Coty Inc. Class A

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 COTI'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 Louvies, Chief Executive Officer, and Pierre-André Therese, Chief Financial Officer. I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Cody'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'll now turn the call over to Mr. Lubies.

Thank you, Maria. And welcome, everybody, to COTI's first quarter fiscal 20 conference call. I will start by reviewing the progress 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 1st. 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 redress 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 and engaging culture, relying less on personal genius and more on collective mastery. Four 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 spent 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 the 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, avoiding value destructive selling tactics. Two, our plans include lease 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 a leaner and more aligned organization supported by an enabling culture with the right balance of creativity 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 code 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 includes 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 months. 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 UK, where Rimmel, the number one 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, Wondolux Mascara and Lasting Matte Foundation, both of which were launched at premium pricing, and while still early, the limited demand elasticity we are 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 number one 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 Men fragrance, increased media support for both the male and female lines, and the successful expansion of the brand into the shower gel category through product range launch. In the US, we have also seen some early positive signals, though we are clear that the path to stabilization will take some time. Sally Hansen, the number one nail brand in the US mass market, has struggled with sales declines for several years. Our analytical approach identify 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 MiracleDuel line, improved the packaging on our treatment product range, and deployed seasonally relevant in-store displays, including a Halloween-themed InstaDry 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 actions plans are strengthening performance in key areas. Our top eight sub-brands, which account for two-thirds 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 support, so we're behind these sub-brands. And while our sales continue to be weighed on by the shared space reduction, we are seeing productivity improvement in our core customers, as well as sales growth in untracked channels such as Amazon and Ulta. Speaking of Amazon, as we continue to focus on improving our fundamentals, both offline and online, we have seen very strong growth of our brands on Amazon, both in the 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 focused on core SKUs that were 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 extension. In luxury, this is illustrated by Gucci Alchemist Garden, which remains amongst the top-performing ultra-premium collection, and now we are applying our learning to support the launch of Chloé's Atelier des Fleurs. We are also seeing strong success in extending our luxury brand into the cosmetics category, with our Q1 luxury makeup sales three times the level of last year. In professional beauty, the team is continuing to drive conversion of leading salons to the premium Vela Collestant Perfect with ME Plus line. And following the core principle of innovation, penetration, driving, GSD 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 COTI's performance and unlock significant value. With that, let me turn it over to Pierre-André.

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 performance in Unique. And therefore, for the rest of the scope, our net revenues were practically stable at minus 0.1%. This was obviously partially held 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 Unique. both last quarter and in full year 19 overall. Supporting the life-for-life performance was strong growth in luxury, in professional beauty, and a sequential improvement in consumer beauty. As we focused 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 detail in a few minutes. But first, I'll shift to, I'll go to the digital results and start with luxury. As you can see here on the 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 a quarter 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 meet single-digit growth. This included growth in Europe. and Almea in a 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 protests 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 Balmerie makeup continue to expand, contributing over a third 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 Memoir has been a solid addition to the expanding Gucci portfolio, and Hugo Boss Bottles Infinite continue to be successful, fueling further distribution expansion. From a margin standpoint, luxury drove strong gross margin improvements coupled with cost control, and this resulted in over 300 basis points of operating margin improvement. And now turning to consumer beauty, you can see on the next slide the number of our recent successful initiatives. 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 three 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 her 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 unix last quarter and in full year 19. Europe reported solid results with a 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 discussed by Pierre. We expect such improvements to continue in the coming quarter as shelf losses moderate and as our investments continue showing traction. Last, we choose in most ALMEA countries for consumers 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% this quarter, we saw a noticeable improvement in the trends of such sales, which declined in low single-digit in Q1 versus high single-digit decline in fiscal year 2019. So as expected, this significant increase in NCP 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 answers 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, aided by innovations such as the Gly Hot Brush and the Platinum Plus Styler, as you can see on the left. And as Christmas is getting close, you should really look at this as a gift ID for the people you really love. That's a great ID, 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 collections. 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. customer discounting that impacted ourselves 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 COTI as a whole. A key outcome of 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 the ANCP as we continue rationalizing our non-working media. This is a key outcome. since it builds a virtuous equation where growth 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 point increase in terms of operating margin. Last, our EPS landed at 7 cents, which was done versus the 11 cents reported last year, which itself included four cents of non-recurring tax benefit, and therefore, 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 unique EV feature in the quarter, we received $50 million of proceeds, and at the same time, we purchased the remaining stake in our Southeast Asia JD for $45 million. In total, added by FX, our net debt and resultant leverage moved down moderately, this is 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 metrics. It was as well a turning point in the management of our equation and a 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 2020 at Consumscope as set in the last earning call. In detail, that means like-for-like net revenues stable to slightly lower year-over-year, an operating income at Consumscope and Consumcurrency 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 two 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 COTI. to increase our focus on core categories and to free up resources to invest behind these categories, namely fragrances, cosmetics, and skincare. 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 three 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 cosmetics, and skincare businesses, and by doing so, reduce the complexity of our portfolio. and with potential proceeds, deleverage COTI with a target pro forma leverage, which we have fixed at around three times. 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 utility 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.