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 fourth quarter fiscal 2020 results conference call. As a reminder, this conference is being recorded today, August 27, 2020. On today's call are Pierre-Andre Thedis, Chief Operating and Chief Financial Officer, Peter Harf, Cody's Founder and Executive Chairman, and soon, Javi, Cody's appointed CEO. 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. In addition, except where noted, the discussion of our financial results and our expectations reflect certain adjustments as specified in the non-cap financial measures section of our release. Later we will conduct a question and answer session. In order to ask a question at that time, simply press star then the number one on your telephone keypad. If at any point your question has been answered and you wish to remove yourself from the queue, press the pound key. Lastly, should you require operator assistance, please press star zero. Thank you. It is now my pleasure to turn the call over to Pierre-André Stedis to begin. Please go ahead.

Thank you, Maria, and good morning, everyone. This is indeed Pierre-André speaking. I'll start this call with a final short, and then I will hand the call over to Peter and then to Sue. To start the financial review this time, let's have a look at the scope of reporting as there are some meaningful changes. As you know, we have signed the sale of 60% of Vela, being our professional beauty division, plus retail hair to KKR on the 1st of June 2020. With a sale not being subject to any substantial condition, as of that date, Vela is considered a discontinued operation in our gap. As a result, we have recasted the accounts for fiscal 19 and fiscal 20, and we now present continuing operations, being the former COTI less Vela revenues and direct costs and directly attributable costs. The cost borne by COTI on behalf of Vela following the closing will for a part be re-invoiced through transitional service agreements and we have therefore prepared a set of numbers called ongoing COTI, ongoing COTI, which better reflect what COTI ex vela is expected to be post closing. Going forward, most numbers will refer to ongoing COTI and I will specifically flag when I use other metrics. You can find the bridges from total COTI to continuing operations and then to ongoing COTI in the recast historical financial posted on our investor relation website as well as in today's earnings release and in the slide presentation. In terms of numbers, COTI adjusted operating income in fiscal 19 on the left was $950 million or 11% margin. Vela Profit ex-central cost was $459 million or after including the estimated TSA cost, $407 million. And as a result, ongoing COTI operating income was $543 million, or 8.7% operating margin. And ongoing COTI EBITDA was $875 million. Looking at fiscal 2020, total COTI Adjusted operating income stands at $161 million, or 2.4% of net revenue. Vela stood at $271 million, and ongoing Coty at a negative $110 million adjusted operating income, with an EBITDA of positive $226 million. Fiscal 20 variants versus 19 reflected the impact of COVID and the closure during most of the fourth quarter of most of our sales channels as well as some other production sites. And so Coty fourth quarter was marked by external shocks. COVID-19 triggered a global real economy and supply crisis. that led to turmoil in financial markets. It did hit Coty harder than its competitors because of five reasons. First, pre-crisis, the company was already experiencing a weak demand situation. Second, Coty's current category mix is skewed towards fragrance, color cosmetics, and professional beauty, which were the categories most affected by COVID-19. Within these categories, Coti was still losing market share in some markets. Fourth, the company is underrepresented in China, which is the market that bounced back first. And last, Coti is weaker than its major competitors in digital and e-commerce. Against these backdrops, ongoing Coti net revenues were down, therefore, a big 60% in Q4. with prestige being the most impacted at minus 73%, while mass was less negative at minus 48%, as mass retailers remained partially open. April was the lowest point, but every month since then has showed progress across the portfolio in both mass and luxury, as well as for Vela. And in particular, July and our latest expectation of the month of August showed significant progresses and stand at approximately 2.5 times April levels, reflecting the reopening of a number of stores albeit with a lower traffic than usual. While many things remained to be done, Q4 also reflected continuing improvements with a strong momentum and market share gains in e-commerce, a good performance of CoverGirl CleanFresh and Sally Hansen good, kind, pure, and improving market share in color cosmetics in key markets in the U.S. and the U.K. specifically. In terms of profit, total Q4 net revenue drop of close to $1.2 billion versus last year led to an operating income drop of $526 million, which is 44% fall through. as the fixed cost reductions initiated in the quarter were insufficient to offset the magnitude of the net revenue drops. This was exacerbated by three elements totaling approximately $50 million, bad debt provisions, plants under utilization costs, as well as excess and obsolescence provisions, as we tried to take a prudent view in closing the fiscal 2020 accounts. While Vela, including TSA costs, showed a minimal loss for Q4, ongoing Coty adjusted operating income was a loss of $323 million for the quarter. As for non-recurring elements, the drop of our stock price led to an increase of our discount rate, which was the primary driver of an impairment of close to $400 million of our brands and goodwill. Turning to free cash flow, For total equity this time, the negative adjusted operating income translated into a negative free cash flow of $316 million for the quarter, which was in line with our guidance of $300 to $500 million negative, as we managed to strongly limit capex when of cost, as well as to balance the working capital thanks to good work from the procurement and the finance teams. This negative free cash flow was more than offset by the first tranche of convertible preferred shares subscribed by KKR for $750 million and net debt as a result decreased by $300 million versus the end of March to land at $7.8 billion despite close to $100 million negative foreign exchange impact. post-closing event, we have received at the end of July the second tranche of convertible prefer for $250 million. I will end up with some updates on the side of Vela. With the closure, while the closure of most salons resulted in a drop of sales of 41% in Q4, things improved from the lowest month, which was again in April. And July and August confirmed the strong progresses with underlying trends negative mid-single digits. While the business is recovering, we are obviously working on the closing of the transaction, which we expect to take place by the end of calendar 20. And following this, Coty will both considerably reduce its debt and leverage to a level which will be adequate to support our turnaround plan. And at the same time, Coty will keep a 40% interest in a low-risk business with a strong potential. And with this, I now hand over to Peter.

Thank you very much, Pierre-André. Let me start by thanking all the people at Coty. They helped us and they gave their best to have the company weather the storm of the worst economic and health crisis we've seen in the last 80 years. So many people in many countries gave all they had to make the damage for the company as small as possible. I thank everybody for that very, very much. We had a very challenging quarter. We had a challenging year. I don't want to repeat what Pierre-Andre already said, but he also talked about the greens policy. He talked about the fact that we are seeing, you know, improved business in fiscal 21 in the first quarter. and I'm glad to report that we're going to be making money in the first quarter of 21. We have significantly lowered our break-even point, so at a lower sales level than in fiscal 19 to fiscal 20, we will make a significant amount of operating income. I've been now CEO for three months. Before that, I was working, obviously, very closely with the Cody management, and my focus has been all the way, relentlessly, to bring the company back on track, to realize its underlying potential. Right from the start, I was aware of the issues that were concerning our investors, our shareholders, and the company. These specifically relate to capital structure, operational underperformance, the product portfolio, and the top management. We have taken decisive action to tackle each and every one of these concerns head on, is bold step changes. In each of the areas of concern, we are showing clear progress during the past few months that we take stock. Firstly, we recognize that Cody leverage ratio is high. To lower Cody's debt level and to strengthen our balance sheet, we entered into the agreement with KKR, selling 60% of Vela. We call it the best call to KKR, but maintaining, as Pierre-André stressed, I mean the 40%. These are very valuable and highly profitable assets for the company going forward. We were going to get for that a $2.5 billion net cash proceed. We expect the transaction to close by the end of calendar 20. Between Q420 and the Q121, KKR also injected negative $1 billion cash into Remainco for convertible preferred stock. Upon conversion, this will give KKR a 17% stock share of remain coal, but we will retain the absolute control to over 50%. Secondly, with coal underperforming on operating margins and efficiencies, we have set rigorous objectives for fiscal 2021. We need to be profitable for the full year and significantly profitable for the full year, And we are striving for a constant like-for-like net debt, excluding the proceeds from the value-advested show, even if the ongoing COVID-19 pandemic will impact the beauty industry more strongly than many anticipate. Second, make the balance sheet lighter and the business less complex. With smart disposals, a reduction in the number of sites, outsourcing, and more third-party manufacturing. We also reduce third-party expenses, people and non-people costs, capex, non-working advertising, and consumer promotion to the absolute minimum. Clear action plans and progress in these areas give us confidence that we will deliver over one-third of the savings of our 600 million fixed cost reduction program in fiscal 21. We also realize that our portfolio exposure is lagging behind new consumer demands and trends. We've taken concrete steps to rebalance and to strengthen our portfolio to be competitive in light of these changing consumer demands. We build platforms that address core structural weakness in skin care, northern Asia, e-commerce, and DTC, direct-to-consumer, by requiring the irrevocable right to Kylie Jenner's and Kim Kardashian West's cosmetics. We create also the space for additional brand building and brand investments in order to re-dynamize our existing portfolio and the sooner we start leadership. With regard to Kim and Cody, Cody entered into a strategic transaction to buy 20% of Kim Kardashian West. That, by the way, secures the irrevocable rights that we have in Cody going forward to the Kim Kardashian brand name and all the activities around that brand. Coty will be responsible for the portfolio development in skin care, hair care, personal care, nail products, and also, you know, in fragrances. Kim and Kylie give Coty the platform to sell skin care and other beauty categories globally, in particular in Northern Asia. We are renegotiating licenses that, you know, we have in our prestige portfolio that do not provide sufficient profitability for Coty. and we are making progress also on that front. Next, I realized that Kodi's culture needs to be fit for the fast pace and the changes in our cosmetics industry, and that the initiatives the company is implementing need us to be very, very light-footed. So we are bringing back the alleged agility and the nimbleness that is part of Kodi's DNA. We have flattened the organizational structure, simplified the decision-making processes, form a small group of leaders that can take important actions fast. So we're making CODI ready for the good things to come. In July, we corrected the key shortfall for the worst issue that distracted CODI throughout the years. The effort had a beauty industry veteran at the helm who truly understands the nuances of the beauty industry that can drive the business, the cosmetics business, forward effectively. We corrected this problem by recruiting Sue. Sue Navi, a proven, successful beauty leader, has the ideal prerequisites to become the CEO of Kodi. Kodi is a 27-year veteran in the beauty space with a breadth of experience across all of the areas which are most relevant to Kodi's future. She was at L'Oreal for more than 20 years, with leadership positions across the mass and the luxury segment, in color cosmetics, skin care, and fragrances, and is well plugged into the key international market. Particularly, she has a deep knowledge of Northern Asia. She not only brings deep expertise and experience in the area that Cody operates in, but also in areas that we want to strengthen, including skincare, e-commerce, direct-to-consumer, and Asia. In her long career in the beauty business, she has successfully navigated countless cycles and trends, adversities, including reinvigorating various established brands. With the uncertain markets and industry conditions ahead of us and the pivotal changes we will make at Kodi, her breadth and depth of experience will be especially crucial. In her latest venture, and the founder of Aveda, she has proven that she is also an adventure entrepreneur who understands startups. This understanding, while having at the same time a strong corporate and institutional background, brings a much-needed nimble entrepreneurial mindset to Cody that could not be more relevant for our current needs. I'll turn it over to Sue for comments. I want to leave you with a few key thoughts on the new Kodi powerhouse that we are on the way of becoming. First, I highlight that Kodi of today is very different from the Kodi even a few months back, because we have taken proactively decisive and bold actions addressing the various key concerns identified head-on and re-pivoting the business. We can clearly see green shoots emerging despite this challenging environment as we gain market share build strong e-commerce momentum, successfully launch new products, and Skyly Skin in particular is on track to expand. Like I said, we have seen a strong rebound in the last couple of months, which we expect to continue. Kodi is back. For our investors, we have been making sure that as we block and tackle to sustain our business, we have also looked to future-proof the company. With the new initiatives that will enable Kodi to operate more efficiently, and that give us the room to grow the business. The new and different quality has a more robust capital structure, improved operations, a streamlined and re-dynamized portfolio, a complementary stable of strong heritage brands and direct-to-consumer brands, is diversified across categories and channels, has a breadth to play in both value and in premium, has digitally and social media capabilities that will help us grow aggressively in these areas, in the digital space, has growth potential both in the wide spaces that we are trying to address and from reinvigorating the existing brands, has a focused management team led by a proven and successful beauty expert. I have always said, including when I took over the role of CEO a few months ago, that there's a lot of potential in Kodi. Today, I'm even more convinced that the new Kodi has more potential than ever before to unlock and to create value. We are rewriting the Kodi story to elevate it to a beauty powerhouse with the right to grow and the right to win. Tsunabe will lead us, and with pride, I hand over to her now.