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 Cody's second quarter fiscal 2020 results conference call. As a reminder, this conference call is being recorded today, February 5th, 2020. On today's call are Pierre Lubies, Chief Executive Officer, and Pierre-Andre 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 will now turn the call over to Mr. Luis.

Thank you, Maria, and welcome everybody to COTI's second quarter fiscal 20 conference call. I will start by reviewing the progress we have made on our turnaround plan in the last few months. Pierre-André will then discuss our financial results, outlook, our newly introduced sustainability target, and some of the recent strategic developments. Exactly one year ago, I was sharing with you and our key leaders my first impressions of COTIE. My first impression at the time was that we had reserves of performance to unlock in the way we ran our company, and that the path to building a bigger business would have to go through building a better one. Our turnaround plan has been underway now for two quarters, and we are beginning to see clear evidence of progress in the key parts of the business. Like we alluded about it six months ago, Our key priorities over these last two quarters have been rebalance working media and non-working media, grow penetration by advertising our brands at scale with the right media mix, improve our gross margins by managing better our mix price and promotion level, put together an organization more adequate with our size, find the right balance between discipline and creativity in everything we do, deliver consistent financial performance in a quality way. I am very happy to report that our teams across our business units, factories, and corporate centers have been doing just that. We are, of course, far from having solved all the challenges that we face and sees all the opportunities ahead of us. Yet, we can see that we are on the right track, that our plans are starting to work, and that now is the time for us to be consistent and persistent. This allows us to reconfirm our fiscal 20 targets. At the same time, we are beginning our work to reshape our portfolio to both provide financial flexibility and raise our growth potential. We will come back to that. I will take now the opportunity to concretely illustrate our approach by sharing some details of our turnaround plan activation. We continue to grow our working media spend, which was up 8% in the quarter. As we focus on investing behind our priority brand-country combination, the media spend behind these priority businesses in consumer beauty grew over 15% in the first half of the year. We also continued to refine the mix between traditional and digital media, activating digital first campaigns in our younger orientated brands, while ramping up TV media behind our more mainstream brands. Our organization is very intentional in driving strong gross margin improvement, activating the levers at the center of our strategy. We have implemented least price increase in a handful of countries, with a broader deployment on track for the second half. Each of our divisions have been actively managing the mix of their sales, prioritizing higher value products and channels. We are continuing to monitor that we have the best possible alignment between sell in and sell out, thus avoiding value destructive selling tactics. Finally, We are advancing on our objective to be a leaner and more aligned organization, supported by an enabling culture with the right balance of creativity and discipline. The new organizational structure has been deployed effective January 1st, and the teams are now working under the new regionally focused framework. We have stepped up our service level to our customers, whilst at the same time increasing our forecast accuracy. and we have begun to execute on our fixed-cost restructuring program. As part of our efforts to build a healthier business, we are steadily restoring the pricing architecture of our brand and premiumizing our portfolio, and we are making strong progress within both consumer beauty and luxury. In consumer beauty, the average net revenue per unit in the past six months has increased by approximately 2%, with even higher growth in Europe. This has been achieved through a combination of implementing net price management in a few countries, although the bulk of the effort will be deployed in the second half. Active revenue management, as we have prioritized and supported higher value products. and more disciplined promotional activity while remaining competitive in the marketplace. In luxury, while we are starting from a stronger position, we are also capturing premiumization opportunities. The average selling price has increased by approximately 4% with improvement in each of our top three markets. The driver for this expansion includes reduced promotional activity improved mix management, including greater emphasis on eau de parfum, and reduced gift set activity, and selective price management. Last quarter, we shared with you early progress in some of our priority brand-country combinations. With that progress continuing to build across a number of brands and markets, I am pleased to offer the global view on our in-market performance. As you can see on this slide, the global mass color cosmetic market, as tracked by Nissan, has decelerated moderately over the past year. In our Q2, the mass color cosmetics market declined by approximately 3% compared to a decline of 2% for the last 12 months. At the same time, our focus on sales and marketing fundamentals has allowed us to improve our global sell-out by approximately 130 basis points, even in a slowing market backdrop. The improved sell-out trend in our cosmetics brand reflects strong progress in the UK with Rimmel and Max Factor, in Germany with Max Factor, and in Australia with Sally Hansen and Rimmel. It is worth highlighting that the action plans we have activated in the UK behind Rimmel, including substantial increase in working media, support on hero sub-brands, and a couple of strong launches, has allowed Rimmel to grow its penetration, hence its market share of the UK cosmetics market, by recruiting light and medium shoppers exactly in line with our strategic intent. Our sell-out performance in the US has been more mixed, though our underperformance gap relative to the category has been moderating in total and very positive on our core franchises. Some of these drivers from their performance are due to external factors, like competitive promo pressure. We can only live with those. But some are also in our control, and we are taking the necessary steps to correct, the necessary corrective action, sorry. It is important to highlight that due to the strong momentum we are driving on Amazon, our U.S. cosmetic sellout is over 100 basis points better than what is captured in the needs and data. Complementing the gradual improvement of our performance in store is the continuing strong growth in our e-commerce sales. In the first half of our fiscal 20, luxury e-commerce revenues grow by approximately 20% year on year. E-commerce now accounts for a low double digit percentage of our luxury business, which is relatively consistent with the luxury fragrance market. This momentum was achieved despite the currently limited presence on Tmall. However, our conversations with our leading licenses about launching on Tmall are progressing well, and we are optimistic about the long-term opportunity for luxury business with this leading e-retailer. In consumer beauty, while e-commerce penetration is still relatively low. We continue to make great strides globally. Our first half e-commerce revenue grew by approximately 20%, fueled by strength on Amazon. Our cyber weekend sales on Amazon in the U.S. and in the U.K. nearly doubled versus the prior year. In fact, in our core markets, including the U.S., U.K., and Germany, We are gaining market share on Amazon, speaking to the strength of our color cosmetics brand when combined with disciplined focus on e-commerce fundamentals. While we continue to strengthen our base business, I'm pleased to announce the expansion of some of our leading brands into the clean beauty segment. It is evident that consumers are increasingly focused on wellness, both their own and of the world around them. This is driving rapid growth for products and brands that serve these dual needs, and we will seize this opportunity. After an initial move in our professional business with the WeDo launch, and as we have chosen to focus on our core categories of fragrances, cosmetics, and skincare, in the last couple of months, we have launched clean label product line in each of these categories. Philosophies, Nature in a Jar, Sally Hansen's Good, Kind, Pure, Calvin Klein's CK Everyone, and Covergirl's Clean, Fresh are each vegan, cruelty-free, based on naturally derived ingredients and free of many contested ingredients. Nature in a Jar and CK Everyone are also packaged in recyclable packaging composed of post-consumer recycled materials. We are very proud of the teams who are driving these efforts and capitalizing on the growing trend while building Coty's reputation as a company that aims to do great by doing good. With that, let me turn over to Pierre-André.

Thank you, Pierre, and good morning, everyone. So about sustainability, sustainability is about, as Pierre just mentioned, consumer innovation, but it's also about more than that. For the past few years, the COTI teams have been working in a number of areas to try and catch up with the industry. And while a lot of things remain to be done, the many progressives which we have made so far have made it possible for us to elaborate the first COTI sustainability platform and to make it public today. So I will not go into the many details present on the chart, but I will just say that we have chosen to call it beauty that lasts. and that it encompasses initiatives in the area of products, environment protection, and people and diversity. And for each of them, we have defined priority initiatives and set targets for ourselves, which we will monitor transversely. So, for instance, we will, by 2022, source 100% of our Indian mica from responsible sources. Or we will, by 2030, reduce our carbon emissions across our entire value chain by 30%, and there are more on the page. This platform will further build our credibility as we deliver against these targets. It will also increasingly give us the ability to take initiatives in a market segment which will be one of the growth drivers of beauty in the coming years, and therefore this is a major step for us. But now let's zoom again to short-term and let me turn to the earnings of the quarters. As said by Pierre, this was a quarter in line with its position, and this is the fifth time in a row it is the case since Pierre and I have started this exercise more than a year ago, evidencing, I believe, an improved control over our business. On revenues, more specifically, Q2 was modestly down at 1.4%. with noticeable sequential improvement in consumer beauty. Beyond the percentage change, the evolution of our top line has been on quality, with strong improvements on that front, evidenced by the increase of our growth margin. So turning to the divisions and to start with luxury, in Q2, we launched the second pillar under our Tiffany fragrances, called Tiffany & Love, which you have on the left side of the chart. It performed incredibly well in markets. This launch confirmed the appeal of the Tiffany brand for both males and females and has driven market share gains for the overall Tiffany brand across the U.S., the U.K., Germany, Canada, and Italy. Our continued support and activation behind Marc Jacobs Daisy has now firmly placed the iconic fragrance pillar into the top four fragrances in the U.S., in the U.K., and Canada. And we continue... to drive growth across our focus brands, Burberry and Hugo Boss. Moving to slide 11, on the performance side, luxury delivered a solid growth at 1.3% on a high comparison day. I remind you that the same quarter last year was plus 10%. This was helped by the previously mentioned innovations, but also by the strong performance of our Gucci makeup. While the traction of our brands remains strong, we are, as we have been doing in consumer beauty, working to improve the quality of the top line. This has already led us to reduce the level of promotions and discounts. We will, in Q3, take advantage of our new go-to market, Bar Region, common to consumer and luxury, to accelerate our work and cut low-value sales, decrease value distribution, better control the gray market, amongst other initiatives. This will temporarily drive our sell-in into low single-digit negative in Q3 specifically. At the same time, our sell-out will be supported by a strong innovation type with CK Everyone coming in Q3, coming today, I believe, as well as Hugo Boss Alive, a boss fragrance for women. And later in the year, the expansion of the Gucci makeup range and other innovations, including Burberry, Marc Jacobs, or Hugo Boss. So luxury definitely remains a key growth engine for our company. Let's now turn to consumer beauty, page 12. The launch of Rimmel Lasting Mate Foundation has been off to a great start. This is on the left. In core markets like the UK, we have been supporting this launch with a strong uplift in media and in star activation. which has driven growth for the entire Rimmel lasting sub-brand and contributed to Rimmel market share gains in the UK over the last five months. Consistent with our focus on high-value business, we have been activating support behind our premium Sally Hansen Miracle Gel line, including media investments and innovative try-on features in select retailers. This has driven mid-single-digit revenue growth for Miracle Gel in the US in Q2, supporting the overall brand. And finally, on the right, for Max Factor, we are continuing to strengthen the product range with a marigold-touch second skin hybrid foundation, which contains pre- and probiotics to support skin renewal, and is capitalizing on the growing consumer demand for skincare-like cosmetic products. Performance-wise, going to size 13, Consumer beauty continued showing progress as illustrated by Pierre a few minutes ago. While North America continued to show a mixed performance with a solid delivery from Sally Hansen but continued weakness of the cover girl, Europe kept strengthening with Rimmel in the UK or Max Factor in Germany. And in Almea, we kept being selective in our efforts in an attempt to continue improving the quality of ourselves. Our priority combo brands, country, evidence that Europex are delivering. And while the overall top line of the decision remains below where we would like it to be, it is clearly showing sequential progresses at minus 6.8%, more than one point versus last quarter, and the best performance for the past 18 months. And this is obviously to be continued. I'm turning to professional beauty, slide 14. GHD continues. to grow at a very strong pace, driven in part by the launch of the Glide hot brush. In our leading VEA brand, we have strengthened the range with the launch of Color Machine Plus, a hair care regimen that improves color of hair quality. And last, OPI continues in liberate the assortment with its latest Mexico City color collection, which you see on the right. Moving to 2015, professionals continued growing in Q2 at 2.2% for the quarter, which means first half at 3.5%. All regions growing, Europe and the U.S. delivering a steady performance, while GHD continued delivering strong growth, helped by continued innovation. At the same time, the margins remained high in the 70s – in the 70s, sorry. These numbers talk for the health of the business and the quality of the PB teams, the professional beauty teams, sorry, at the time we are working full speed in parallel on the strategic review. I'll come back to it. So I will now get back to Coty overall, slide 16. Looking at the profitability for the entire group, we are now well anchored in our virtuous equation. Gross margin was up 130 basis points to 63.4%, reflecting progressives coming from mix, price, but also channel management. At the same time, we kept increasing the support by our brands with working media up high single digits and key brands being advertised at sufficiency. In front of that, we continued being more selective on promos. Together with the tight control of our fixed costs, these assume strong improvement of our operating margin to 13.9%, up 110 basis points. And these flowed down to the EPS, which is up $0.03 to $0.27, half of it driven by a one-time tax benefit. So we showed good progress on the earnings side, but even more so on the free cash flow side, slide 17, a $364 million free cash flow for the second quarter alone, almost double that of last year. This was driven by time control in all lines with a specific contribution of receivable. We have been reducing the overdues and the inventories thanks to a better supply chain working, a better service level, and a better S&OP process. Our debt closed at $7.2 billion, down from $7.4 billion the previous quarter. And free cash flow continues, of course, to be very high on our agenda. So to sum up slide 18, this was a quarter very much in line with expectations on our line. It allowed us to reaffirm our target for the year, with a delivery expected to be due towards Q4. Like for like, net revenue stable too slightly down year on year. Adjusted ROI growing 5% to 10% like for like with a strong working media reinvestment. An adjusted EPS growing mid-single digit and improvements of our free cash flow. I'll move to slide 19 now and would like to give you some last comments regarding the change of scope we are currently driving to complement and build a stronger COTI. On the strategic review first, we are very happy with the way things are going. First and foremost, as you have seen, the business keeps delivering well. This was the case in Q1 and is very much the case in Q2 in professional beauty and across the businesses under review. And we expect this to continue going forward. It's a clear testimony of the quality of the business under review as well as the quality and commitment of the teams running it. We continue running the process and have now moved into a more concrete phase, the information memoranda having been distributed to the interested parties. We continue seeing many strong marks of interest and keep working with an unchanged timeframe with a decision to be made by summer 2020. Moving to slide 20, Kylie, is a second topic. As you have seen, We have closed the deal on the 6th of January and soon appoints Christophe Honfelder as the CEO. The business has continued delivering well in the last month of 2019, actually ahead of expectations with a strong skin scale start and a strong Black Friday overall. We will consolidate Kylie globally as of the acquisition date, early January 20. However, we will report sales and margin as a scope change, instead of as part of the like-for-like performance for the first 12 months. We will use this time to define the right sequence of initiatives to accelerate the brand, starting from calendar 21. Our first interactions and thoughts confirm the potential we were seeing in the brand at the time of signing, and we will take the time to get things right before pushing and delivering our objective, which is, I remind you, to bring an additional one point of top line to the group. Finance-wise, we will therefore just make sure in 2020 that this transaction is EPS neutral for the Canada year. Moving to slide 21, and this is going to be the last one, a few words of recap on the issue before we move to Q&A. As detailed by Pierre, our turnaround is progressing well. Whether on the top line or on the cost side, we start seeing the benefits coming. Out of the benefits, two KPIs are showing strong progressives and they are important. Growth margin on the one hand, which talks of the quality of our top line and business. and the free cash flow, which is a proxy for the comprehensive business delivery, we will continue focusing very much on these KPIs. As a result, we are confident in our ability to reach our targets for the year, and we are happy to reaffirm them. We are also happy with the progress made on the reshaping of our portfolio and with each of the strategic reviews and the partnership with Kinley General. As you may sense, we are dealing with a very intense value creation and transformation agenda. If we manage to drive it and show so many progresses, this is thanks to the COTI teams who have been and keep showing talent, energy, courage, and resilience. And on behalf of Pierre and myself, the two of us, I would like to conclude by thanking each and all of the COTI associates for this performance. And now, we'll be happy to take your questions.