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 first quarter fiscal 2021 results conference call. As a reminder, this conference call is being recorded today, November 6, 2020. On today's call are Susan Abbey, Chief Executive Officer, and Pierre-André Therese, Chief Operating and 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. In addition, except where noted, the discussion of Cody's financial results and Cody's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release. I'll now turn the call over to this, Naby.

Ladies and gentlemen, good morning. Back in August, I spoke to you on Coty's fourth quarter earnings call and shared with you that I had considered Coty to be a jewel in the rough, and I continue more than ever to believe in this. After several months of leading as CEO, I can confirm that Coty is transforming and emerging from the COVID-19 crisis much stronger than and more nimble, and also better prepared to face any secure market disruptions. Our Q1 results are a clear testament to this. Across all metrics, both operational and financial, our results improved significantly from the low point of last quarter and came in at or ahead of our expectations. Month after month, we're seeing net revenues sequentially improving with solid orders in advance of the holiday season. Part of our improvement has been driven by an improving market backdrop. We have seen better sales trends across each of our regions and across both the prestige and mass channels, which reaffirms the validity of our dual channel model. And with retailers' inventories now at normalized levels, we are also seeing much closer alignment between sell-in and sell-out. In fact, in some areas, sell-out trends are stronger than expected. At the same time, we have made significant progress in improving the performance of our P&L and our portfolio. On the financial side, I'm extremely pleased to see that the organization has continued to adapt to the new normal, executing on our financial and operational priorities, including profit and cash flow protection. Our stringent cash control enabled over 20% growth in our adjusted operating income and over 50% of the total company EPS and stable net debt. We remain committed to diligent cost control and delivering on our fiscal 21 financial commitments, including being profitable on an adjusted operating income basis for continuing operations and being cash positive for the year, contributing to a decrease of our net debt. The Vela divestiture is expected to close as planned by the end of calendar 20, which together with positive cash flow in the second quarter 21, will lower the financial net debt from $7.9 billion today to around $5 billion, including the value of the remaining 40% Vela stake which Coty will retain, Valued at $1.3 billion, economic net debt will be reduced to below $4 billion. At the same time, we have seen good progress in the first quarter on our key priorities, including strong innovation performance in both prestige and mass channels, strengthened market share in our core markets, e-commerce moving from a catch-up mode to a momentum mode, while at the same time gradually strengthening our foothold in skincare and in China. As we progress through the year, we will continue to invest behind these key priorities, for example, through amplifying our skincare R&D and through smart organization changes, strengthening our brands and reinforcing their connections with consumers. Part of this investment includes strengthening our executive leadership team, and we've made two very high-quality hires recently. Isabelle Bonfanti, formerly at L'Oreal and Hermès, has joined as Chief Commercial Officer of the Prestige business to accelerate our growth in makeup, skincare, and in Asia, and to champion the Prestige distribution model and its unique characteristics. Second, Jean-Denis Mariani has joined in the newly created role as Chief Digital Officer to superdrive our digital transformation. First, to accelerate our e-commerce momentum, to put in place the right conversation, CRM, and virtual testing tools, to prioritize digital in our media mix consistent with consumer trends, and last but not least, catalyzing Coty's huge direct-to-consumer potential with Kim and Kylie Skincare, Philosophy Skincare, and all other digitally gifted Coty brands. Let me now turn it over to Pierre-André to discuss our financial overview.

Thank you, Sue, and good morning, all. I would like to start with a reminder that of how to read our figures, given the complexities generated by the change in its scope. Indeed, since the signing of the sale and purchase agreement with KKR for the disposal of 60% of Vela, we have been reporting our professional and retail hair business as available for sale and discontinue the pressures for U.S. purposes. Somebody seems to be not on mute. Could you please go on mute? Thank you. So this means in particular that we consolidate Vela net income on a separate P&L line, which is below operating income. As a result, our net revenues and most P&L metrics are presented on the basis of continuing operation, that is being the total equity less Vela. And to give you a better idea of what COTI will look like going forward, we also produce what is called ongoing COTI, which adds to continuing operations the cost recovery we are going to receive from Vela from closing as per some transitional services agreements. All KPIs relating to the P&L from net revenues to operating income relate to continuing operations and ongoing COTI. In the presentation here, as for the rest of the EPS and the cash flow, we do continue referring to total equity with a 100% contribution of Vela net income and cash flows. This being said, let me now move to slide 5 and our net revenue trends, which have been showing a strong recovery versus the previous quarter, both in mass and luxury. After a trough in Q4, and more specifically in April, our sales have been increasing month after month, throughout the period, with the month of September ahead of our average revenues for the third quarter. Compared to Q1 2020, our net revenues remained lower by 19% on a life-on-life basis, mass being at minus 10 and luxury at minus 25. This is very much in line with what we expected, minus 20%, as you remember we indicated during fiscal 20, full-year fiscal 20 earnings call. I would like to add a few comments to help you read these numbers. First, private retail remains by far the most impacted at minus 70% versus last year. This, given its weight, represents approximately five points, which implies that the rest of the business therefore declined by 15%. Second, e-commerce has been growing not only strongly, but ahead of the market, leading to market share gains for Coty. The percentage of our net revenue done through e-commerce and ETC has doubled versus where it stood at the beginning of COVID. And this is not only helping our net revenues, but it also makes us less vulnerable. Last and importantly, we are carefully managing sell-in and phasing it with sell-outs, thus limiting the inventories in the trade and our exposure to the upcoming second wave. What about Q2 now? We just completed October with net revenues down high single digits, very close to minus 10% actually versus a year ago, reflecting strong pre-Christmas orders and confirming a very fast recovery of our net revenues. Of course, as we see lockdowns reinstated in several countries in Europe, we will get some impact on our net revenues for the rest of the quarter. But for all the reasons previously mentioned, and for the limited number of markets concerned, only some in Europe, we do not expect such impacts to be in any way close to what we suffered in the first wave. I will now turn to the operating income slide 6. While we suffered a very significant loss in the fourth quarter of last year, we are delivering for the quarter an operating income of $81 million, which is 93 if you add the revenues from the TSA, and that is up 24% versus our operating income in the first quarter of fiscal 20. This is a testimony of the actions taken by COTI since the beginning of COVID under the leadership of Pierre, Peter and Sue. All P&L lines have contributed. COGS first. After a weak Q4 marked by high excess and obsolete levels and a low level of fixed cost absorption, gross margin has come back to the average level of fiscal 2020 at 58.6%. This is still 150 bps lower than the same quarter last year and it shows that we still have room for improvement but the speed of the rebound has been particularly good. Second, we have operated a reset on ANCP with three objectives in mind. First, adjust the spending to our new sales site. We have spent 20% of our net revenue this quarter and adjusted to our new profile, specifically to geographies and channels, more online, less offline, less travel retail. Second objective, to adjust the support to the net revenue trends we have ahead of us. First, making sure we make the best possible use of our money and we protect our P&L. Third, this reset aims at helping us become more strategic and focused in our investment, leveraging through leadership and getting away from a fragmented allocation by market. To this effect, A pay-as-we-go process has been implemented where Sue and the leadership team review all initiatives and opportunities brought by the central and the in-market teams and actively free up spending on a fortnight basis in light of net revenue opportunities and upcoming initiatives. This is a deep change in our way of working and we expect will increasingly help our top line. The third element is fixed costs. and I will detail it, page seven. So you remember that we had concluded at the exit of COVID that we needed to reduce our fixed costs in a very sizable way, setting for ourselves a target of $600 million for RemainCo with the first $200 million in fiscal 21. Q1 has been remarkable on that side as we have already delivered 80 million dollar savings laying the ground for a delivery ahead of the objective for the year. Several world streams have contributed to it, including an acceleration in implementing our headcount reduction, substantially in line with that designed for the turnaround. But we have added to this many initiatives on the business service side, of course with a maintained freeze of expenses like T&E, but also with very strong and visible actions on third-party services. And the procurement team have, of course, added to it in many fields. $80 million, the delivery of the quarter, is approximately the size of our operating income in Q1, and it shows how critical this achievement is for COTI. Beyond the profit of the quarter, it makes us incomparably stronger to face what is likely to remain for some time a volatile environment. I'm now moving to total COTI and the EPS. The 24% increase over operating income has been the first source of a 57% growth over EPS. The second one has been Vela performance. Over the quarter, net revenues have grown by 7% as salons start reopening after the lockdown and retail hair and nails remain strong. Like COTI, Vela has seen a strong rebound of its gross margin and has benefited as well from a tight control of its fixed costs. To this have added some temporary effects with a pause of depreciation linked to the discontinued oppression accounting treatments and with a gradual stand-up of the new teams over Q1. The sum of these effects have fueled a doubling of Vela operating income and a contribution to Coty EPS north of £90 million. The performance of the two businesses has boosted their EPS, right, or share counts, increased under the effect of the $1 billion convertible preferred subscribed by KKR, which are treated as equity for the purpose of a diluted EPS in the red cap. To end with this, upon closing of the Vela deal, our EPS structure will remain similar, but Vela contribution will be recognized for 40% only, and our net interest, will be reflecting a significantly reduced net debt. I'm turning to page 9 now, and cash flow. So the profit delivery has translated into a free cash flow, which is ahead of our expectation, and almost stable for the quarter at minus $28 million. Beyond profits, we've made progressives in many fields, and in particular, too, the one-off, which we have reduced, and you know that these have been one of expenses, have been a big cause of leakage in the past, and we have now put that under control, under tight control. And secondly, we have been, the teams have been doing an incredible job in managing the overdues with a very high intensity, bringing them to a two-year slow. And so these efforts have upset the impact of the restart on the working capital, with in particular a reduction of payables from the fourth quarter of 2020. Our net debt as a result has remained stable at $6,864,000,000 at the end of the quarter, with a negative $200,000,000 foreign exchange conversion impact, and on the other hand, the payment of $250,000,000 of convertible preferred by KKR. Our debt, however, and this is slide 10, is going to deeply change in the coming weeks as we are about to close the sale of 60% of Vela to KKR for a net proceed of 2.5 billion dollars. Together with a positive free cash flow expected in Q2, we expect the financial net debt post-closing to land close to 5 billion dollars and our financial net debt to EBITDA to get close to five times within one year at the end of calendar 21. Another important factor in this respect is, as mentioned by Sue, the 40% stake which we keep having in Vela, which has a value at inception of $1.3 billion, and you have seen the performance of Vela. This is very likely to grow in a meaningful manner. Since this Vela stake is known for Cotia Financial Holdings, We think it is important to take it into account when looking at our capital structure, and we will be following what we call the economic net debt, that is our debt net of the Vela stake. This ratio will land post-closing below $4 billion, and by the end of calendar 21 should translate into 3.5 times of economic net debt to EBITDA, not far from our medium-term objective, which is to bring back Coty leverage below three times. Together with a cost reduction, this is a very important element as the more solid COTI is also about capital structure. With $5 billion financial net debt, a $1.3 billion financial stake in a performing VELA, and attractive debt conditions with three and five years maturity, that represents a key improvement of our capital structure. And it is a fundamental building block to bring COTI back to growth and competitiveness. And with that, I hand over to you, Sue.