remelt continuing to gain over 100 basis points of market share several quarters in a row confirming its number one market share position.
In Germany, the preachy prestige fragrance market trends have improved and are now declining in the mid single digits here again.
Good he is gaining share driven by Hugo boss Allied in the female area. You go bust bottled in mass fragrances, and also with just under half cent or the person finally.
Finally in China.
Which we'd I will discuss in more detail shortly our precision brands have seen retail sales growth over 20% fueled by both fragrances and this is new buy 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 the 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 John do not only has got his first chief Digital officer. This is clearly a top focus for me and for Coty Cookie.
He began building out its ecommerce capabilities, yes later than leading beauty peers and we are therefore, not as advanced as some in terms of ecommerce penetration yet yes.
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 TNL given the business is nicely accretive to Coty is Costco has margin average.
While DTC is a small portion of our business. This is a strategic area. We are focused on growing substantially with Kylie Jenner 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 KD skin care direct to consumer web sites across a number of international markets, including the UK, Germany, France, and recently Australia the.
Initial results has been very positive with international traffic from this market to Katie skincare website, doubling and in market sales at seven times in prestige eco enough sellout grew double to triple digits in most markets and our ecommerce penetration doubled to 19%.
And and all the while we kept full control of how our brands are presented.
The success has been driven by strong momentum on retailers dotcom web sites as well as luxury E retailers like no Tino and second in China. Burberry has performed strongly on Timo with good she due to launch on the online more in early 21.
We are continuing to capture new white space opportunities in this fast growing channel, including recently signing a distribution agreement with his Alonzo Europe's leading online fashion platform with over 31 million active users across 17 countries.
In consumer beauty, we likewise, so double to triple digit E commerce sell out in most markets with ecommerce penetration doubling to more than 7%. The growth has been fueled by strong execution on retailer dotcom website as well as E retailers like Amazon in fact Coty is brands.
Gained 140 bps share on Amazon across our core markets Us UK, Germany, including 112% sales growth over Prime day.
To further drive penetration will be accelerating our deployment of this you had beauty services, especially on makeup in Q2 and Q3.
Our fourth strategic priority is leveraging the potential of our skin care brands formulating top quality products with the portfolio that spans from accessible price points to the very high end.
It's clear to me that we own advanced that skin care technology and capabilities in house, and we will be we will build on this expertise and key capabilities cookies eyepiece on compasses, Footlights protection technologies, including Blue light protection, environmental and biological repair.
There are mastering the metallurgical grade active such as retinal 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 shoots already in Q1, Kt 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% five zero of Kaylee scheme 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 US 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 philosophies purity, which is the number one facial skin care at facial cleansers sorry.
America to remove numerous contested ingredients. So we intend to broaden this approach to the fool feeders of your ranch in the coming two years as.
As we do this we will be tapping into philosophies in Bolivia, Billy loyal customer base.
As we have seen that over two thirds of philosophy DTC orders.
From returning customers.
With both he loves us she engages skincare boasting a loyal customer base in the beauty category already known for loyalty. We will continue to build on this success and expand our skin care footprint wide.
These two examples of kaley and see that the skincare perfectly on compass. Some of the key trends underpinning consumer demand today, namely a desire for clean and healthy products and direct connection with consumers through DTC last but not least and as we mentioned on the last call. We are re.
Early in the process of developing the Kim Kardashian, West Skincare line and expect to launch it in fiscal 22.
The final strategic priority is expanding our business in China.
It's the widest economic trends, we see great potential from the increase in domestic travel, which sees our brands over perform 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, they'll Billy Chloe Tiffany Calvin Klein to name a few the.
The big hurdle for Coty in the past to expand in China has been our category exposure with fragrances at the heart of our prestige box for you yet the Chinese beauty market dominated by skincare and cosmetics. There was clearly a limit to coty is in market potential. However, we have begun to address to clear to address this category mixture.
And with the successful launch of good she underbelly cosmetics maker in China, and the continued expansion of Lancaster and philosophy skin care with long cast that already the number one Sun protection brand insofar in China.
As I mentioned before our recent launch of built very makeup on T. Mobile is performing very well and we are on track to launch Gucci beauty on T Mall in early 21. The combination of this effort has resulted in our prestige cosmetics and prestige skincare retail sales in China growing over 40.
The percent in this for quarter four zero now accounting for for close to 20% of our prestige business. There and this is just the beginning in fact, despite the more limited assortment, our gucci to access counters setting both Gucci fragrances and Gucci cosmetics have generated more.
Monthly sales, which are on par with the leading prestige multi axes 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.
Good she beauty has been further boosted with the recent announcement of Gucci Beauty first Chinese brand Ambassador Lou Han who is a leading influencer and senior in the country with over 60 million followers. The announcement testing breakthrough results with over 100 million digital conversations about the and.
Huntsman and this drove results with within only two hours the whole stock of lipstick that Lou has promoted completely sold out on Gucci dotcom.
Time for conclusion, not together, it's clear to me that the 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 include being profitable and cash positive for the year and further de leveraging upon Baylor closing after several months those in the CEO role I am as convinced as ever.
Her that we've put in place the right Foundation to unleash Coty is a huge potential I want to take this moment to thank our executive chairman Peter half for all his absolutely exceptional work in put in cutting back on track Cott is now ready to grow in all core regions categories and price positioning across the differ.
Rent markets, let me remind you the priorities more than ever we are committed to reigniting, our mass color cosmetics business, especially cover girl. Likewise, we will accelerate coty prestige business growth through makeup by leveraging our designer brand portfolio of course, Gucci and don't really especially in Asia and in China.
Now and we will continue building two new growth in jeans, leveraging the potential of our skincare brands powered by our new DTC capabilities, starting already with Capex skincare. The sum of these lay the foundation for Coty is sustainable growth in our new normal thing.
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 your question of yourself from the queue press the pound key.
Okay.
Our first question comes from want as Steph Wissink of Jefferies.
Good morning, everyone and thank you for the comments.
And today relate to cost of sales and marketing expense. If you could just talk about your your change in marketing approach I think Karen talked about it as.
At 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 sale how should we be thinking about the mix effect as you advance more into prestige skincare and cosmetics or would that be a net benefit to your overall gross profit margin. Thank you.
Thank you so to answer on your first question we.
We are mid singles together, especially has been describing it on almost a daily basis to really think about what are the areas, where we need to focus our working media investment.
Clearly the results we are having at the moment in the US for example on the luxury side of the business showed that when we concentrate and focus our investments on key bets on products such as clean fresh makeup by cutout girl profit by Mike Jacobs, which are the products that are currently resonating with the needs of customers, especially investing online.
The results out there. So this is really a lesson in a way versus what the industry probably in general and could see in particular has been doing in the past, which is maybe to invest in a very on a very wide.
Ranges of launches and beds. 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 mix the mix effect on the pre season like the prestige sorry makeup and skin.
Have you seen margin into in margin terms, we expect that to be year to be accretive.
Thank you Emily Thank you.
Our next question comes from the line of Faisal Ali of Deutsche Bank.
Yes, hi, good morning.
So.
Thank you talk a little bit about that.
The coverage brand I think you highlighted that as well.
Like to reignite growth in that band and I was hoping to hear from you.
Like how are you thinking about that is that more incremental sort of smaller stuff like the cover glass clean and fresh or are you thinking about it more as you know a big splash relaunch like you did two years ago and two I wonder if you've looked at that.
After we launch coverage.
And from your perspective, what do you think one too.
You know, what the advertising and what the price.
Quality was that are you know the operational shelter execution or something else and just how do you intend to approach that brand.
This time around.
Thank you for your question. This brand is very Dear to my heart again.
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 cover girl is the most loved brand in America and in the makeup area is 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 at another.
If people are aware of this but clean makeup has been invented by cover girl in 1961. So we are talking about you know 60 years ago cover girl invented the first Medicated foundation using the Zimmer ingredients and today. This is exactly what we call the skin indication of makeup.
So couple girl in a way was a pickup so 60 years ago of what we call. This communication of makeup. So there is no other brand that can own. This territory. The uncut algo that explains a lot. The success of clean fresh makeup, which by the way we are expanding into considers into powders into miscarriage and also.
Expanding in other brands of our portfolio very very soon so this is really something that's for me is going to take back cover girl to the position where it has been very few where very few years ago and the other great news that I can share with you is that this launches are attracting to cover girl, but also to our retailers in America.
Our younger much younger consumers Gen Z consumers are those who made the success of clean fresh and stabilize in a way overall clean makeup market share in America and cover girl. The good news is that for the first time in five years, the shelf space of cover girl is not reduced.
Anymore and this is also another green shirt I wanted to share with you when it comes to Whats next of course, we are working on something.
Let's say quite strong in terms of what cover girls stance for Anshu 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 brands 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 I saw that on other brands have been taking care of in the past years and looking at competition.
<unk> is a you know always a problem because the tendency is to do what the others are doing and probably cargo gas would have never moved from its story of being the inventor of clean make at being the most loved brand in America being the brightest brand in terms of colors and the most luminos I would say breath breathable brand.
In other words. So so there is a story there that has nothing to do with what has been done in the past Thats hopefully is going to take back cover girl into its leadership position.
And when should we expect sort of new news on that is that is that again is that is that sort of incremental or should we are you going to announce you know sort of a bigger be launch.
You know in the next question how exactly.
We're working hard on they were making a lot of progress since September on that you know the new story and everything so hopefully we'll be able to you know Uh huh.
All the news internally to other news externally to our retailers of course and build with them the new cover girl.
Hopefully next year, yes.
Great. Thank you so much though.
At weekly as possible to be honest with you.
Thank you.
Thank you guys.
Our next question comes from line of Rob Hansen of Evercore.
Great. Thank you very much and congratulations on such an exciting start.
Two questions one shorter term and one maybe maybe slightly longer term. So 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 preorders there and.
And any other sort of color you can give us in terms of prestige versus mass is it still for the holiday season very much per station and how are you planning to that so that would be the shorter term question.
And then the slightly longer term question or are more strategic question.
You know a lot of your main competitors are.
Our obviously adjusting their channel strategy in the U.S.
Moving away from Department stores.
Oh own freestanding stores and really become very dependent on ecommerce and.
And obviously, you're also pushing hard in ecommerce for all the obvious reasons. The question is are any of the air moves.
In the brick and mortar area actually opening up opportunities for you.
So those would be my two questions. Thank you.
Okay.
And try to give you some sense of what we are seeing ahead of the holiday seasons.
Actually starting with what you said about prestige versus a mess, we see very good traction on the prestige side and in particular in the <unk> in the in the U.S. and.
An altogether in the Americas, but in particular, India in the us.
And that's been one of the elements shooting.
Actually a pretty good performance in the on the on.
On October.
If you.
If you ever look at the product more specifically Sue mentioned them. So Marc Jacobs is a clear one gucci is another one.
I'm sorry.
Makeup absolutely from which she is a use another one so.
In in Q1.
You see that luxury east.
He still behind.
Yes.
At the moment and ahead of the early this isn't this is not true anymore.
The trend as a as well so.
Again very encouraging signs.
Signs in particular in Americas, that's a bit less the case in a in a in Europe and there is a lot going coming in addition, but altogether. It's clear to me that we should expect to Q2.
Improving versus Q1, a lot or less than a lot depending on the on the effect of the look down but there will be improvements.
So thats for the for the show them cushion or noise Sue if you want to add something no.
And on the on the channels I mean, the only thing I can say is that on E. Commerce. We are different each engines came and we are changing scale twice a day, we have penetration, which is twice the way we had a year ago. So.
You know just change completely things.
And two we are adding resources with those on line as long as revenue my any coming.
And the development of the DTC platform, which is a which is going very very well and very fast. So that's definitely going to be a one of the key element of our strategy going forward in Americas business on in Americas.
Okay.
Next question.
Our next question comes from the line of Olivia Tong of Bank of America.
Great. Thanks.
Hi, how are you.
A question for you I'm curious on your view.
And.
No.
So far I think fairly measured I mean, great growth.
Very good so far.
Lets stick.
The current backdrop.
Im not challenging.
I thought I was really refreshing to hear your perspective.
Okay.
Exercise in terms of.
Thanks.
Hi.
Thank you.
Thank you Yeah, I think that's it that's it that's a very important question, we see clearly that the sales of brands such as good. She because you name. This brand that are really booming both in the U.S., but also in China in France. We just started the C and the figures were very very good in including Lipsticks before this.
Price, but again there is a strong appeal towards products that are going to be.
On on one side, you know very well positioned versus what the customer the consumers are looking for nothing the success as clean fresh makeup, but also I didn't mention it in my previous answer the success of good country ordinary nimble from Sally Hansen, but also the success of many other things we've been doing in the fragrance arena with.
Causing CK everyone fragrance, that's a cradle to cradle certified fragrance. All these shows us that there is no issue.
Issue on the mid to long term with cosmetics is just a 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 xoom or if I do just due to the assays give me something that that will not feel.
Guilty consuming because it's good for the planet and good for the society, we're living on et cetera. 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 good she and bill Barry in the makeup area.
Arena.
Assuming that these brands and this is exactly what we are doing are you know launching products that are of course clean began using ideally reusable packaging et cetera. So I really don't see any reason why this category.
Could be challenged more than after you know.
The they did this current crisis is with US. So makeup is going to be back but not the same makeup.
That's helpful.
You, obviously outlined a lot of initiatives.
So can you just talk a little bit about how you're going to be.
One incremental.
Okay.
Yes, we can.
Greater ecommerce.
Just kind of curious.
Timing on when you think those will come to.
And if I could just one more on the other.
You mentioned.
What's your view on the likelihood of potentially more.
Are there brands that you maybe.
We really haven't really pushing in recent years as you look at the time.
Do you.
We think the.
Sure.
Thanks.
Yeah. Thank you for your question yet again, we are a key.
Committed to reigniting, our mass color cosmetics business, especially cover girls. So were going really to focus a lot on cover girl continue of course, the Fabulous story, a free man in UK and of all our other brands Sally Hansen in the U.S., our make a business in Brazil to but we're going to focus strongly on cover girl.
Two because there is huge potential undercover goes for all the regions have been mentioning in the past you to come to your question about are there other asset they are going to leverage I can give you one in the mass business. That's a you know a not a lot of people talk about to me, which is added us.
He does is probably the brands that 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 cannot answer I can give you on this area in.
The area of of the prestige business clearly consolidating our number one luxury fragrances makers in the world and success is just perfect are really adding to this and accelerating in the luxury makeup arena, especially in Asia and in China and the brands, we are doubling of course to focus.
So when it comes to luxury make up a good she and debris and last but not least investing on DTC. This can benefit all of our brands, including Kt Skincare also keen competition, where 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 had as clear return on investment, but also brands that are advanced in terms of digital conversations or brands that are highly desirable.
And the RIDEA, sorry can we just to complement a on a very technical point, what we said about Stetson is noted divestiture is just a license which has not been renewed.
We have since December decided to take a more realistic view concerning your own concerning sorry, the licensees and to focus on the one which we think it would be 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.
It's from the line of Lauren Lieberman of Barclays.
Great. Thanks, good morning, everyone.
Thank you.
Two questions.
First with just about fixed cost reduction.
I was just curious if you could any you mentioned right Karen Karen.
I mentioned that head count reductions 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 cost for so many years.
Part of that prior plan, so curious a little bit more color there and then closer in and I was just curious as to the decision to launch Gucci and until now and in early 21, rather than being there for 11 11, and moving more quickly I understand you've been in seat only.
A few weeks, but.
We're still just curious on the panel decision there. Thanks.
Okay.
I think the fixed cost.
Well, it's a it's really a good blend between people cost and indeed.
600 people have left the company since Q4.
And ER and on people costs and in non people costs I can tell you we have been.
Reviewing it.
Every scene taking advantage of.
Of what we went through during the time, which in a number of cases meant no spending anymore.
And leveraging on that.
One thing, which is which I mentioned, which is a not necessarily very noticeable because it was so these were expenses, noting the pinedale, but the so called normalized cost.
As being precisely the fact that we have tightened a lot.
The rules to normalized making it a very exceptional then that's really creating a mentality of we need to look at the cost and we need to make sure that every year or every dollar in fact, which he spent we spent because it's necessary to the company.
And I think the change of mentality the change of speed as well in implementation and the garden has been helpful. In a in that with the with the teams coming from a capstone.
These changed as a as Nate for the first time as far as I know Coty delivers such a magnitude of a fixed cost reduction.
And so people Kirsten people focus on the two main buckets of course on top of that you have some others in Cogs and distribution in particular.
But you have the sense of urgency is completely different oh, there's no leakage anymore and therefore, they are going ahead with a with that and I think thats a that for me.
I mean, what I mentioned during my speech and I'm, sorry to repeated but to me that's very important when.
When you look at the savings 80 million and the operating committee 1 million I mean, you see that this is a game changer for us because then the he's 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 be applied to accelerate top line.
So that's that's really on the fix a.
On fixed cost on a chemo.
Yeah, I mean, it's a I don't think we can enter into the detail of the leader of the discussion we had we had to true the timing which was this one.
I think it seems I mean, the important thing is to do it well rather than to do it soon.
That's that's again going to be one of the game changer for us in a in China, China is a priority China luxury the priorities going well.
We need to accelerate and beyond that and clearly distinguished agreement.
Is key.
Great. Thanks, so much.
Thank you. Thank you.
Our next question comes from the line of Wendy Nicholson of Citi.
Hi that actually is a good lead into my question, which is more about the China market place.
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 on some of your luxury fragrance brands are 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 the four or you really focusing on key mall as a primary distribution channel. Thanks.
No no it's a meta and led to an elaborate on that answer but it's a it's it's clearly a so.
So a fragrance is the base and user base of the brand because when we talk about makeup we talk about nickel for switching from Burberry, which as well fragrance brand. So it's not one of 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 the others like so if for instance, or Tiffany, which are which are we doing.
Well.
And makeup is coming on top of that it's true that some of the Chinese markets. The makeup a petition is a is bigger than the.
Is bigger than the fragrance petition and is louder.
Smaller than the than the skincare petition so insensitive, new and important one in terms of in terms of a channel of distribution clearly the.
Own store.
Are an important part they've been the base of all developments indicate of the two brands of I've mentioned.
So brick and mortar is absolutely the base, we have been able to build a.
Strong franchise, there, although not very be very strong franchise there.
Without the help of a weakness we were noting timo until last summer, we started with a with Burberry and now we're doing that with a with Gucci when when you look at the rest of the competition. There's been a lot relying on E commerce, while we have no. So that mix in fact that the advance that gives us a solid foundation to.
No accelerate with with ecommerce, but definitely has to be again, 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 channel. They just said to compliment I would say that the fact that the particular example, gucci and beverage brands that are in flagship counters and on its actually counter as you can really expose your two categories, which are makeup and fragrances and therefore doing joint sales you know selling the latest Gucci powder.
Her soon the first foundation made the custom made for the Chinese market and the latest Profumo discovery, which is doing very well in China.
And they 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 the expression and I don't know she went recently into a store if you see the way our brands Gucci and Burberry to name the two ones in the makeup every now freezer.
Rented they really stand out from the crowd and this is something that is not 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 complimentary with this idea to keep.
You know this two hands of of the two hands in a manner, bringing this Chinese markets.
And one thing we heard increasingly about the Chinese market, a shift and an elevated level of promotional activity from Paul.
Western brands, but also and 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. Thanks.
I mean, we're not seeing that at all maybe because we are in a instead of a very happy in a in a specific place, but we are not seeing that at all and yes. We expect this market to be a to be to be profitable and in fact to be very profitable.
So we don't have any concern of that of that of the time.
Thank you.
Thank you. Thank you.
Ladies and gentlemen, we do have time for two more questions.
Our next question will come from the line of Jeff TSFL of JP Morgan.
Well, 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 something fastest sequential progress how much.
When you consider your accretion like for like 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 on your presentation given the you mentioned the cost recovery on the KKR.
Ugliness of about 12 million in the first quarter is that recurring and that's approximately the same amount going forward that just.
For modeling purpose. Thank you.
Yeah, sure well I start with I start with.
Or with the second one.
So this is going to take place as soon as we close so in a few in a few weeks.
We have to keep in place certain cost to to.
To make the separation with Bella occur over a period of time of when you're.
In terms of actual logistic and a.
Logistic terms and operational terms.
Discussed represent about a 12 or 12 million and we arent going to reinvest into two vela for as long as the agreement you need which is likely to be between 12, and 18 months. Okay. I mean, not likely it will be between 12 and 18 months for the most for the most of it.
Once the seas finished we will stop reinforcing but we will also dismantle the costs, which were necessary for that for that reason, okay. The cosby into their presence in the in country because they were in Coty and now we have dedicated them to to get to the Villa agreement.
They will be.
There will be a a necessary after a after the end of the TSX.
On the first one.
You're right in fact, it's it's when you look at the like for like trends in July August September you see clearly that July was a was helped by some.
Temporary effect, which can be either because there's been some movement from June to July or because the base in July you a year ago was very weak or because indeed, there is some some building and.
And we see that by the way both in Remainco and diverse school.
Now since then we've had the benefit of a seeing a.
Oh Good September October.
And October for instance is completely clean of that kind of that kind of elements a clean of.
A good amount of restocking, which I could not quantify but.
They both one of the reason why the performance in Q1 is better than in the previous quarter, but.
But they are just not you know they're not the trends the trend is there an October definition also shows that.
I hung last for your question.
Our last question comes from the line of Joe Lachky of Wells Fargo Securities.
Hi, Thanks, I just wanted to hit.
Hit Asia Pacific and in China, specifically.
From a little bit of a different angle than than what you guys discussed before obviously the performance in that business is weaker than peers and.
You mentioned in your press release weakness in travel retail in Asia.
And so in that channel, there's been commentary from others that domestic duty free market is on fire and you know there's been positive impacts from.
More rapid reopening a travel corridors within within Asia.
So so maybe if you could unpack the travel retail channel a little bit and then and then you mentioned a number of initiatives you are doing in China.
But obviously you know you're lagging with your exposure to the skin care categories. So I'm curious what it will take longer term to improve your presence in that category I mean will it be new brands are the.
So acquisitions.
Yes.
Launching highly you know kind of what you could explain more of a long term perspective on skin care in China. Thanks.
Yeah.
Yeah I mean.
Simply are you you said that the travel retail in Asia, we have in international and there is no international sites anymore in a in Asia. So.
Our travel retail business GDP impacted we don't have a a sizable by any means a sizable business in a in domestic travel retail and therefore, we don't benefit from that end.
Obviously, we don't have a full travel retail purposes, and therefore in skin care and we don't benefit from that either and so you are right that some of our competitors have attrition numbers entre return in a in the Asia, which are.
Definitely a far away from from hours, but we just don't have the same the same the same portfolio.
Sorry complement what bill is saying I would say that.
This is precisely the reason why we are accelerating strongly strongly on first make up again and stays makeup which today is a part of skin care 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.
As to expose our brands wider than with fragrances and again fragrances are doing very well today as you said that somebody else said it previously in Sanya, Ireland, our sales our threed triple digit growth and we are opening new stores by the way I'm 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 IP Cootey owns I think.
A portfolio of technologies that unique today on the market with a lot of know how coming from the Lancaster brand. That's by the way number one in some protection to say four in China around light and environmental aging protection, we're going to build all our brands into this area. So.
Second and around the victimization of metallurgical grade actives again, a non cash that is the inventor of putting Ritchie now the right way on the face every brand asking God knows that retinal is the most coveted ingredient for now and for the future. We had also patterns in regenerative may.
Ladies in inspired repair technologies in the longer area. Obviously from the makeup from the makeup side and we're going to add in.
New expertise, we will have probably four or five skincare expenses. So that we can build a portfolio of brand building from the least expensive to the most super premium brand to really own. All these areas. Since we know that skin care is today happening in every size of the market is.
Actually growing in the premium and premium fees arena.
And just to maybe two or two and to to circling back on the on the travel retail channel.
Travel retail is obviously, we are not saying arms crossed so.
Being shocked by these days.
As we are reacting to a direction one is addressing the cost structure because definitely di business has to be has to be.
As to be re sized considering the fact that some of the trends are going to be here for some time and B. We are re directing a behind an initiative.
Were.
In a 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 more.
Much better much more useful much more contributes even the in the in the new environment and talking about scheme I just want to add as well that there is one brand with attention, which is a which is going to be very important going forward. We are.
Finalizing a weve, we sued the integration of our vendor.
As a as a premium brand in the portfolio and Thats going to be one of the tools. We are going to we're going to need to you. So you know altogether and maybe to conclude and leverage on this question on on on the QNX.
We are really actively working on a on the one hand on costs and I can tell you that this is not the end 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 end on the rebuilding of the of the portfolio net revenues and frankly speaking what we seen a february's a is a is good we have to obviously cope with the environment that we are much much more solid and well the best is yes definitely yet to come.
I think when we end the Q and a no. Thank you.
We look forward to a zooming you seen you not on the road, but in a on the network. Thank you. Thank you. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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