Coty Inc (NYSE: COTY) Q3 2020 Earnings Call Transcript

Coty Inc (COTY) Q3 2020 earnings call dated May. 11, 2020

Corporate Participants:

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

Pierre Laubies — Chief Executive Officer

Analysts:

Nick Modi — RBC Capital — Analyst

Robert Ottenstein — Evercore ISI — Analyst

Faiza Alwy — Deutsche Bank — Analyst

Olivia Tong — Bank of America — Analyst

Steph Wissink — Jefferies — Analyst

Lauren Lieberman — Barclays — Analyst

Mark Astrachan — Stifel — Analyst

Wendy Nicholson — Citi — Analyst

Joe Lachky — Wells Fargo Securities — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. My name is Maria, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Coty’s Third Quarter Fiscal 2020 Results Conference Call. As a reminder, this conference is being recorded today, May 11th, 2020. On today’s call are Pierre-Andre Terisse, Chief Operating and Chief Financial Officer; and Pierre Laubies, Chief Executive Officer.

I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty’s earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. All commentary on like-for-like net revenue reflects the comparison of the business at constant currency in the current and prior year, excluding the impact of acquisitions and divestitures. In addition, except when noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the Non-GAAP Financial Measures section of the earnings release. You can find the bridge from GAAP to non-GAAP results in the reconciliation tables in the earnings release.

I will now turn the call over to Mr. Terisse.

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

Thank you, Maria, and good morning everyone. Welcome to the third Quarter Conference Call of Coty for the fiscal — fiscal 2020 and together with Pierre, who is in Amsterdam, Oregon, New York and I am myself in — in London, and we are very happy to host our this — this exciting conference — conference call.

Before we start, and we go in the mid of the topic, I just would like to — to thank Coty teams for what they have done and what they have demonstrated for the past — for the past few weeks and north now, beyond their hard work to handle the situation from a business standpoint, this crisis has been the opportunity for many associates at Coty to take all contribute to many initiative, which illustrate the role we want and we try to have in this environment, we have been producing Hydroalcoholic Hand Sanitizer in 12 of our plants in 10 different countries, including in France, in the UK, in Germany, in Morocco and in the U.S. and we have donated it to front line health-care workers.

Our brands on the other hand have been donating gloves and caps or shampoo to local hospitals and everywhere in the group numerous relief funds have been established throughout — throughout Coty to contribute to what has been the huge solidarity, so may main take away, in fact over the past few weeks is the great commitments, the energy and the solidarity, which has been shown by your associates and before we talk of what we are going through, and what we are building. I just wanted to publicly thank all of them. And each of them for this.

Now moving to the following page, I — this is a summary of the upcoming call and release as you have seen with — with the press release, we’ve posted we are announcing something, which is far more than just earnings today, but Treasurer important initiative, which are going to accelerate the transformation of Coty. The first of them is obviously the announcement of a strategic partnership with — with KKR, that’s a major step with $750 million convertible preferred share subscribed by KKR improving immediately our liquidity in a strong way. And at the same time the signature of an MOU for exclusive talks to be held with KKR on the 60-40 partnership on Professional Beauty and Retail Hair for an enterprise value, which is basically reflecting, pre-COVID conditions at $4.3 billion or 12.3 times fiscal 2019 EBITDA for this group, which does not include Brazil importantly.

The second, the second element is the delivery of like-for-like net revenues, which are down in Q3 by 20% and I think that was I admit that’s clear a few — few weeks ago. But with a strong operating deleverage we’ll come back on — on that and that’s been for us very much a call to action and we are not seeing today a comprehensive plan to reduce our fixed cost base by $700 million or 25% to make sure in fact, we have the right cost structure and we adapt to the new environment fast enough. And the lasted amount is — is important as well is the preparation of the restart, which we are going through at the moment with a focus on webs, are the most relevant platforms of Coty in this environment and here we’ve mentioned group three, we’ll come back on that, e-commerce, Kylie Beauty and mass Beauty.

So let me come back maybe on these different elements. And then we like to look at the earnings. On the strategic review first, so the third bullet is an important element, we have concluded that Brazil mass beauty operations would remain fully in Coty they are one of the key assets of our consumer beauty brand units and we are very happy that they will stay within this unit and keep contributing and helping us building Consumer Beauty brands.

The second element is that the circumstances, have in fact created opportunity and — and the creative option, which is a 60-40 partnership on Professional Beauty and Retail Hair, which we call Wella. And that’s a creative because that’s basically building things, which otherwise would have been difficult in the current context ie., is building continuity and I think these elements of continuity is very important for the business and very important for the partners and it creates an element of sharing value i.e., Coty will continue being exposed and benefit from the value creation agenda of this — of this 60-40 partnership. The valuation as I mentioned, alluded to reflect the strategic nature and the resilience of this business at more than 12 times 2019 EBITDA, which given the current circumstances is a real sign of a strong — of strong confidence. We expect that this is going to, to bring to Coty incremental cash proceeds of $3 billion so just these — these part the 60-40 JV. And that will come in addition, with the next part, which we are going to see afterwards ie., the $750 billion to $1 billion preferred stock investments.

We have discussed and agreed the main terms, but obviously that’s kind of — the kind of agreement is complex. So beyond the main terms, which has been formalized with an MOU we now need to complete the work and agree on their regime. That’s the work which is going to be taking place in the coming days and weeks with a view to signing at the end of May, so in line with what we had said from the very beginning by — by summer we expect a closing of this transaction to take place within six to nine months post signing, so that should be at the very — at the very end of 2020 or beginning of beginning of 2021.

So that’s the conclusions on how of the strategic review, but the strategy review has carried a second important sentiment, which is the issuance of the convertible preferred shares for $750 million, which are extendable to $1 billion upon signing of the Wella deal. And these $1 billion, $750 million plus, $250 million on top of the $3 billions, I was referring to before. The preference shares will carry a coupon of 9% and have a conversion price, which is 20% above probably closed and therefore is set at $6.24, beyond the strengthening of Coty balance sheet in — in a very meaningful manner these formalize a brother partnership and Coty will benefit from the presence of two representative of KKR at — at its [Indecipherable].

So that’s the, obviously the key elements in the strengthening of our liquidity, before that and ahead of that we have announced a few days ago that we have been reaching, concluding amendment of our credit agreements with our lenders. And when you’re holiday of our covenants to reflect the fact that the covenants will be distorted by the — by the crisis and we had also at the same time a bit ahead of that. In fact, decided to suspend the cash dividends until we come back to what we believe is the — is a proper leverage below 4 times, net debt to EBITDA. So as well as a result of all that. Obviously, liquidity is stronger. It was strong at the beginning of Q4. We of $1.3 billion in — in cash on hand and the beginning of the quarter and we expect it to remain even stronger in fact to be even stronger at the end — the exit of the quarter with $1.2, $1.5 billion to $2 billion at the exit of this — of this quarter and the exit of the fiscal year. So that’s really what I wanted to say about the — about the transaction we announced today on the strategic partnership with — with KKR.

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

The second element is the acceleration of the procurement initiatives in two areas. In the area of business services first, and there also in the area of commercial expenses, where we have not, in fact leveraged our scale to lower the cost and we are going to do so, we have started to do so and we are going to complete it and to amply it and at the same time, our intention is that part of the savings generated are going to be used to increase deliver support behind our brands and productive — productive support.

And the third element is about the completion and the extension of our O2 program, O2 is the change of organization and the program to get a leaner organization, which was designed as part of the turnaround and we have been during — during the past few months finalizing the negotiation with the unions. We are now in a position to implement that, we are not only going to implement that, but we are going to see the way we can further simplify the organization by leveraging our processes reviewing our network. We have many, many sites and locations around the world and at the same time, we will be at a simpler compensation.

Between the various projects I mentioned in here, in fact we have a crew $860 million in addition of $700 million because we know that we need to take some headroom, a number of them are quite advanced, and we expect to deliver in fiscal 2021 more than a third of the selling so it’s not a program, which is going to be back ended. It’s a program, which is going to start delivering as soon as the coming fiscal year, the goal we have is really to make Coty more efficient to make it simpler and to make it fit for growth. The deployment of these fixed cost reduction program in fact allows us to confirm our mid-teen operating margin target by fiscal 2023 on this scope, which is a scope plus a strategic review. So without the 60-40 partnership in Professional and Hair Retail.

I know very quickly go on each of the streams to give you a bit more color on what — on what it is. On the supply side first, our manufacturing footprint consist of 13 factories, which are running at — at an average utilization, which is — which is below 40% with a number of complexity over 30,000 product flow combinations, we have a big complexity of portfolio with more than 50,000 SKUs. You know that, we have a speed to market, which is in our view suboptimal, and we need to, we estimate 20% and down by by 20% or more and altogether given the downsizing of our business, we estimate that we need to go for a fixed cost reduction of 20%. The base of the cost of supply is higher than $1 billion, 50% of it is fixed, so it means that the reduction of 20% will mean that we are going to target cost savings by $100 million.

There is a number of projects, which have been in the past, some of been our relevance, some of them are relevant, some of them are less. The supply team led by Richard is going to put everything together and to design the roadmap, which is going to be ready by the end of August for an implementation, which we work on, which will start shortly after depending on the — depending on the topics.

So that’s the first element. The second one is about procurements, again the fragmentation of Coty has prevented us to reduce cost from two important France. On the right side of the screen first, our network remain too exploded with many offices around the globe. High travels IIS cost. We will capitalize on the moves, which we have initiated in first 18 months and for instance, some of you know that we have been, we are downsizing our presence in the Empire State Building or we are going to close our office in Pennington and we are going to reduce the costs linked to the networks to continue that movements.

In the same way we are going to reduce the re-cost through external services, which are obviously costly by themselves. But on top of that has been in the past, generating an efficient of project we’ve often a level of delivery, which was not — not high enough and we expect these various measures to help to save 30% of all non-people costs, that will be by the way, putting us in the median of comparable companies in terms of cost to revenues are not in the third class side and in the best-in-class, but in the median. So the measures, the possible measures, the possible improvement as well as a benchmark are clearly showing us that this is possible.

On the left hand side A&CP. So I just want to be clear here, we are not looking to get A&CP, what we are looking at is rather to increase their impact and Pascal, our Procurements Head, and the teams have already progressed on the organization of media and concluded global negotiation already for that, they will start delivering in fiscal — in fiscal 2021. The second element is that we yet have two platform of marketing materials, furniture, tester etc. We are very open fragmented and taking initiative, a different cost and generating complexity everywhere. We are starting the project of [Indecipherable] and here the saving at stake are very, very sizable.

We will in addition increase the spend accountability and — and make sure that’s every expense goes direct to P&L and its not flowing in a different manner starting from 1st of July. Now, as I said, we don’t want only to get efficiency, but we want, as well to increase our impact and therefore we are going in this program to reinvest 50% of our sellings immediately in productive entity in working media in priority.

The third bucket is about making Coty simpler. We have much to do to make it — to make these organization simpler and very effective. So you remember that we have initiative a downsizing of organizational a year ago with a target of $180 million, you know that the negotiation has been concluding with the work partners during the third quarter, we are ready to deploy it, only which queue by the way in Amsterdam has opened last week and teams are progressively migrating, although obviously carried as many slower than planned.

One of the elements of, I mean, one of the element of these downsizing has been really the writing of the Coty Operating System, which is basically the description of accountabilities an interdependency and this work has evidence massive opportunities for processing simplification and transactional efficiency, and that’s going to help us further decreasing our structural costs in the — in the future. In addition to this, we’ll be revisiting our compensation system and extra policy with a view to better leverage and grow Coty tenants, so to monitor all the above I mean the free pages in the $700 million program we are sitting today or dedicating governance, I in my function as a COO, I’m going to lead the program and with a subset of the VC, which is going to be made of people from supply from Procurements from HR, from Finance, from IS, but also the head of the two regions, we have EMEA and then APAC And we have appointed our Head of ISIT, [Indecipherable] Chief Transformation Officer and you will coordinate the various aspects of the transformation. So that’s in a nutshell the program on which we are going full speed right now, and which I just want to repeat ease an expansion of the turnaround in acceleration of the turnaround and is the right, the right level of savings we need to be able to address the size of Coty right on, give us flexibility to — to in our growth. I will now turn to the third quarter results, and with the first snapshot before I hand over to Pierre. As expected and shared with you earlier in April. Our net revenues have declined over the quarter by 20% on the like-for-like basis and while January and February were showing progresses in particular on the performance of our brands in Consumer Beauty. COVID-19 already had impacted our performance in Asia than in January, February, but obviously the big turn happened in March with the first live balance in Europe, which started in Italy expanded to other markets pretty quickly and so not only your net revenues were impacted, but the operating income was impacted in more deeply by this loss of revenue and the margin as well as by some one-off item and I will come back on that. Obviously, our EPS was impacted as well as a result of these and our cash flow was negative as these by the way, usually the case in the third quarter, but obviously, significantly more here given the drop of profit for the first nine-month on the COVID-19 basis our net revenue are now declining by 7% like-for-like. Our operating income remains in line with that of the first half at $480 million and our cash flow is broadly stable. So I’ll come back at the end of the presentation on the main profit elements, but I will hand over to Pierre to talk about the top line trends, we have observed both on the impact of COVID, but also on our performance in terms of [Indecipherable]. Pierre, over to you.

Pierre Laubies — Chief Executive Officer

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

The Coty associative demonstrated both in our first Phase together and now in this testing times resilience as well as an inspiring ability to learn and adopt new ways of working. The aim of this approach as you may remember was an ease to tie the right balance between creativity and discipline and we are beginning to see the results of this work materialize across several brands, markets and initiative. As you can see on this slide, we had a number of strong innovation successes this quarter even as COVID began to disrupt the demanding picture.

Starting with CoverGirl, we continued our laser focus on improving e-commerce fundamentals. As a result CoverGirl recently surpassed competitive digitally native brand to become number three mass cosmetics brand on Amazon U.S. the brands, improve performance both online and offline was in part, fueled by the launch of clean fresh earlier in the quarter. This was the first clean label product line across established mass cosmetics brands and quickly became the number one foundation in launch in mass. Similarly, Rimmel maintain the momentum we have seen in the recent quarters, fueled by media support and strong in-store execution and supported by the recent launch of Scandaleyes volume on demand mascara, Rimmel has now reached its highest market share in the UK in over five-year at 31%.

Sally Hansen continues to fire on all cylinders. The brand is continues to build on its leading market position reaching it’s highest U.S. market share in several years at 45%. This is in part due to the launch of Clean-Label line Good Kind Pure, which has already reached close to 3% of the nail market. In Prestige Fragrances we had a number of great launches only a few weeks after launch, Boss Alive became the number 1 female fragrance in Germany. Similarly, CK Everyone, our first Clean-Label mainstream fragrance, we’re seeing strong momentum in multiple markets as a top free launch at Macey’s and top five in markets like U.S., Canada and Germany. While the lockdowns are impacting consumer demand in access. These launches amongst others that clearly resonated with consumers and will fuel all recovery once retailers begin to open.

Moving to our performance by segment. In the Americas, like-for-like revenues declined 18.8% as a result of the lockdowns at the end of the quarter. This resilient operating deleverage pushed operating margins, lower to 2.6% however building on the progress outlined already last quarter, we continue to see green shoots in the region. For the first time in many years CoverGirl’s market share in brick-and-mortar retail stabilized and actually expanded even as the mass cosmetics market has been impacted. Sally Hansen, which was already expanding market share further accelerated this gain with shared 100 basis point and while Clairol also continues to see improvement in tough times. As the COVID pandemic spreads to the Americas, leading to store closure and stay at home orders. We saw consumer shift purchasing online, our e-commerce sales accelerated beginning in March and remained very almost through April, we saw particularly outsize e-commerce growth within our mass business, which as you can see on the slide grew in the U.S. 164%, while not quite as strong.

We were also very pleased with the strong sell-out growth within U.S. prestige, which accelerated meaningfully in April. In the EMEA region, like-for-like revenues fell 20.1% due to the corporate situation and the resulting lockdowns that we are put in place. It’s like-for-like decline led to an operating deleverage pressuring the margin to minus 2.5% despite the COVID-related pressure, we do see evidence of our turnarounds taking hold. Within the Mass business, some of our key brands, we’re able to take market share to and Q3. Rimmel, Max Factor and Bruno Banani all grew market share by 50 or more basis point in brick-and-mortar during March. On the e-commerce side of our business, we have seen set out plans accelerate, our store closure on lockdowns were implemented.

Similarly to the Americas, we have seen particularly a e-commerce turns within the mass beauty category. We have some region, such as the UK and EMEA grow in excess of 100%. Operating e-commerce sales growth was not quite as strong, however, we have seen set-out trends accelerate through the month of April, as many consumers return to purchasing prestige beauty after weeks of being locked down. In the APAC region like for like revenue fell 34.8% as the region was one of the earliest hit by COVID during the quarter. Both China and travel retail, were hit particularly in Q3. Encouragingly, we are starting to see trends improve in China though many markets continue to have lockdowns in place. Overall, the like-for-like decline led to very meaningful operating profit deleveraging the quarter pushing our margin down to minus 14.1%.

Despite this, we continue to see positive sign that our strategy is having success, as shown here both Sally Hansen and Clairol gain over 100 and 200 basis points respectively of market share in Australia during March. In addition, we also grew market share within the China Prestige Make-up market, although overall market share remains quite small today, we continue to believe the Prestige Make-up market particularly within China will be an important long-term growth driver. Moving to e-commerce we have a really strong growth investment models, similar to other regions as consumers shifted more spending online. Just to highlight a couple of markets was Australia and Japan with both experience, e-commerce sell-out in excess of 100% during the March and April period. For our professional duty business like-for-like revenue declined 11.9%. This decline was due to the COVID-19 pandemic, which forced many salons to close, particularly during March. Moreover other like-for-like decline led to operating margins being pressured falling to 5.4%. However, we continue to be very pleased with the e-commerce times for the Professional Beauty business including ghd which delivered another quarter of very solid growth.

As I just mentioned, many salons were forced to close during the quarter and still remain closed to these days. Despite this demand for salon services such as coloring remains very strong, based on the sale that we conducted in the U.S. and the UK. The majority of respondents want to sell an appointment within the first two weeks of salon reopening, we view this as a very encouraging sign that the difficulties many have, so many salons operating are likely to be temporary. Before we turn the line back to Pierre Andre. I would like to reiterate my thanks to all the Coty associates for the journey achieve — accomplished together. They all have been truthful in their action and attitude to our vision that to build a bigger business, we needed first to build a better one.

I have just share with you a few of our green shots, there are many orders growing currently in the company and many more to come. I know that their gone times are very testing. Having lived myself through some of this events in the past. Yet I know so that our people have the skills and the drive to get through this crisis, why staying the course of front of strengthening our fundamentals. I have absolute confidence that the good team people will not waste this crisis. That they will use it to individually and collectively learn and grow and that our company will come out of it stronger than ever.

Yeah, Andre. I’m turning the mic, back to you.

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

Thank you, Pierre. Thank you, Pierre, it’s good to — it’s good to have had you and to have you.

Now turning back to the — to the result of the third quarter taking over on the — on the minus 20% like-for-life net revenues, we’ve seen dollars terms meant a decrease of net revenues, like-for-like by $370 million and given that the impact was late in the quarter and that we did not really have the necessary time to react, there was no evolution of our fixed costs, which remain broadly flat. This is the previous year. And so the loss of revenues was only mitigated by variable cost and went almost for almost half of it straight to the operating income for loss of Huwaii of $174 million.

On top of these $174 million where it’s going to be several non-recurring charges for a total sort of $53 million. First, the depreciation of the ruble and the Brazilian reais led to some re-evaluation of intercompany receivables and resulted in the foreign exchange losses. Secondly, or excess and absolutely provision was boosted by COVID as obviously make any clear expecting sales in the coming 12 months decrease. And as a result of that, we made some provision on the — on the inventories, behind 12 months and last, we could not incorporate to our costs certain factory to our COGS, sorry, certain factory cost as we had been slowing down or even stopping the production in those factory.

So as a result of all the above the operating income went to zero for the quarter down by $227 million and our EPS was negative, given the fact that we have interest and tax charges, below the operating income.

Next time — next slide, sorry, our free cash flow is — is usually week at this time of the year in the third quarter, but it was obviously amplified by the weakness of the EBITDA, which stood at $103 million. The working capital and the one of course we are negative for $322 million. And we also closed at the very beginning of January the King Kylie deal investing $600 million and that’s together increased the debt to a level of $8.1 billion at the end of the, at the end of the quarter.

I will conclude by, after having talk of the cash, the liquidity, the reduction of our cost. I will conclude by just leveraging on the — what Pierre has been telling you on the performance of — of our brands in the middle of this — this crisis and this quarter having a look at, what we see as some of our key assets for growth at the outset of the recovery, and that’s quite interesting on Luxury or innovation pipe comprises many projects, some of them — some of them yet to come and you see on the left of the chart, the Daisy Petals by Marc Jacobs and some of them have been very successful at launch, as mentioned by Pierre or will cover that obviously in the dynamic and this is a case of Boss Live and — and CK Everyone.

So this is obviously as we reactivate, our distribution going to be an asset for us. The mass beauty is increasingly, so the recent trends have definitely shown progress for free of all CB brands. And you remember that in the last quarter we had been talking of Sally Henson, and Rimmel, which continue performing — performing well, but in addition to that CoverGril with the launch of our Clean Fresh story has been — has been clearly improving in terms of trend and this is in the context for mass beauty is likely to benefit from a foreseeable switch to affordable Beauty by — by consumer.

The other element which is interesting is that the opex program, we have been designing and the grow the head could detail is going to have a very direct use in this — in this circumstances, because we have to prioritize obviously the restart we cannot — we cannot restart everything at the same time and we will be restarting inferiority, the SKUs and the product, which we believe can grow faster and can be of the stronger net revenue base. The following elements is e-commerce, you probably have heard that from many, many company. We have as many other shifted resources and the energy to this channel with some success I must say Sally Hansen and CoverGirl gaining market share and then as we went into the U.S., and I believe CoverGirl as well CoverGirl in particular became number three brands would gain one position, it was number four, it became number three during this quarter. So we are progressing and progressing well.

We also accelerated the preperation of — the provision to expand Kylie. We will be launching Kylie in Europe this month in May. I think on the 22nd May that’s going to be done with dual Douglas and at the same time, the performance of skin care for Kylie in direct to consumer has been strong and we are working at widening and strengthening the — the platform. And so I’m mentioning these — these several example, because these are all the sales and platform, which are relevant in the current circumstances or relevant in the current circumstances and has been showing stronger improved trends and we will be using them, clearly in the context of result, which we believe is going to be gradual and selective depending on the market and which we therefore be running in a very articulated and an organized manner with a view to maximize our impact and to maximize our success with the — with consumer.

So I’ll move now to conclusion and make sure we have some time for — for — for questions, I just want to say that we are very excited at service, that we are going through a time of — of uncertainties. But we have been getting equipped to face dues and to not only face due, but to leverage the uncertainties and the opportunities we are going to cross. We have now the right balance sheet, we have the right balance sheet now and we have, we’ll have an even stronger balance sheet the end of, at the end of the year. We have the right program to adapt our cost and our mindset. And I think that’s very, very fundamental with a $700 million cost reduction program and we have the relevant and we believe the right top-line levels and therefore we are all very exciting of having all these assets in hands and be able to and be able to be assessing a very attractive.

That’s all for these pretty long presentation and we’ll try to answer your questions now. Thank you.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Nick Modi of RBC Capital.

Nick Modi — RBC Capital — Analyst

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

Pierre Laubies — Chief Executive Officer

Okay. Thank you, Nik, and by the way good to talk to you. On the taxes we’re talking of an amount, which is going to be within $300 millions, obviously, we need to to complete the calculation, but that’s going to be within $300 on the — on the margins. So we have to assume that we don’t know what — what the growth is going to be, the reality is that I think we have everything we need to get through it, but you and I see the environment, we see the lockdown stoping and then restarting. You see the very well the social differentiation and its impact on this part of the business and therefore we have to, I have as a CFO and the COO, I have to assume that it’s not going to get better soon. And it you does that’s perfect, because they will have the right constructor, but if it doesn’t I need to get protected. So in building that I have assuming building these mid-teen margin, I’ve assumed that we would not come back to or we needed to be equipped to face the case, where we will not come back to 2019 net revenue level before the back end of the plan, and even after that. So it will take us time to do so, even in this case or even in the case, where that will get done, we will be delivering the mid-teen sorry Huwaii margins I’ve been — I’ve been talking about.

Nick Modi — RBC Capital — Analyst

Excellent and if I could just throw in one more. It seems pretty impressive actually you’re ramping up your cost savings, quite a bit without extra cash charges. So I just wanted to see if you can provide any context around that. Because this is the first time at least I’ve seen that happened?

Pierre Laubies — Chief Executive Officer

Sure. Well, the reality is that in the progress we see as we’ve made so far, we’ve seen a level of when, of course, which has been lower than what we had indicated, we had been pretty careful at the outset of the turnaround because the history of the company was encouraging us to take some, take some headroom. Now the reality of what’s we have been managing for the past — for the past one year has been, has been lower, and therefore the envelope we had to deploy the turnaround is enough to cover the additional cost, which — which we will incur. I think in mind two things, a there’s a lot in the plan, which is not going to be on that’s only going to be about people, and severance, so there is a lot, which will be done by method and discipline rather than Food and Food severance and — and the second one is that, yeah we’ve improved revenue. We’ve for the best, when you’re with the team need to silent work, but it’s a work, which we have done very methodically, we’ve been trying to to make sure that we will minimize these one of course, because we knew that they had been extremely helpful for the company. So yeah, I mean we, with this $500 million net by the way, because we believe in — in the restructuring we can also have some capital gain, which are going to finance some cost, we can do it with these envelope.

Operator

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

Robert Ottenstein — Evercore ISI — Analyst

Great. Thank you very much and congratulations on the transaction. A lot of moving pieces here. And I just want to make sure I heard this right, I think maybe I didn’t, but you’re talking about taking $700 million of fixed costs out, but I think I also heard that the total that you’re going after is $850 million is the $150 million reinvestment in the business. I’m just — just trying to understand those parts again, and again my apologies, because I know you mentioned it.

And then second, it looks like the working capital was pretty negative in the quarter. Can you talk a little bit more about that and what the working capital outlook looks like for the rest of the year? Thank you.

Pierre Laubies — Chief Executive Officer

Yeah, hi. Well, thank you. No, indeed I — it’s let’s be clear on that. So what I said is that we have a total program, a total lease of opportunities if you wish, serious opportunities have you seen that not only, ie, which amounts to $850 million. And we feel sufficiently are confident in these opportunities to be able to commit on EUR700 million, which means that we assume that some of them are not going to be realized on that, and if realized not realized fully. That’s every time you do that kind of program that’s what you have to — that’s what you have to assume.

In the $700 million we are discussing. Most of the elements are gross, but there is one element, which is net and it’s the A&CP components, which broadly speaking, is going to be the efficiencies, we expect efficiency to be in the region of $250 million to $300 millino and half of that to be reinvested. So in the $700 million I’m counting only half of the sitting, I’m going to move on — I’m going to make on that, on that side. Okay. So there are two elements. One is the fact that we have headroom and one is the fact that we are counting only the net of what we save on the A&CP, because we think it’s important in fact to do an exercise of reallocation to what he is working and with he is going to be activating the demand.

On the working capital side, so I think the dynamics to have in mind are the following. We don’t have much increase in — in inventories now we had at the beginning of the quarter, because at some — at some moments, we saw demand going down, but obviously production did not stop right away. But it’s that — it’s that growing, the interesting element is about payables and receivables because we have seen on top of the decline of that revenues we have seen the situation of some of the customers being difficult and not many have come to serious difficulties of the point that they will be going to refer us, but many of them have been in difficulty basically telling us that they needed, then needed help and support and that they will be postponing some — some payments and we have to take that on board, but obviously we have to take that and share it with our — with our environment. So we’ve been adjusting the cash flow and the way we manage cash to make sure that we would be spreading and sharing this — this element of contraction of liquidity, which exist across the supply chain in the industry and in many industries at the same time.

So I mean, all the details to — to maybe be a decline, but to say that we’ll see in Q4. Another quarter of a negative evolution of working capital that we, which we are controlling very tightly balancing basically the need to control cash and on the other hand, the need to — to build to continue building medium-term relationship with our partners.

Operator

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

Faiza Alwy — Deutsche Bank — Analyst

Yes, hi. Thank you.

Pierre Laubies — Chief Executive Officer

Hi.

Faiza Alwy — Deutsche Bank — Analyst

So, my first question is just about the $700 million of reduction in fixed cost, sort of how quickly, do you think you can — you can get there. I think it sounds like, it’s by fiscal 2023, where the program ends, but I’m wondering if you can give us some guideposts in terms of what type of savings we should expect in fiscal 2021 as a start?

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

Well, I mean, my answer is going to be simple. It’s not going to be by credit, it’s going to be more from savings, we expect savings in fiscal 2021 to be more than the third between 35% and 40% in fiscal 2021 and then probably a third in fiscal 2022 and the remaining in fiscal 2023 and the reason for that is that again, I mean, some initiatives first of all, our part of turnaround is only two-third of it’s incremental. That’s the first point. The second point is that some initiative are going to be leveraging on the current — on the current circumstances, and what we are going to do in travel, and what we are going to do on consulting are clearly going to be — are clearly going to be the extension of the crisis management mode we’ve been in for the past few months as many other companies and that element is that many, many things has been studied at Coty, many project, which had not been implemented, because we have decided to pursue other priorities and now we put them together they exist, they have a lot of strong foundation and some of them can go pretty fast. So that’s the reason why we will go for — front facing I mentioned.

Operator

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

Olivia Tong — Bank of America — Analyst

Great. Thanks, good morning.

Pierre Laubies — Chief Executive Officer

Hi, Olivia.

Olivia Tong — Bank of America — Analyst

Hi, how are you?

Pierre Laubies — Chief Executive Officer

I’m good.

Olivia Tong — Bank of America — Analyst

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

Pierre Laubies — Chief Executive Officer

Yeah, well, as I said at the beginning of the Luxury was — was showing, was in really three different trends. A, remember that we’ve been going from divisions to segments, and there were some level of noise on that. B, more importantly, we had the beginning of COVID and the slowdown of travel retail following the Hong Kong issues and so the performance of Aisa in travel retail was — was weak, but see at the same time, we have been seeing very successful launches, but pretty good performance of you have of CK everyone of both of Boss Alive and very interesting performance from CoverGirl, Clean-Fresh and Sally Hansen pure, the two or three brands, which we launched together with our system, we give that one.

So that’s why the mix of it, we’ve plus and minuses, but broadly speaking, in line with what we expected and then March and to be precise from the second week — the second week of March, became very much on the pressure and I mean, started in italy, but it’s been spreading to Europe very, very quickly and April — April obviously, we expect is going to be — is going to be significant fee, fee is slightly worse, May is likely to be in the same regions and — and the b, the b question is going to be about June and early keep recovery, and I think it depends very much business by business and probably market by — market-by-market, among other reasons, because the phasing of the — the pandemic, and they lockdown is different depending on the — depending on the countries and business-by-business, people want to go back to hair dresser, I think that’s fairly — that’s fairly a guess for everyone and — and the opening of luxury store is going to take a bit more time, but yeah, April and May would be difficult we expect June to start showing some sign of recovery and we expect Q1 to be showing as well as some sign of recovery, but I think Q1 will not be by any mean return to previous level and to normal.

Operator

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

Steph Wissink — Jefferies — Analyst

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

Pierre Laubies — Chief Executive Officer

Pierre, you want to take that.

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

I’ll take that. Yeah, Laubies. Yeah, sure. I think really where we decided to make a decisive a fault in e-commerce has been really on Consumer Beauty, where we are really under playing our fair share. So we — we in Luxury — in Luxury and in professional, clearly, we continue to stand firm and the growth has been solid in the line with the market growth, so that’s easy and good, where we have been really, as I said earlier, catching up has been on the — has been on the, on the Consumer Beauty, where we have by and large, if I — if I look at the last month. Our business is going globally by 75%.

And so it’s a very, very good result, at least for the place where we can get that time talking set out here and — and which is a very, very substantial acceleration for market on the same panel, which we measure to be in the mid-teens. So on 15%. So that’s — that’s a spectacular, spectacular performance, what have we done there? I mean, to be honest with you a lot of basics, right. A lot of focus on conversion, a lot of focus on the basics of e-commerce, building our key set into the organization and really building a playbook, building a playbook, deploying the playbook, deploying the playbook into the key market and after that deploying the playbook from the key market to the risk — to the — to the — to the smaller markets. So I think that we are, we have made a step here and we have made a substantial step change and I do not see, why we would go backwards going forward.

So, and that’s clearly very pleasing and again in my view, it is very exemplary of the culture that we want to create a culture of the culture of dive, but also a good share of discipline and distribution of playbook, so that make sure that everybody catches on that. And — and we feel very, very good about that. In the same way and we feel very good about our general trend in Consumer Beauty overall to give you a bit of — bit of of data. I’m talking like combination of brick-and-mortars and — and e-com, if we look at our business and Consumer Beauty something like 12 months to 18 months ago, we would have lost market shares in 80% of our market.

Now in the last, in the last period we are stable or gaining share in 80% of our markets, and very often the reason why we do share is because we have made active decision of withdrawing some lines from the market for instance from those who are in the UK. Right where — we knew we were not able to operate at scale. So I’ll be honest with you, I think while we are in the plan and the plan is working. Okay. We have the crisis, but I really believe and I said it earlier, I believe we will come out of this stronger, because we now start to embed our opex program or our conversion focus program on e-commerce, our advertising program marketing our investment at scale behind more limited number of brand as well as. Yes, we have experienced a bit of setback with a focus on gross margin lowering promotion, building working media, all this stuff works.

Operator

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

Pierre Laubies — Chief Executive Officer

Hi, Lauren.

Lauren Lieberman — Barclays — Analyst

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

Pierre Laubies — Chief Executive Officer

Yeah, [Speech Overlap] I mean, I’ll start and you can and we can play it together and I think, the fundamental difference is that a year ago is exactly what we said we wanted to achieve with the opening of the strategic review, ie refocus the company, refocus the company on fragrance, on cosmetic, on skincare give ourselves — give ourselves a number of categories on which we can make — we can make a difference, which are basically at the peak to the level of human investment efforts, we can — we can, we can have, and at the same time re-size the balance sheet to make sure that we have the means to develop these — to develop these categories and to win in these — in these categories and so yeah, I mean my answer would be that we have achieved exactly what we said we will be achieving. We have in Luxury and in fragrance, but you know, a number of a number of assets, which are evidenced by the new launches we are doing. And by the success of some of our brands in Consumer Beauty we have, the opex simplification program and the program of reinvestment behind our brands — behind our brands. So which start working fundamentally. In skin we need to accelerate, now we have one very, very strong and important elements, which is playing both in skin earn and indirect consumer and this is Kylie and I can promise you that this is going to be a real, real asset for the — for the company and all that we a, less debt level of debt, which is, I believe the right one to our financial flexibility to support that portfolio and b, with a real intention and program to address the simplification of Coty and to make it not only lighter in term of cost, but we’ll see, but c, but also much more manageable. And so, yeah I think strategically we have resize the company, we’ve scoped it to some team in which — with which it can win.

Operator

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

Mark Astrachan — Stifel — Analyst

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

Pierre Laubies — Chief Executive Officer

Yeah. Thank you. So in terms of dilution we’ll come up with we precise numbers at this stage at which we are is — is an important step. But don’t forget that we are only talking with MOU and there is a number of parameters we need to, we need to fix, including the precise — precise carve out the buildup of the stand-up of these new 60-40 company and way we are going to address the consequences on — on Coty Gucci what’s true is that the Dallas credit cost, for the credit cost following the addressed by the — for it parts by the, sorry, by the $700 million gross reduction program. The — the way to look at that and to get confirmation of that is the fact that we confirm our mid-term target for operating margin even though this is no applying to a group, which is going to be about one-third lower in terms of, in terms of site. So, we’ll deal with that and that’s going to be tough, that’s going to be as part of $700 million cost reduction — cost reduction program.

On Brazil, yes, you’re right, it’s more than that, but it’s — it’s a part of that. And basically that means that similar to what we do in Luxury, where we are licensees of some brands. Brazil is going to be the licensee of the Wella brand in that country — in the — in the consumer space, as long as both parties find it interesting now. The Wella brand is very important brand in Brazil and the platform we have — with Hypermarkets is an extremely efficient platform in Brazil with not many equivalents in terms of its ability to produce, distribute at the right cost and with efficiency and with and we’ve reached so my bet is that, this is going to continue for quite a long period of time.

Conversely we are reorganizing our Luxury business in Brazil and we are deciding that we will be leveraging the Utah markets platform to try and accelerate our penetration in the rest of our businesses.

Operator

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

Wendy Nicholson — Citi — Analyst

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

Pierre Laubies — Chief Executive Officer

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

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

Sure. I think honestly speaking, I don’t think that, that COVID makes a difference to our plan. We had the plan to focus on our power SKUs and to give them a disproportionate share of — of shelf and — and the line, I would call it our power SKUs with a cost line from a distribution promotion and advertising standpoint. And this is exactly what we are doing for instance, which could be early in the U.S. So our view is that clearly, yes we can always accelerate and we will, because we have now, I would call it refine our poach. We started with a limited number of markets. And now we see that this plan is working. So we are expanding and we are accelerating. Well, now the second phase, where we are looking at combination between markets we have not only look at complexity within market. But now we are looking at complexity between market and that’s the next stage of the whole kit on that one, but I mean I’ll be honest, I don’t think, I don’t think COVID changes everything to the plan, we need to — we need to continue to push. We need to continue to push our core franchise. And as I said earlier, to have a total activation through the line from distribution to promotion to advertising, through our core franchise. And and we know that it is also — also, the way we built attribution for advertising support to make sure that we advertise the core line, the core sub franchise of the brand. And we have seen it has a fantastic result in COVID, overall in the U.S. market for instance, where our top six or seven franchises are really growing very fast.

Operator

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

Wendy Nicholson — Citi — Analyst

And that’s going to be online? Thank you.

Pierre Laubies — Chief Executive Officer

[Speech Overlap] please. Hi.

Joe Lachky — Wells Fargo Securities — Analyst

Hi. I wanted to ask about Kylie and the trends you’re seeing in that business is your kind of navigating through this crisis, obviously there are — there are largest retailer partner, experienced some disruption closing stores and so forth, and I obviously Kylie has a pretty big e-com presence. So just wanted to figure out the balances, as you’re working through there. And then if there’s been any sort of manufacturing issues with that business. Are you able to keep up with supply and — and if there were there any chance that any plans to move manufacturing in-house a little quicker than you had previously plan? Thanks.

Pierre-Andrew Terisse — Chief Operating Officer and Chief Financial Officer

Well. A lot of very good questions. So, yeah, I mean, we are constrained by on cosmetic, we’ve clearly been constrained by — by prediction. The third-party manufacturing we’re using has been — has been shutting down and therefore we’ve been, we’ve been out of stock for a lot of the cosmetic references, which is a pity backlog because that direct-to-consumer still works and is — and is very active. So we are indeed looking at what are the options we are in the short-term that’s going to be, I think the reopening. But in the more medium term, of course because we need to be able to make sure that we have supply at all time, we can’t be in that — in that kind of position again.

The other side is skincare and here we have really, really seen a lot of traction. A lot of traction on the direct-to-consumer side in particular, beyond what we are, what we thought. So it’s really good because it means that we have confirmation that the skincare range of Kylie has as — has a lot of future in front of — in front of her and we need to develop that, now what we are also doing is take advantage of this period to number one, accelerate on the building of — of the infrastructure, we need and the frame we need to be able to leverage Coty network and size for the benefit of — for the benefit of Kylie and we’ve been pretty active on that and — and we will be in fact ahead of, we are ahead of the plan we had. And on the — on the other hand, we have accelerated the — the launch in Europe, as I said during the call, and on the 22nd of May 13, in 11 days we’ll be launching Kylie products in skin in — in Europe, so a lot of promising elements. We have to solve discussion of the supply, but we have everything — we everything we need to do it. And then on the demand, the direct-to-consumer, what you call the ecommerce is really an opportunity for both, by the way Kylie, but also the rest of — the rest of Coty. All right. Well, thank you, again. Very happy to have been able to share these important news with — with you and I wish you all — we wish you all Pierre Andre and I to stay safe and to stay close to this incredible market, full of uncertainties, but also full of opportunities. Thank you and we wish you a very good day.

Pierre Laubies — Chief Executive Officer

Thank you very much.

Operator

[Operator Closing Remarks]