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Edited Transcript of COTY earnings conference call or presentation 6-Nov-19 1:00pm GMT

Q1 2020 Coty Inc Earnings Call

New York Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Coty Inc earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Pierre Laubies

Coty Inc. - CEO & Director

* Pierre-André Terisse

Coty Inc. - CFO

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Conference Call Participants

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* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Faiza Alwy

Deutsche Bank AG, Research Division - Research Analyst

* Joseph Bernard Lachky

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Lauren Rae Lieberman

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Robert Edward Ottenstein

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

* Sunil Harshad Modi

RBC Capital Markets, Research Division - MD of Tobacco, Household Products and Beverages

* Wendy Caroline Nicholson

Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research

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Presentation

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Operator [1]

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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 First Quarter Fiscal 2020 Results Conference Call. As a reminder, this conference call is being recorded today, November 6, 2019.

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 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 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.

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Pierre Laubies, Coty Inc. - CEO & Director [2]

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Thank you, Maria. And welcome, everybody, to Coty's First Quarter Fiscal '20 Conference Call. I will start by reviewing the progresses we have made on our turnaround plan in the last few months. And Pierre-André will then discuss our financial results, outlook and some of the recent strategic developments.

Our Q1 can be characterized by several key developments. First, we have begun activating our turnaround plan announced on July 1. Second, our operational and financial results illustrate that we are off to a solid start for the year and that we are showing improvement on the parameters that we seek to drive. And third, we remain confident in the fiscal '20 targets we laid out on the last earnings call.

As a reminder, we built our turnaround plan aimed at solving what we consider our most pressing issues. More specifically, we were talking of the need to readdress the trajectory of our Consumer Beauty business, retain the high-performance levels of our Luxury and Professional Beauty businesses, close our margin gap against our peers, reconcile our organizational design and our size, and build an engaging culture relying less on personal genius and more on collective mastery. 4 months into the activation of our plan, we are tackling each of these areas one by one.

To begin stabilizing our trends in Consumer Beauty, we have been refocusing our teams on the most pressing fundamentals, namely our working media strategies. In Q1, working media spend increased 11%, with the biggest step up behind Consumer Beauty brands. Within Consumer Beauty, we are actively focusing our resources behind our priority brand-country combinations, leading to an investment increase of close to 40% on these strategic priorities. We are also returning, as you may have noticed with the recent announcement on COVERGIRL, to a marketing strategy rooted on our strongest distinctive brand assets.

We are also beginning to address our gross margin gap in several ways. First and foremost, we are now making sure that we have the best possible alignment between sell-in and sell-out, thus avoiding value-destructive selling tactics. Two, our plans include list price increases where relevant, which have already been, or as we speak, are being activated in several countries. Finally, we are advancing in our objectives to be the leaner and more aligned organization supported by an enabling culture with the right balance of key activity and discipline. We have defined our new organizational structure and have been communicating it for the core functions and in market.

We are currently actively recruiting externally and internally for our new Amsterdam headquarter, which will be ready by Q4. And we have recently named Richard Jones our Global Chief Supply Officer. Richard joined us with extensive experience in the beauty industry and is a key addition to our leadership team to lead our [comm] and SKU simplification agenda.

To build further on the progress we have made, our proprietary approach to defining market turnaround plans has now covered approximately 50% of our business. This include: Consumer Beauty U.S., U.K., Germany and Brazil; as well as Luxury U.K.; and an overall review of the philosophy brand. In these markets, we have arrived at core findings, identified the value at stake and have begun deploying action plans. This analytical approach is now being deployed in Consumer Beauty Russia, Poland and Canada as well as Luxury U.S. and Germany, where we expect many of the same findings and conclusions. Our remaining markets will be covered in the next 12 to 18 month.

Although we are still in the early stages of activating our plans, we are beginning to see some green shoots in our operational performance. In the U.K., where Rimmel, the #1 cosmetics -- mass cosmetics brand, had experienced market share erosions, our actions have driven a 200-basis point improvement in sell-out trends, driving market share gains. Behind these improvements are a substantial increase in working media investment, particularly TV; the strong performance of recent launches, Wonder'Luxe mascara and Lasting Matte foundation, both of which were launched at premium pricing; and while still early, the limited demand elasticity we're experiencing following our recent pricing actions are in line with our expectations.

In Germany, we are seeing many of the same dynamics in the mass fragrance category. Bruno Banani, the #1 mass fragrance brand in the market, has also significantly increased its sell-out performance from a modest decline to a double-digit growth. Fueling the growth are the strong performance of the recently launched Loyal Man fragrance, increased media support for both the male and female lines and the successful expansion of the brand into the shower gel category through a product range relaunch.

In the U.S., we have also seen some early positive signals, though so we are clear that the path to stabilization will take some time. Sally Hansen, the #1 nail brand in the U.S. mass market, has struggled with sales declines for several years. Our analytical approach identified the core sub-brands we must focus on as well as the key levers to drive consumer engagement. In recent months, we have increased our digital media support for the premium Miracle Gel line; improved the packaging on our treatment product range; and deploy seasonally relevant in-store displays, including a Halloween theme INSTA-DRI color collection. As a result, while the mass nail market continues to moderately decline, both Sally Hansen nail color and nail treatment are back to solid growth.

And in COVERGIRL, while the improvement in the overall brand sell-out has been more moderate, our action plans are strengthening performance in key areas. Our top 8 sub-brands which accounts for 2/3 of the brand sales are now back to growth, marking a 320-basis point improvement. Underpinning this improvement is a strong ramp-up in TV -- in TV support, sorry, behind these sub-brands. And while our sales continue to be weighed down by the shelf space reduction, we are seeing productivity improvement in our core customers as well as sales growth in [untapped] channels, such as Amazon and Ulta.

Speaking of Amazon, as we continue to focus on improving our fundamentals, both off-line and online, we have seen very strong growth of our brands on Amazon, both in U.S. and globally. This strong growth has been supported by our close collaboration with Amazon as part of the global vendor management program, the increased TV support for our hero sub-brands, execution focus on core SKUs that work particularly well on Amazon. As a result, in Q1, our mass brands listed on Amazon grew over 40%, and we now have our fair share on Amazon across most categories, which is a substantial change for us.

In Luxury and Professional Beauty, we are continuing to deploy our strategies of premiumization and category expansion. In Luxury, this is illustrated by Gucci Alchemist's Garden, which remains amongst the top-performing ultrapremium collection, and now we are applying our learning to support the launch of Chloe's Atelier des Fleurs. We are also seeing some success in extending our luxury brand into the cosmetics category, with our Q1 luxury makeup sales 3x the level of last year.

In Professional Beauty, the team is continuing to drive conversion of leading salons to the premium Wella Koleston Perfect with ME+ line. And following the core principle of innovation, penetration-driving, ghd has built on its strong positioning in traditional hair straightener to launch its very successful Glide hot-brush.

All of these positive signals give us confidence that we have the right brands, the right people and the right action plans to steadily improve Coty's performance and unlock significant value.

With that, let me turn it over to Pierre-André.

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Pierre-André Terisse, Coty Inc. - CFO [3]

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Thank you, Pierre, and good morning to everyone. So overall, as you have seen, our Q1 results are in line with expectation and sign a solid start to the year.

Starting with top line. Our like-for-like net revenues declined minus 1.1%, which was weighed down significantly by the weak performance in Younique. And therefore for the rest of the scope, our net revenues were practically stable at minus 0.1%. This was obviously partially helped by low comparables in Q1 last year, but it was nonetheless an improvement from the approximately minus 3% like-for-like decline on the same scope, so excluding Younique, both last quarter and in full year '19 overall.

Supporting the like-for-like performance was strong growth in Luxury, in Professional Beauty and a sequential improvement in Consumer Beauty. As we focus on gross margin improvement and continued controlling costs, our adjusting operating income grew 10%, resulting in 110 basis points of operating margin expansion. I'll come back on that point in more details in a few minutes, but first, I'll shift to -- I'll go to the divisional result and start with Luxury.

As you can see here on this slide, the campaign for the new Tiffany & Love fragrance launch is expanding the brand into both male and female fragrances. Over the course of October, the line has been exclusive to Bloomingdale's in the U.S., but we are already seeing strong results. The sales of Tiffany & Love on the very first day of launch exceeded an entire week of sales of the initial Tiffany signature fragrance launch. And we're pleased to see that 1/4 of the sales are coming from the male line, speaking to the appeal of the Tiffany brand across genders.

On the right of the screen, close on the heels of the launch of our Gucci lipsticks globally, we also have been relaunching the Burberry makeup line focused on Asia Pacific, and the results have been very promising.

So if I move to Luxury financial performance then. In Q1, the division delivered another quarter of low to mid-single-digit growth. This included growth in Europe and ALMEA in the Luxury fragrance category that continues to grow in the low single digit, including in the U.S. While our revenue growth was broad-based, in part helped by easier comparables, some of our sales were impacted by the protest in Hong Kong. This has been hampering our growth in the city and the surrounding travel retail corridor throughout the quarter.

From a brand perspective, we are seeing solid performance in our innovation. Both Gucci and Burberry makeup continued to expand, contributing over 1/3 of our divisional growth in the quarter. And this confirms the strong potential of several of our Luxury fragrance brands to expand into adjacent beauty categories. As I mentioned earlier, Tiffany & Love is off a strong start -- to a strong start. Gucci Memoire has been a solid addition to the expanding Gucci portfolio. And Hugo Boss Bottled Infinite continued to be successful, fueling further distribution expansion. From a margin standpoint, Luxury drove strong gross margin improvement, coupled with cost control, and this resulted in over 300 basis points of operating margin improvements.

I'm now turning to Consumer Beauty. You can see on the next slide, a number of our recent successful initiative. On the left of the screen is Lili Reinhart, an actress and celebrity who has a strong following amongst Gen Z consumers, and she will be the new COVERGIRL Easy, Breezy, Beautiful ambassador. And the consumer response and engagement with this announcement has been quite positive.

For adidas, we are capitalizing on the strength of the sports brand with the launch of 3 new fragrances which are working well in market. And as Pierre discussed already, Sally Hansen has significantly improved its momentum through a number of initiatives, including our Halloween nail collection and associated in-store displays.

So let's turn now to the financial performance of the division. For the quarter, the like-for-like net revenues declined 7.8%, improving from the minus 10% decline, ex Younique's, last quarter and in full year '19.

Europe reported solid results, with the growth of net revenues reflecting incremental improvement in sell-out, so that's important.

In North America, the performance was mixed but encouraging with Sally Hansen once again back to growth and noticeable improvements on the priority COVERGIRL SKUs as already disclosed by Pierre. We expect such improvements to continue in the coming quarter as shelf losses moderate and as our investment continues showing traction.

Last, we choose, in most ALMEA countries, for consumer to drive healthy and sustainable sales, foregoing margin-dilutive, low-value sales. And as a result, revenue declined in this region.

In the division, as in the rest of the group, we remain indeed focused on driving gross margin improvements, and these trade-offs will allow us to free up gross margin dollars to reinvest in the business.

And so on this point, in Q1, we actively ramped up working media and redeployed it to our priority brands. With working media investments behind these brands up 38% in the quarter, we saw a noticeable improvement in the trends of such sales, which declined in low single digits in Q1 versus high single-digit decline in full year -- in fiscal year '19. So as expected, the significant increase in A&CP, coupled to revenue decline, drove a contraction in operating margin in Q1.

To end up on consumer. While the performance of this division remains weak, this quarter has shown positive answer to our initiative, and we look forward to more gradual improvements in the coming quarters.

I'm now shifting to Professional Beauty. ghd continued its strong momentum across core countries. They did it by innovations such as the Glide hot-brush and the Platinum+ styler, as you can see on the left. And as Christmas is getting close, you should really look at this as a gift idea for the people you really love. That's a great idea. So I recommend it.

On the right, you see that OPI also returned to strong growth, supported by easier comparables and a successful execution of some of our collection. You see on the screen the Scottish collection in particular.

Talking about financials for the division. Professional Beauty returned to growth, as expected, reporting a strong 5% like-for-like. We saw strong growth in Europe and North America, partially helped by low comparables in the case of the U.S. specifically. As expected, U.S. consumer -- customer destocking that impacted our sales in the second half of last year has run its course, and we have been shipping in line with consumption. The combination of this top line expansion and cost discipline drove over 400 basis points of operating margin expansion, which stood at close to 10% for the quarter.

So that was for the division. I'm now going back to Coty as a whole. A key outcome at the beginning of this year is the changing shape of our P&L as we are seeing our active focus on gross margin translating into results. Gross margin in the quarter was up 160 basis points to 62%, which was a strong improvement throughout the quarter.

Consistent with our comments in August, we significantly increased working media in the quarter by 11%, and this resulted in an overall increase of 70 basis points in our A&CP as we continue rationalizing our nonworking media. This is a key outcome since it builds a virtuous equation where gross margin progresses finance investments behind our brands, which will gradually help our revenues and in turn our gross margin. It's also the main driver of growth of our operating income, which was up 10% in Q1 or 110 basis points increase in the -- in terms of operating margin.

Last, our EPS ended at $0.07, which was down versus the $0.11 reported last year, which itself included $0.04 of nonrecurring tax benefit. And therefore abstract -- absent from this tax benefit, the EPS has been stable.

I'm turning to cash flow statement, which, as you know, is an important element for us. While Q1 is always a seasonally weak period for cash generation, we did improve our free cash flow very meaningfully by $169 million year-over-year. This growth reflects strong underlying improvements in cash generation as well as an additional $75 million from factoring.

Having closed the Younique divestiture in the quarter, we received $50 million of proceeds, and at the same time, we purchased remaining stake in our Southeast Asia JV for $45 million. In total, aided by FX, our net debt and resultant leverage moved down moderately versus last quarter to less than $7.4 billion for the debt.

So I'm now moving to Slide 18. In summary, Q1 was a solid delivery on all metric. It was as well a turning point in the management of our equation and the first milestone in the construction of our turnaround plan. This makes us confident for the rest of the year, and we're happy to confirm our target for fiscal '20 at constant scope as said in the last earning call. In detail, that means like-for-like net revenue stable to slightly lower year-over-year, and operating income at constant scope and constant currency growing 5% to 10%, a mid-single-digit growth in the EPS and a moderate improvement in our free cash flow. We expect Q2 trends to be generally consistent with this growth algorithm.

To end up, let me remind you of an important decision which we announced 2 weeks ago. While our turnaround plan is fundamental to building a better business, and you have seen some first elements of delivery, we have, with the Board, come to the conclusion that we need to accelerate the transformation of Coty, to increase our focus on core categories and to free up resources to invest behind these categories, namely fragrances, cosmetics and skin care. And therefore, we've decided to engage a strategic review of the Professional Beauty business, associated hair brands as well as the Brazilian operations.

The teams in these businesses have done an incredible job over the past 3 years in creating strong platforms in their respective business. However, we believe we need to work to identify the best options for them with very simple objectives: number one, unlock shareholder value; number two, sharpen our focus on our fragrance, color cosmetic and skin care businesses, and by doing so, reduce the complexity of our portfolio; and with potential proceeds, deleverage Coty with a target pro forma leverage which we have fixed at around 3x.

We anticipate that the review will be completed by summer 2020. And I must say that we have already received multiple marks of interest which I think says about the high attractiveness of these assets.

After the stabilization of our supply chain, after the building of our turnaround plan, this is a key decision to accelerate the transformation of our company into a focused and competitive beauty company.

That's the end of our opening comments, thank you for your attention. And let's now go to the questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes the line of Robert Ottenstein of Evercore.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [2]

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I was just wondering if you can maybe just help us understand a little bit more of why selling Professional is a strategic imperative. Great business, important cash flow generator. I think we were a little surprised to hear about how you were thinking about it. So just really trying to understand in a little bit more depth kind of the thinking around that.

And then once -- assuming that happens, maybe give us a little bit of sense of any issues in terms of stranded costs or scale issues that could result from the sale. And then finally along those lines, what that does to your kind of expected medium-term algorithm, whether the kind of targets that you have for fiscal 2020 would make sense as a medium-term algorithm after that divestiture.

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Pierre-André Terisse, Coty Inc. - CFO [3]

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Okay. Robert, this is Pierre-André. I think the reasoning is very simple. We have 3 great categories, we believe in each of them. But we also believe that each of them has a lot of potential, and we need to be able to put the means, human and financial, behind each of them to develop them. We don't believe, at the moment, we would be in the best position to manage the 3 at the same time for reasons which has to do with leverage, on the one hand, and for reasons which has to do with complexity of, and focus on others. So we've chosen to focus on 2 segments, which are Luxury and consumer, which in reality, category-wise, are fragrances, cosmetics and skin care. Because we believe by focusing on these categories, and only these categories, we can go faster in creating value with them and we can sharpen our focus and transform the group faster.

At the same time, we believe that by putting the professional business, the hair business and the Brazilian business in a different context, that's going to give this business as well the means it needs to -- they need to develop. So it's -- yes, it's really a matter of focusing, of giving ourselves more attention to the categories we've chosen, freeing up financial means as well and recovering financial flexibility to invest behind those. And this is, we believe, the way we are going to maximize the value creation for our shareholders.

With respect to stranded costs, this is something we'll have to deal with, but we are not overly worried for a couple of reasons. The main one being that most of the turnaround plan efforts have been focusing on Consumer Beauty and Luxury. And therefore the essence of the plan is going to remain on a slower base, and we think that's going to be definitely allowing us to deliver the target we had set [for it] at the time, which was a 14% to 16% operating margin and which we have confirmed recently. So essentially, it doesn't change our target in terms of gross margin and operating margin improvements, and we hope it's going to help us accelerate the transformation of the group.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [4]

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And in terms of the algorithm, what do you see as a good medium-term algorithm, ex divestitures?

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Pierre-André Terisse, Coty Inc. - CFO [5]

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What do you mean by algorithm?

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [6]

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Well, just in terms of expected top line growth, operating profit growth, EPS growth, as the kind of targets that you gave for fiscal 2020.

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Pierre-André Terisse, Coty Inc. - CFO [7]

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Okay. So we're opening a strategic review and I think it's a bit early days to talk about all that. What we are confident about is our ability to deliver substantial margin improvement and to target the 14% to 16%. And then for the rest, we need to work. We need to work.

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Operator [8]

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

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [9]

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First question is just on Luxury, if you could just break down the performance a bit because it decelerated despite comping against a period where you had some supply chain issues. So are there still old disruptions you're working through? Because it doesn't seem like the underlying category has changed much, particularly in fragrances.

And then if you could just talk about your exposure to Hong Kong and travel retail there, that would be great.

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Pierre-André Terisse, Coty Inc. - CFO [10]

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Yes, I can take it, and Pierre can complement. And it's true Luxury had a favorable base. So that's why you -- the way to read the 4% is that it's very strong, it's a strong performance. But at the same time, it reflects easy comps and the Hong Kong and travel retail impact I've been mentioning.

And so if you turn to Q2, you would expect the reverse, i.e., you would expect that the comps are going to be much higher and therefore probably Luxury is going to be low single-digit growth in this particular quarter. We continue seeing fundamentally positive drivers of performance in the fragrance, in the expansion to cosmetic. And at the same time, we have this situation in Asia which is likely to continue impacting us for a few quarters.

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Operator [11]

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

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Sunil Harshad Modi, RBC Capital Markets, Research Division - MD of Tobacco, Household Products and Beverages [12]

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Two quick questions for me. First, I just want to make sure I heard it right, that your second quarter outlook is in line with the full year. I just -- I thought I heard that, but I just wanted to confirm that.

And just given how important the December quarter is for the beauty business in general, just any more clarity or specifics you can give us in kind of how you're thinking about that season will be very helpful in terms of sell-in of new products or programs or anything that would give us a little bit more clarity.

And then the second question is just a bigger-picture question on makeup. Obviously, a lot of companies have been struggling in this area. Just wanted to get your views on what you see going on in that market. Do you think it's something that can be turned around? Is it really just a function of a cyclical change between skin care and makeup that tends to go every 3 to 5 years? Any thoughts around that would be helpful.

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Pierre Laubies, Coty Inc. - CEO & Director [13]

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Nik, this is Pierre. I'll take the last question first and then -- and Pierre-André will take the other ones.

I think our vision on the makeup is that probably there has been a bit of binge spending, if I may say so. And I think we probably are in a normal cycle of multiplication of purchase by consumers. The category is maxed out probably in term of penetration. It has probably increased penetration by going to lower ages -- younger ages, sorry. But we do think that, clearly, we have seen a pattern of increase of quantity of purchase over the years, and I think we are cycling through that.

We also, I think, have a certain number of channel which are not measured in the typical panel, and like we are talking of the online business. And if I assume that if we have such a good performance with Amazon, we may not be the only one having that performance. And as a consequence, I think alternative channel are also taking their fair share. So I think probably the shift in channel is -- plays a role here in the official data that we see. And probably have going through, I would call it an accelerated cycle of purchase for the last 2 years which we need to cycle through.

But we do think that the category still have potential. And particularly, we really believe that the category has -- or will have potential in the Luxury side of this category.

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Pierre-André Terisse, Coty Inc. - CFO [14]

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In -- Nik, Pierre-André. So on the new launches, there's a couple of things. We've already mentioned Tiffany & Love, which is really a Q2 -- going to be a Q2 event, which is off to a strong start as you have seen. We'll have, in addition, Gucci Bloom Ambrosia and the first time we have operated positive in the U.S. and in the U.K., but these are very early days. We have Burberry Her Eau de Parfum Intense, which is adding to the range of Burberry for Her. We have as well 2 shades of glittery lipstick for Gucci which are going to come in addition and widen the range. And that is for Luxury, so we are -- we continue -- we'll continue coming with innovation on the market.

With respect to Q2 and what we expect. So you all know that the base of comparison, in particular for Luxury and PB was low this quarter. And therefore, you would expect to have still a solid and positive performance of these 2 businesses next quarter, but probably being on a higher base level. And at the same time, we expect to see continuing progress in Consumer Beauty. So if I look at the consensus now on net revenues, I would say that we are comfortable with that.

On the operating income for H1. Given the strong start, which [for in part] is attributable to phasing elements, I would see the OI up in the low part of the range we have given for the year, which means about mid-single digit. So Q2, it will be on a different base, very much in the continuation of what we have shown in Q1 and with -- reflecting a substantial improvement in the business.

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Operator [15]

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

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [16]

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So a couple of questions. So first, I just wanted to understand sort of, why did you decide to include Brazil -- and as part of your strategic review? Because I thought that business was doing reasonably well relative to the rest of Consumer Beauty. And so I just wanted to clarify how much did Brazil and the retail hair care business contribute to growth this quarter on an organic basis?

And then I also just wanted to ask about gross margin and was hoping that you could disaggregate for us the margin increase here. Because I think last quarter, you had sort of the higher incremental freight costs because of the supply chain issues. So I was wondering if we could get an underlying growth rate excluding that. And if possible, sort of a breakdown between mix, if there was any contribution from lower promotions, any contribution from productivity, cost-cuttings and synergies.

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Pierre-André Terisse, Coty Inc. - CFO [17]

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Okay. I'll take these question -- number of question, maybe, about the gross margin elements. So strong progress in Luxury for the quarter. Strong progress in Professional Beauty as well for the quarter. In Consumer Beauty, it's been mixed, pretty different from one market to the other. ALMEA, for the reasons I mentioned, which is that we have chosen to give the priority to gross margin and really to be extremely selective on sales. We are negative

(technical difficulty)

but we have a strong rebound on the gross margin. Europe depends very much market by market. Overall, it's slightly negative, and so is the case of the Americas. So Consumer Beauty as a whole is pretty contrasting. This, again, very different movements and dynamics market by market, and I think it's important we try not to manage consumer as a whole, but really to address the specific situation of each market.

On Brazil, well, the reasoning is very simple. Once you eliminate hair, hair is a substantial part of Brazil as well as mass product and deodorants in particular. And therefore, Brazil, in this perimeter, in this -- with this portfolio, was not really fitting in our portfolio. So we thought it was natural for Brazil to go with professional and hair in this strategic review. And not for reason of performance because the performance of both Brazil and the rest of the scope under review is positive. So I mean, it's really not a question of getting rid of businesses which are not performing. It's more a question of having the right level of focus to invest our resources where we think which we can generate more result.

And on your question of what's been doing what on the quarter. The scope, which is under strategic review was positive low single-digit, and the scope under -- which is not under strategic review was negative of single digit. I hope that's been complete.

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Operator [18]

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

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Joseph Bernard Lachky, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [19]

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I just wanted to get back to the strategic options review that you're doing. And I guess first off on the timing of it, because 4 months ago, you guys presented plans after doing a thorough review of the business. So I'm wondering what's really changed and what's driving the need to accelerate change, given the confidence that you had 4 months ago in the turnaround plan. And who's really driving the decision to do that? Is it the management team, is it the Board or the primary shareholder? Can you shed a little light on that?

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Pierre-André Terisse, Coty Inc. - CFO [20]

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Well I mean, you're right on something, which is that we go fast. Pierre has been in the business for about a year. I've been in the business for about 9 months. And in this period of time, we have solved the supply chain issues, then we have stabilized the business in '19, then we have produced a turnaround plan, and now we're starting a strategic review. So that's a lot of things in 1 year.

I think that's just made necessary if we want to reshape Coty and to transform it into a performing beauty company and beauty champions, somehow. I don't think there was any change. We -- I once said that we had to take things one by one and not to try and do everything at the same time. So that's really the methodology we follow. We had to stabilize the company and solve the supply chain issues. That was done. We had to stabilize '19 and to deliver '19. That was done.

We definitely had to look at a plan to close the performance gap of all of our businesses. And that's what we've tried to do with the turnaround plan. And once we've done that, we started looking at the portfolio and thinking, is there any way we can improve faster, we can make run faster, the transformation of the group and improve faster our performance. And obviously a key element was our ability to free up resources, human and financial, behind core categories, and this is why we have made these decisions.

So no change. A diagnostic from the management which has been shared with the Board and fully supported by the Board. There's not one company -- and another one, there is only one company with management and Board, and we have taken this decision together. That's fundamentally it.

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Joseph Bernard Lachky, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [21]

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And then if you could maybe talk about if you have any expectations for proceeds. Is there a hurdle level in mind where you could potentially walk away from doing a deal and hold on to the businesses?

And then maybe if you could talk just generally, I know it's early, but generally about like potential uses of the proceeds, how they could potentially be allocated between debt repayment and share repurchases. And along those lines, would you do a deal that could be dilutive to EPS in order to hit your leverage target of 3x?

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Pierre-André Terisse, Coty Inc. - CFO [22]

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Well I will comment on the last one. Again, it's too early days in terms of expectations. The only thing I can say is that these business are incredibly attractive, whether you talk of Professional Beauty, which for many, many reason, the hair business is one of the leading platform in the world and has been performing well and has been strengthened for the past few years by the management: OPI, which is an outstanding brand; ghd, which is literally flying in terms of growth; and Brazil, which is a unique player on the Brazilian market which is, as you will recall, a very attractive market in the beauty space. So we had expectations which basically match the attractiveness of these assets. And I will not comment further on that.

On the potential use of proceeds, we've been fairly clear, I think, in the press release saying that the potential proceeds will be used to decrease the indebtedness with a target leverage of about 3x net debt-to-EBITDA, and any excess will be returned to shareholders. So I've got nothing to add to that.

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Operator [23]

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

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [24]

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So I wanted to ask again about Consumer Beauty margins. I know you touched on it already, but I was intrigued by you saying you're not going to manage holistically, but more thinking about the specific situation of each market. So with that in mind, when you said that for ALMEA, where you've really decided to start to prioritize gross margins more dramatically, sales were down. So when I think about the situation in the U.S. and promotional intensity and things that you've talked about trying -- needing to start to correct, how does that play out? Like if I think about the trajectory for Consumer Beauty of the U.S., is there a point in time somewhere in the next, I don't know, 12 months, 18 months, when we see more pressure on sales because that focus switches to be more about gross margin.

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Pierre Laubies, Coty Inc. - CEO & Director [25]

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Lauren, this is Pierre. The -- I think I'll come back to that point. At the end of the day, it's first and foremost, our strategy is to raise the gross margin. And we'll raise the gross margin by a combination of be relatively competitive on the promotion, but do not be overly competitive. So clearly, we do understand that there is a certain promotional intensity that you need to respect. So we are going to be in line with what we think should be the level of promotion in the market. But certainly, what we believe is that we have not exerted pricing power on our products over the course of the last 5 years, and it is time to return to that, all right?

And so we do know that we have our math in order, we do clearly understand that there is some elasticity. And we are ready to accept some of these volume losses associated with that because we think it is very important that we generate the gross margin which enable us to increase the velocity of our brands by advertising. And I think that model, I -- we are convinced that this model will work and we are going to exert it.

The second thing we are going to work to improve our gross margin is to really simplify our portfolio, simplify our range. And make sure that the SKUs, which are a penetration driver and are also in general a high-margin SKU, these are the -- they get the shelving that they deserve. And being working on the shelf of 6 elements, 4 elements, 2 elements or 1 element. And I think it is -- there is a lot of tackling and blocking there to be there -- to be done. But actually, I do believe that we can both, at the same time, play by the rule of the game of promotional intensity, which is acquired, but not over. And at the same time, raise our gross margin by balancing the mix of our offer over time.

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Operator [26]

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

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [27]

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I wanted to just focus on the working media. I want to make sure I have the statistics right here. So I think you mentioned core brand investment in working media was up about 38%. Can you help us understand what percentage of the business falls into that priority or core brand mix?

And then also, tell us a little bit about where some of those media dollars are going. I know you mentioned TV, but if there are other -- any other areas of emphasis in terms of your media mix, that would be helpful.

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Pierre Laubies, Coty Inc. - CEO & Director [28]

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Our media mix is established by a rich-based strategy. And as a consequence, we apply the media mix that we need to apply based on the -- again, the specific country situation. You have countries where you can use -- you need to have a balance between -- a tilted balance in term of online versus regular TV and -- due to the penetration of digital and other countries where the penetration of digital is lower, and as a consequence, you do more mainstream media. So that's -- and even in some countries, you can do -- you will do regional balances. Take Russia, if you look at the Moscow area, you are going to be massively investing into digital whilst the rest of the country you are going to invest in TV. So I think we tailor-made this media plan market by market, and there is not a one-size-fits-all strategy. So that's one of the first driver.

The second thing is that these core brands, at this stage, or these core BMUs, as we call them, brand market intersection represent on which we are focusing this media effort, [put into] about 60% of our revenues, and they tend to be also our biggest global brands. Over time, we do want to continue to expose -- to increase that because we still have gaps to close in term of media investment in a certain number of market. And this is why the job that I was relating to earlier on gross margin is absolutely important as well as the balance between working media and nonworking media which still can be improved at Coty.

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Operator [29]

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

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [30]

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Two -- one on the pricing commentary. So is this something that's more of a onetime repositioning of product pricing? Is it something that you want to use as a lever on a more ongoing basis kind of inflation-plus? So kind of curious on that.

And then secondly, back on the potential asset sales. I realize it's obviously early and this is kind of a second step, if you will, but the implication of what you said about leverage would imply redeploying proceeds, assuming multiples or value that we all kind of believe is reasonable for the business. So maybe holistically, if you could talk a bit about, what you would do with cash were you unencumbered by the current debt levels? That would be kind of helpful and just hearing your thoughts there.

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Pierre Laubies, Coty Inc. - CEO & Director [31]

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Okay. Mark, I'll take the pricing decision. This is Pierre -- or the pricing question, sorry. I think both of the above will be my answer. Yes, we have a catch-up plan to do, and we are executing a catch-up plan. We have not taken pricing for many years and it has depleted our ability -- it has depleted our gross margin; and as a consequence, has weakened our brand; and as a consequence, has unfortunately led us to increase promotional intensity. So we need to get out of this vicious circle to get back into a virtuous circle. And at this stage, we -- this is why we do think that we need to have a bit of a reset, all right? And then going forward, indeed, you're absolutely right. We need to make sure that we manage inflation correctly and we do not fall back into this trap we have fallen into.

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Pierre-André Terisse, Coty Inc. - CFO [32]

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And Pierre-André here. I think it's really a matter of trade-offs and financial flexibility. Trade-off, we have a debt level which, given the recent evolution of the business, has led us to make a lot of trade-offs in favor of cash as opposed to in favor of brand investment and profit, by the way. So I think by coming back to a leveraged level which is more adapted to the industry and category, we are putting ourselves in a position to make better trade-offs overall, which sometimes will still be in favor of cash but sometimes will be in favor of growth.

And then all together, that's giving us more financial flexibility and more financial flexibility, that means that with 2 categories which offers a lot of possibilities of growth, we would have the ability to invest, if and when, in front of the right opportunity. So yes, I would say overall, that's definitely an improvement in order to grow the business we have chosen to keep.

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Operator [33]

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Our next question comes from the line of Wendy Nicholson of Citigroup

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [34]

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My first question has to do with the comments you made about selling on Amazon and the great growth that you're seeing there. And you're one of the few beauty companies who talked about that. So I was curious why do you think that is? Are you doing extra promotion on Amazon? Can you talk about what your margins look like on Amazon, selling to Amazon versus selling to traditional retail?

And then my second question, just on the divestitures. I mean, I was stunned to see the price -- the proceeds you got for Younique. I mean, 1/10 of what you paid is kind of stunning. And I'm a little bit worried that, that sends a signal to potential buyers for professional hair care or the Brazilian business, that you're in kind of fire sale mode and you'll sell these assets for anything. So was Younique like a one-off situation, you just wanted out? Or was it really that bad a business? I mean, maybe you could just comment on how much discipline you're going to show in terms of the proceeds you'll get for these businesses.

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Pierre Laubies, Coty Inc. - CEO & Director [35]

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I'll take the first part of the question and I'll let Pierre-André answer on the second one.

Why are we growing on Amazon, mostly because we are applying on Amazon and -- the strategy that we aim at applying in the rest of the [retail] or the mass market. We clearly know now what our core SKUs are. We know what our high-velocity items, which are penetration-building items, are. And we are making sure that they get their fair share on Amazon. As a consequence, the business is growing. So they have an absolute correlation between the job that we have been doing and these markets that we have identified, U.K., U.S., Germany and Brazil and what we are doing on Amazon.

And the benefit is that definitely, with online, I mean, the implementation of the situation -- of that strategy works faster. And the ability to expand your assortment or the ability to adapt your assortment is just more rapid. And as a consequence, we get this result. And also, we have put resources behind it which probably we haven't been necessarily putting before. And our margin is up from the [material level].

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Pierre-André Terisse, Coty Inc. - CFO [36]

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So we are not, absolutely not, in a fire sale mode. I think Younique, you will understand, was a very specific case. Not to use the unique word, of course. It's a business which was far away from our competencies, which we have been struggling to manage for the past few quarters now with very difficult performance. And at some stage, we just choose to move on. And we choose to move on and to divest it in conditions, which I agree, are not very good looking. But at the same time, we thought it was very important for the rest of Coty that we could move on and that we could put this problem on the side, knowing that Derek will be managing it much better than we have done together. So that's a choice we made. Again, not being in a fire sale mode.

What we are doing now with the strategic review is completely different, of course. We are talking of an asset which is not -- which has not been losing ground or falling. We are talking of an asset which is performing well. You see this quarter, this is the case of Professional Beauty, this is the case of hair, this is the case of OPI, ghd, Brazil. We are talking of brands which are recognized by many, many people, professional sector, but also by many investors, which attract a lot of interest, which was not the case of Younique.

These are brands which have a fairly good level of profitability, improving. PB was 12% last year, OI, and that's a good proxy for the overall group. So if you take into account the common costs which are going to remain [for a part] at Coty, we're talking of a scope which has a mid-teens operating income. So given what I said about the profitability, about the growth, given the obvious appetite which we see and which I'm sure you can see, we expect this transaction to be creating a lot of value, actually. Just creating a lot of value. And we are going to make sure that this is happening this way.

It's really about [exteriorizing] value for the group and reshaping Coty in a much more substantial way than Younique, which was a very different, small case.

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Operator [37]

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Our final question will come from the line of Andrea Teixeira of JPMorgan.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [38]

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So just as a final question, sorry, on a couple of clarifications. One is on the Q2 guide, when you mentioned first half, did you mean the first half operating profit would be up mid-single? Or were you referring just to Q2 specifically?

The second one was on the expectation of the proceeds from the sale of the assets. I mean, I think the $8 billion to $9 billion, from what have you talked about, implies about 20 to 21x EBITDA. So as a follow-up, just to see if you think that could be feasible from what you just mentioned about not being on a fire sale.

And then on the marketing spending -- sorry, the third one would be, you said working media was up 11%. But can you comment about the whole A&P because I understand you were taking down couponing. So in the couponing, on the total A&P spend, it this still down relatively? I think it is still down, so I want to just double-check that. And also how a like-for-like -- I understand that you do on a net basis, how a like-for-like would have been without the reduction in couponing.

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Pierre-André Terisse, Coty Inc. - CFO [39]

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Okay. Pierre-André, I'll take this -- I think I'll take these questions. On A&CP first, it's up 70 bps all together. So 11% is increase of the working media, but the total A&CP is up 70 basis points. It's been up and it will continue going up. And we believe it's important that we keep reinvesting all together. And therefore will invest or invest -- we'll increase our investment in A&CP.

On the guidance for the operating income. So I said mid-single digits for H1. And therefore, that includes the Q1, which has been specifically strong with some [phasing events], as I said. But all together, H1 is going to be up. We expect it to be up mid-single digits, so within the range we have given for the year, in the first part -- or in the [lower] part of the range.

And then for the proceeds, we didn't say it's $9 billion. That was I think an information in the press, in The Financial Times, if I'm not mistaken. Now clearly, that's going to be a sizable transaction. You know how much we're talking about in terms of earnings. I've given you some [items] about that. You know how strategic transaction can price on the market, what kind of multiple it can attract. And therefore, you can make the math. It's going to be a sizable transaction, and we don't want to speculate on the amount. That's far too -- but it's far too early. But we believe it's going to be a sizable one.

I think that's it. We'll conclude the call now. Thank you very much for your attention. It's an exciting time at Coty, exciting to see the progress we are making. And we look forward to sharing more progresses with you next quarter in February. Thank you. Bye.

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Operator [40]

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