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 Second Quarter Fiscal 2020 Results Conference Call. As a reminder, this conference call is being recorded today, February 5, 2020. On today’s call are Pierre Laubies, Chief Executive Officer; and Pierre-André Terisse, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty’s earnings release and their reports filed with the SEC where the company lists factors that could cause actual results to differ materially from these forward-looking statements. All commentary on like-for-like net revenue reflect the comparison of the business at constant currency in the current and prior year, excluding the impact of acquisitions and divestitures. In addition, except where noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the non-GAAP financial measures section of our earnings release. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release. I will now turn the call over to Mr. Laubies.

Thank you, Maria. And welcome, everybody, to Coty’s second quarter fiscal ‘20 conference call. I will start by reviewing the progress we have made on our turnaround plan in the last few months. Pierre-André will then discuss our financial results, outlook, our newly introduced sustainability target and some of the recent strategic developments. Exactly one year ago, I was sharing with you and our key leaders my first impressions of Coty. My first impression at the time was that we had reserves of performance to unlock in the way we ran our company and that the path to building a bigger business would have to go through building a better one. Our turnaround plan has been underway now for two quarters, and we are beginning to see clear evidence of progress in the key parts of the business. Like we alluded about it six months ago, our key priorities over these last two quarters have been, rebalance working media and nonworking media, grow penetration by advertising our brands at scale with the right media mix, improve our gross margins by managing better our mix, price and promotion level, put together an organization more adequate with our size, find the right balance between discipline and creativity in everything we do, deliver consistent financial performance in a quality way. I am very happy to report that our teams across our business units, factories and corporate centers have been doing just that. We are, of course, far from having solved all the challenges that we face and seize all the opportunities ahead of us, yet we can see that we are on the right track, that our plans are starting to work and that now is the time for us to be consistent and persistent. This allow us to reconfirm our fiscal ‘20…

Thank you. [Operator Instructions] Our first question comes from the line of Olivia Tong of Bank of America.

Good morning. First, just wanted a little bit more on the strategic review because there wasn’t a ton more information just like three months later. So just wondering if you could give a little bit more detail. And then is this - is the planned move of professional hair in Brazil in any way influencing the timing of any projects you might embark on with respect to cost and efficiency improvements, free cash flow improvements that you plan to make? Thank you. Pierre-André Terisse: Hi. This is Pierre-André. I’m not sure I’m going to be able to give elements about the timing. So maybe just to - yes, just to repeat. We have started the process back in October. We took the time to prepare the information and to have everything we need to be able to run a smooth process. We are running the smooth process as from now. We took the time to make sure that we find the best possible solution for the business, but also for Coty shareholders. Obviously, we are very comfortable with the timing we gave as an indication at the beginning, which is by summer ‘20 in terms of decision. But of course as you can imagine, to run this smooth process, we just have to do it in quiet manner. So we’ll come back to you in due course with more elements. But for the moment, I just can tell you that things are proceeding really as we expected and well. On the impact on restructuring cost, well, there’s two elements. We don’t foresee - I don’t foresee any change to what we have said so far. Because on the one hand, we will have - I mean Professional Beauty and Brazil, we’re carrying part of the cost, and they are going to leave, so these costs are not going to be incurred by us. But on the other one, we think we have to make some further adjustment to the business to reach the same level of profitability. We are working on that. And therefore, all together, I expect the same $600 million figure to remain our envelope of restructuring cost as announced before.

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

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

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

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

Okay. So on Macy’s, we do expect the exposure to be very limited. And for us in Luxury, so we don’t feel very - that the impact is going to be big. The question, the second question was?

On the specialty channel with Ulta and Sephora.

Yes. Well, I think we are - our share on Ulta and Sephora in the Luxury business is on the - is doing well. And we are doing better than - we keep growing and we keep growing on e-commerce, too. And also, we know that on Ulta, we have some good result with COVERGIRL. So again, we are taking our fair share of that market for the balance of the business that we have. So we see that this is really a channel that we want to continue to push and we want to continue to develop. Pierre-André Terisse: And maybe on Ulta, before Pierre takes over on the shelves. As I was saying, Kylie has been doing spectacularly well at the end of ‘19, better than we expected. And that’s been, for a part, with Ulta, of course. Both, by the way, in cosmetic and in skin care. And your next question was about the expectation on the reset of the shelf.

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

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

Great, thanks. Good morning.

Morning, Lauren.

I was hoping you could talk a little bit about Luxury and that you’d specifically talked about the route-to-market changes. So if you could just elaborate on that, it’d be very interesting. And then more specifically, why the exit of the lower-value sales would only be an issue in 3Q. Because I would - just the way that my head was thinking about it, it would be something that would sort of linger for a year. So if you can explain a little bit more about that, it would be great. Thanks. Pierre-André Terisse: Sure. I’ll take it - or Pierre, you want to?

No, I can take the Luxury and route-to-market changes and you can also... Pierre-André Terisse: Yes. So maybe I take it on your specific question on the timing. Actually - fundamentally, we have the same goal in - throughout the company and throughout - in particular business we are going to retain, which are Luxury and Consumer Beauty. We’ve been starting very much in Consumer Beauty to be more selective about some sales and cutting some sales. We’ve made mention of that in ALMEA in particular. And by doing so, we’ve been able to reduce the gray market. And we believe that’s very important to drive up C1 [ph] to reduce the impact on our main markets and to make sure that we focus on the right particular top line. We’ve done already some things on Luxury, as shown by Pierre. But now we’re going, in Q3, to go deeper in Luxury for one reason, which is that we have a common go-to-market, as you know, starting from Q3, between Luxury and Consumer Beauty. And therefore, it makes sense for us to do it now. And do it now means just cutting low-value distribution sales, promotion going a bit deeper. Because we know that we have a big pipe of innovation coming and we want to be able to focus on these innovations as opposed to [ph]. So in Q3, we’ll accept that this has an impact on the sell-in and it’s driving actually our sell-in into negative territories. But because we believe this is what we need to do to continue strengthening Luxury and continue making it a strong engine of growth for the company. And Pierre, you probably...

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

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

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

Our next question comes from the line of Nik Modi of RBC.

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

Hello? Okay. So I mean, on China, we are very happy with the momentum in Luxury, all right? And I’m sure you are still on, Nik. So - and so in our view, we keep progressing and we are happy. And particularly, the expansion into cosmetics have really driven incremental sales, which is, I think, a very good indication of the type of strategy that we want to do, partition coverage or with the same brand. And I think many of our brands have the right to play into more categories than they do play today. And we will - we have demonstrated that with cosmetics in Gucci. So that’s the big learning that we will capitalize on. On makeup, I think that the combination of makeup, and I assume that you are a bit probably driving and talking about the U.S. market makeup and the reason for the decline.

Yes.

Yes. Actually, there is - there are many driving forces for that. And I would say that the structural forces, I would say, has been, first, an explosion of availability of new brands in a market which is very important to novelty has probably driven a level of stock at the consumer level. So that’s one, probably, driver. The second driver is that I think that many retailers have given - and we have some data, we’ve demonstrated that, has given - particularly mass retailer, had given a lot of shelf space to new brands which do not have the necessary productivity. And therefore, unfortunately, it - and they have been subsidizing that space by taking away from big brands. So that has probably driving the penetration of the mass cosmetic market. And three, I think there is possibility - there is most likely a bit of a shift from make - or consumer shift from makeup to skincare, and we observed that around the world. I would say these are, in my view, the three fundamental drivers. Some of it, we need to get - some of these trends, we need to capitalize on. And some of these trends, we need to have conversation with our customers about.

Thank you.

Thank you.

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

Thanks. So a couple of follow-ups. I guess first on Luxury. Given the negative growth in Q3, I understand you’re pulling back on lower-value products, probably lower-margin products. But how will that impact operating income growth in the third quarter? And then more broadly, when you think about the flow between the quarters in the back half, right, so overall, expecting pretty significant improvement in EPS growth. But Q3 is going to be pressured by the Luxury and not fully lapping distribution losses in Consumer Beauty. So should we expect operating income, EPS growth will be weighted more towards Q4 in the second half? Pierre-André Terisse: Yes. It’s Pierre-André. That’s correct. What I would say about - you’ve seen that we reiterate our guidance. Obviously, we still have the same objective for the EPS, full year. You’ve seen that we have - we are a bit ahead of what we thought what - where we expected to be at the end Q2. For Q3, I would say that EPS is going to be broadly in line with that of last year. And therefore, you’re right to say that the EPS progress are going to be skewed toward Q4, which is not impossible - by the way, given the seasonality of the business and the fact that regularly Q2 and Q4 are our bigger half.

Okay. And then just one quick follow-up on the strategic review. So do you - as you’re going through the deeper view of the businesses, do you have any more visibility on potential stranded overhead? And then also if you had any additional details on the tax basis of the assets and how much tax leakage we could expect to see in a sale? Thanks. Pierre-André Terisse: Yes. I mean, limited answers, but you will understand that I cannot go much more - much ahead at this time. On the stranded cost, maybe the two examples I can repeat on that. A, taking into account credit cost, the average margin or the ballpark margin of the divested business is in the mid-teens. So that’s one element. The second element is that we have, in the initial announcement, reiterated our margin guidance which is 14% to 16% by 2023. And everything we see today confirms that we’re working actually on strengthening further the plan to make sure that we have enough room to cover it, and for continuity, possibly to go further. But we definitely confirm the 14% to 16%. And then for the rest, I will get back to you when we have more elements, which depends, obviously, on the progresses of the process. The second thing, about tax rate. We’ve said that the tax rate would be the corporate tax rate, which is of Coty, which is in the low - sorry, we said that it would be below, and in fact, meaningfully below the corporate tax rate of Coty, which is in the low 20s.

Our next question comes from the line of Stephanie Wissink of Jefferies.

This is actually Helen on for Steph Wissink. Thanks for taking our questions. Do you have any update on the travel retail channel quarter-to-date with the virus impacting travel itineraries? And then also if we could just get a little color on the softening of the Pro Beauty margins. Pierre-André Terisse: Sorry, a little color on the? Softening of the Professional Beauty margin. Well on that one, frankly speaking, I would not see this as material. Margins remain at a high level, in the 17%, which is not bad. That’s with the performance of the top line, which is good. Gross margin, good. So I would not read anything specific into it. The business keeps delivering. And it’s going to be on track with its target. Actually delivered against its target internally on the sales side, and we expect it to continue for the second half. On the travel retail, on the virus. One thing on the virus, first, is that obviously we care about people. So we have organized process internally with a view to make sure that our people are protected at all time and in the best possible conditions at all times. So we are extremely vigilant on that point, I imagine, as everyone. Secondly, on the impact themselves, yes, there is, and there will be, impact on the travel retail because the amount of traveling is decreasing. I think it’s far too early to quantify any impact. The only two things we are sure is that there will be an impact, first; and secondly, that the impact for Coty is going to be pretty small relative to competition since China represents only 3% of our sales. And Asia, generally speaking, we are underweight. So this time is a bad for a good in this case. But we’ll get back to you once we have more visibility. Again, for me today, it’s far too much early days.

Our next question comes from the line of Faiza Alwy of Deutsche Bank.

Hi, good morning. So a couple of questions for me. Firstly, I just wanted to talk about Kylie. Thank you for giving the calendar ‘19 number, that’s really helpful. But you talked about preparing the company for rapid expansion and I was hoping to get a little bit more color around that. Is it - I know you’ve talked about expansion previously, but sort of how should we think about the timing of that expansion? Pierre-André Terisse: Well again, a bit early to talk about that. Today, we are the 5th of February, so we closed less than a month ago. As you can imagine, these are not things you get into a rush to solve. The first thing we wanted to do was to set up the right sort of dialogue, having Christoph appointed, Christoph connecting with the teams locally. And then we need to understand within what we had defined, how do we operationally move from the current setup to broadening the number of markets; to accelerating the penetration of skin care in the U.S., elsewhere; to understand the way we are going to lead the innovation process with them? How Coty is going to be an asset to Kylie? This is very important. We don’t want to integrate Kylie, we really want to give Kylie the ability to develop and to grow for the benefit of the shareholders, and the primary shareholder is obviously Kylie. How do we want to sequence things? So I think we need a bit of time to make that and to come back to you. The focus this year is really on preparing the plan. We have high ambition. The ambition is to bring one point of growth to Coty overall between ‘21 and ‘23. So CAGR. This is ambitious. We may be able to do more. But for that, we need to get prepared and ready. And this is what is going to be the priority of the coming 6 to 12 months.

Okay. Thanks… Pierre-André Terisse: Sorry. And the element, it’s as you rightly pointed. Is that the traction is good? In fact, the traction in the last part of the year was even better than when we expected.

Our next question comes from the line of Andrea Teixeira of JPMorgan.

Hi. Thank you. Good morning and afternoon, there. So I have one question and a follow-up. First, hoping to - you can talk more about how should we model travel retail. And if you can remind us the percentage of total sales coming from China and the contribution of travel retail globally, even excluding - and especially now, excluding professional going forward, if you have that number. And my follow-up is on the life post Professional Beauty and Brazil divestitures. Can you please confirm? You just reaffirmed the 14% to 16% EBIT margin goal by fiscal 2023. I know it’s long - it’s a long-term guidance. But is it considered in stranded costs, both divestments? And how should we be thinking in 2021? I’m assuming that there is a timing to which you rightsize the company to the new sales profile. So how long should we think about margins going down in the first moment in 2022 - in ‘21? Sorry. And then getting back to that goal by 2022 and 2023? Thank you. Pierre-André Terisse: Okay. I’ll take the second question. Maybe I’ll let Pierre answer the first one. On the second one...

Maybe I’ll do the first one, in any case. So travel retail is about 15% of Luxury, all right? So that gives you a bit of the modeling. So that’s about, therefore, 5% of - I would say 7% of the company globally. Pierre-André Terisse: Okay. From a...

And travel retail - I’m sorry, travel retail in globally, how much is it currently?

I said 15% of the Luxury business. Pierre-André Terisse: That’s global. And if you want specifics, Asia is about one third of that.

One third of that. Good to know.

And China overall is 3% of the company.

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

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

Our next question comes from the line of William Reuter of Bank of America.

Good morning. I just have two. The first is, you didn’t talk about leverage at the end of the asset sale. Do you still expect to be at three times once that’s completed? And then you also talked about accelerating the growth of Kylie in calendar year ‘21. Do you expect that Kylie would be growing in calendar year ‘20 as well? That’s all. Pierre-André Terisse: Well, on Kylie, frankly, that’s not the topic. Given the current trends, it will be legitimate to expect growth. But at the same time, the priority will - is not going to be on the growth in ‘20, it’s really going to be on selling up the growth for ‘21. So we won’t be too much looking at that. But today, the asset is definitely growing. On the leverage, yes, we said to be accurate and precise that we would target a leverage, post-deal, of approximately three times. And there is no reason for us at this stage to get away from that. This is our target and expectation.

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

Yeah, thanks. And morning, everybody.

Morning.

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

Yes. I think overall, Mark, in the - clearly, you can call it pricing, I can call it value, too. I mean, at the end of the day, there are many ways to take pricing. There are, first, amount of business on deal, to depth of the deal, free balance between mainstream portfolio, premium portfolio. Typically for instance, we do see, to give a bit of flavor for instance, that in Luxury, we are substantially overplaying in eau de toilette and underplaying in eau parfum. That is, basically speaking, one of the ways we will manage price or pricing. And you can it pricing, I call it value creation. And so yes. Definitely, it is part of our strategic agenda to continue to push the value of our product set, right? There is one systemic plan, and I would call it like the long-lasting trend in consumer goods in general, and in beauty, even more, it’s wealth. Markets up-trade systematically and we have a little bit of a catch-up job to do, but it is definitely one of our vision of innovation going forward. Innovation for us going forward has two fundamental roles to play, one, it continues to enable us to premiumize the portfolio of the company, and two, enable us to increase the penetration of our brands. And sometimes, we can do both; sometime, we do one; sometimes we do the other. But basically speaking, that’s the way we are going to look at our innovation pipeline going forward. Does it contribute to improve the value of what we sell? Or does it give us more consumer? Or does it do both? All right? And so it is a big shift, and I believe it is one of the substantial shift or systemic shifts, which at the end of the day transforms, energizes to do at the same time, better and bigger.

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

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

On Luxury, we are. And on Consumer Beauty, we are gaining share in both categories, right? So we are happy with our development on e-retail. The main reason why we are gaining share, honestly speaking, on Amazon and we are not gaining on Consumer Beauty mass is we are not losing distribution in Amazon. And I think fundamentally speaking, our brand is strong. They have the right to play and the right win in this channel. And what we have done is that we have clearly professionalized our sales. Now we have taken online as a very serious channel, which is here to last, and our capabilities have been increased and our effort has been increased. And we are sharing our business plan with Amazon, and I think they are very happy with these plans because they see an opportunity for them to grow their own penetration whilst at the same time growing our own penetration. And coming back to one of the early questions of Nik earlier over the trend of mass Consumer Beauty. There is also an element in the decline of Consumer Beauty that a lot of - some of the business is shifting to Amazon and is not picked up by Nielsen, too. Pierre-André Terisse: Okay. So thank you all for following the call and for your questions. And we’ll be seeing you on the road. Thank you, and have a good day. Bye-bye.

Thank you so much.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.