Coty Inc. Class A

Good morning, ladies and gentlemen. My name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to Cody's second quarter fiscal 2021 results conference call. As a reminder, this conference call is being recorded today, February 9th, 2021. On today's call are Sue Nobby, Chief Executive Officer, and Laurent Mercier, 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 FCC where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, accept where noted the discussion of Cody's financial results and COTI's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release. I will now turn the call over to Ms. Nobby.

Ladies and gentlemen, having completed another quarter, I'm very pleased to share with you the substantial progress COTI has continued to make strategically, financially, and on its organization. This amplifies the improvements Coty made in the first quarter and confirms that Coty is emerging from the COVID-19 crisis much stronger, more nimble, and well positioned to capitalize on the eventual market recovery. Our Q2 profit and net debt came in well ahead of expectations. First, our adjusted operating income and EBITDA grew high single digits versus last year as we continued executing on our cost reduction program with approximately $80 million of savings delivered in the quarter consistent with the first quarter. The strong savings delivery in the first half of 21 coupled with the acceleration of certain projects into the year give us confidence to raise our savings target for the year to approximately $300 million compared to the previous target of over $200 million. At the same time, the successful closing of the Vela transaction and strong free cash flow drove our financial debt down to $4.8 billion with an economic net debt of $3.6 billion when taking into account the value of our retained Vela stake. At the same time, despite the resurgence of COVID and related lockdowns in multiple parts of the world, we delivered Q2 revenues in line with expectations, including a one percentage point improvement in like-for-like trends to minus 18%. Most importantly, we made tangible progress on our strategic priorities, which, as you recall, include One, moving our e-commerce business from a catch-up mode to a momentum mode. Second, building out our presence in China. Three, strengthening our foothold in white space opportunities, including prestige, cosmetics, and skincare. Four, building market-leading innovation. And as a result, strengthening our core prestige fragrance business and stabilizing market share in our mass beauty business. Building on the progress last quarter, we continue to strengthen our executive leadership team in recent months, including Stefano Curti, joining as Chief Brand Officer for Consumer Beauty. Alexis Vagané, promoted Chief Commercial Officer for Consumer Beauty. Laurent Mercier, elevated to Coty CFO. And Stéphane Delbos, promoted to Chief Procurement Officer. The new COTI team is now in place, bringing strong beauty and business experience, deep knowledge of COTI, and relevant knowledge of new areas like skincare. At the same time, we are supported by a strong and female-majority board of directors, including the recent addition of two new directors, Anna Adeola-McAndrew and Mariasun Aromvourouzabala Laraghi. So let me now spend some time reviewing our recent revenue trends, as well as provide more details on our strategic progress. Our second quarter sales came in in line with expectations, even as the environment was disrupted in many parts of the world by a resurgence of COVID-19. This resurgence and the lockdowns announced that in early November had been a key reason why we had suggested that sales trends would improve moderately in the second quarter, and this played out as expected, with like-for-like sales down minus 18% compared to minus 19% in the first quarter. Within this framework, we saw diverging trends across our challenges. Our prestige business, which accounts for approximately 60% of our overall sales, declined at minus 16 like-for-like in Q2, which was a meaningful sequential improvement of nine percentage points versus quarter one. Excluding travel retail, which remains heavily impacted by COVID, our prestige business declined minus 9%. During Q2, we continued to see the trend of resurgent prestige fragrance demand in several markets, particularly in the US, where luxury fragrances once again outperformed luxury skincare and luxury cosmetics, as well as many parts of Asia, including China, Australia, Singapore, and Thailand. This improvement in the prestige fragrance category, coupled with the growing contribution from our Gucci and Burberry cosmetics line, which are becoming the second leg of our prestige portfolio, help drive this sequential improvement in our prestige business. At the same time, our mass business decelerated in Q2 to minus 22% light for light. With the uptick of COVID cases and shutdowns coinciding with the holiday season and usual social occasions, there was a pronounced deceleration in mass cosmetics category trends in most markets. This, coupled with some trade restocking benefit in Q1, drove the deceleration in our mass business. From a regional perspective now, the Americas, which account for 40% of our revenues, continued their relative outperformance. I'm excited to share that our US prestige business returned to growth, and this helped but partially upset the mass beauty weakness, resulting in a 7% like-for-like decline in the overall Americas. EMEA, which accounts for nearly half of our business, remained heavily pressured by COVID and multiple lockdowns, driving a mid-20s decline in our like-for-like sales. In Asia Pacific, half of the minus 17% like-for-like decline was driven by the pressure in travel retail. And while our selling for the region was negatively impacted by our continued cuts in low-quality distribution, The sellout of our prestige brands across the Asia-Pacific region was very strong, in many cases outperforming the market. While the headline number showed some improvement in sales trends, I'm pleased to say that we have continued to make very tangible progress on the strategic priorities we shared with you on the past two earnings calls. One of these priorities centered on accelerating our digital and e-commerce capabilities with a strategic focus on direct-to-consumer. Building on the momentum in Q1, our second quarter e-commerce sales grew 40% year-over-year, with the e-commerce penetration reaching 19% and helping overall margins. This growth was broad-based. with over 50% online revenue growth in the Americas, 30% growth in Europe, 45% growth in prestige, and 20% growth in mass. U.S. was the fastest growing market, with over 60% e-commerce revenue growth fiscal year to date. EMEA is our largest e-commerce region and the number one contributor to growth. While in APAC, we continue to reduce low-quality sales and distribution. And finally, travel retail e-com is beginning to accelerate. At the brand level, our e-commerce powerhouses include Hugo Boss in luxury and Rimmel in mass, with booming e-com businesses from Sally Hansen and Chloé Fragrances. Underpinning this e-commerce momentum were multiple initiatives and, of course, digital activations. As one of only 15 companies globally to be admitted to Amazon's global vendor management program, we have been working very closely with Amazon to share data, improve service levels, and trial new programs. One of these initiatives was VendorFlex Warehousing, where Amazon set up a fulfillment operation inside a Coty warehouse in the UK. This drove down the delivery lead time from seven days to three days, which is a critical driver for consumer purchases. In the US, we have also initiated our first Spanish-language Amazon media campaign, resulting in an uptick in consumers in this critical demographic, with 70% of them new to our brands. These initiatives, amongst many others, helped Coty double our market share of Amazon's mass beauty business with brands like CoverGirl consistently outperforming its peers at this critical customer. We also worked closely with Snapchat on best-in-class activations, including Snap ads for CoverGirl Clean Fresh Makeup Line, Marc Jacobs Perfect Fragrance, as well as Sally Hansen Nail Polish Try-On Lens. The efforts resulted in sales across these product lines significantly over-indexing to Gen Z consumers. Finally, our creative TikTok campaigns for Marc Jacobs' Perfect Fragrance and CoverGirl Clean Fresh Makeup have each garnered close to 10 billion views, further cementing both launches with younger consumers. In fact, the Marc Jacobs campaign surpass TikTok beauty averages in video views, engagements, and engagement rates for the entire first half of calendar 20. Now our second strategic priority, which is expanding our footprint in China. We have continued to drive this effort with two powerful and beautiful brands in our prestige portfolio, Gucci and Burberry, both of which are highly desired by Chinese consumers. We are laser-focused on building out the beauty franchises of both brands by expanding their cosmetic assortment, engaging key opinion leaders, and building excitement through in-store and, of course, digital activations. And in Q2 and entering Q3, we saw their momentum accelerate. Even a sellout for our overall prestige business in China grew strongly. Sellout for Gucci Beauty and Burberry Beauty grew strong double digits. Other prestige brands driving strong sellout in China include Calvin Klein on GD.com, Chloé, as well as a year-to-date performance in Tiffany. As we discussed it on the last call, at the end of Q2, we launched Gucci's first liquid foundation formulated specifically for Chinese consumers. The excitement is also evident on social media, with Gucci makeup ranked at number three amongst all beauty brands and number two amongst makeup brands in social buzz. And this week, we are adding a key pillar in Gucci's China strategy with the opening of the Gucci Beauty flagship store on Tmall, overnight bringing Gucci Beauty to over 700 million Chinese consumers. While this is a soft opening with a grand opening and full support planned for March, April, we see tremendous potential for Gucci on Tmall in the coming years. At the same time, we have been moving quickly to capitalize on the moving tourist activity and luxury purchases in High Nine, Sanya Island. We have opened three doors in High Nine, with three more planned in the second half of this fiscal year. As sales have continued to build up in these doors, Gucci makeup is already accounting for over 50% of our sellout. Our third strategic priority is expanding into white space opportunities, including prestige cosmetics and, of course, skincare. I've already discussed the strong momentum we have seen in Gucci makeup in China. However, this success is mirrored in many parts of the world. In the second quarter, Gucci makeup retail sales grew by five times in China, doubled in the U.S., and tripled Thailand and Singapore. In the first month of launch, the Gucci Liquid Foundation sold over 35,000 units globally. Burberry makeup sellout likewise grew by close to plus 50% in China. On the skincare side, our US-centric philosophy brand grew in Q2 thanks to strong momentum in particular on DTC and e-commerce. As for Kylie Beauty, the business continues to perform consistently with Q2 revenues in line with Q1. It's evident that consumer engagement with Kylie and her products remains very, very strong. The Kylie Skin Advent Calendar and skincare fridges, each priced at over $100, both sold out in roughly five minutes. Harnessing the social listening capabilities on Kylie's DTC site and tapping into the current consumer desire for self-care, we launched Kylie's rose scented bath collection during the quarter, which reached over $1 million in sales in one day. The incredibly fast sellout on this launch has confirmed that we continue to strengthen the drop model which is critical to a personality-driven DTC brand like Kylie Beauty. At the same time, we are strengthening the fundamentals and building the brand for long-term growth. This is evident in skincare, where we continue to see good momentum with the Kylie Skincare direct-to-consumer website, with revenues up versus first quarter and versus the prior year. And as COVID-related lockdowns begin to lift, we are optimistic about the potential of Kylie Skin in retailers across the US, Europe, and Australia supported by our unique brand installations. Looking forward, it's important to note that Kylie's prior manufacturing arrangement for its color cosmetics line with a third party manufacturer recently expired. We are working with Kylie on a new cosmetics line to be launched this coming summer 2021. which will also be a great opportunity to significantly improve the consumer experience with one website portal developed and supported by Coty, offering the full collection of Kylie's beauty products across cosmetics and skincare. In the meantime, we continue to focus on building the Kylie skincare business with new launches and activations planned for the coming months. Altogether, we have continued to make progress in expanding into the white spaces opportunities of prestige cosmetics and skincare with these two categories already accounting for 8% of our revenues in the first half of 21, up from 6% in fiscal 20. Our fourth strategic priority and a key in making Coty a product centric company is to continue building market leading innovation that builds on the universality and deep equity of our brand portfolio. With the conclusion of calendar 20, I am thrilled that Marc Jacobs Perfect Fragrance has ended the year as the number one fragrance launch across the US, UK, Canada, and Australia. In fact, Perfect is tracking to be the largest Coty fragrance launch in the US for the past 15 years. Vic speaks not only to the appeal of its messaging, celebrating self-expression, authenticity, individuality, but also to the quality of its juice, packaging, and very, very unique media activation. Another fragrance this year has been Hugo Boss Alive. Launched at the start of the calendar year, this has been the number one fragrance launch in Germany and has also underpinned 30% growth for Hugo Boss female fragrance business in the UK. On the mask side now, we have continued to build on the success of the first two masks clean beauty lines we introduced under the CoverGirl brand with the recent launch of CoverGirl Lash Blast Clean Mascara, part of our effort to concentrate on the two leading categories of CoverGirl eyes and face makeup. Building on the iconic Lash Blast franchise, this new volumizing mascara has a clean, vegan formula free from contested ingredients. It's also certified cruelty-free, a key pillar for CoverGirl. While still in early stages of the launch, this new mascara is seeing strong success. Already a top three CoverGirl SKU are the key retailers and providing a halo effect on Amazon with a 10% lift to the total Lash Blast franchise. The launch is also over-indexing with Gen Z and Hispanic consumers a key part of the market we were missing previously. In conjunction with the launch of Lash by Skin mascara in the coming days, we will begin airing the first part of the new COVERGIRL image and positioning that has been fine-tuned during Q2. The new campaign reinforces our strategic work over the past year to steadily build COVERGIRL's clean pillar, which began with clean fresh foundation last spring, followed by clean fresh pressed powder, and now the Lash Blast Clean mascara. Finally, on Rimmel, we recently revamped a core pillar, the lasting finish 25-hour foundation. Boasting full coverage, a long-lasting, and of course, mask-friendly transfer-proof formula with hydrating ingredients, this revamp has helped Rimmel regain its spot as the number one foundation in the UK market. It also nearly doubled sales for the franchise in Australia. Our final strategic priority is accelerating our core prestige fragrance portfolio and stabilizing market share in our mass beauty portfolio. Building on the recovery emerging in the first quarter, we're happy to report that prestige fragrance category is back to growth in several markets, including in the US, China, Australia, Singapore, Thailand. In many cases, outperforming prestige skincare and prestige makeup. This outperformance appears to be driven by consumers redirecting their discretionary spending to mood-boosting categories with a higher emotional appeal while also indulging in self-gifting. And against this backdrop, Coty brands such as Gucci, Burberry, and Marc Jacobs have seen strong sell-out growth ranging from high single digits to double digits depending on the markets. And noting the strong momentum behind artisanal fragrances in many parts of the world, this is an area where we intend to expand quite quickly with several projects underway for several of our brands. On the match beauty side now, while much work remains to be done, we're making progress towards our objective of stabilizing our market share broadly. The North America and Europe mass beauty market, particularly cosmetics, remain pressured by resurgence of COVID, and this is driving weakness in our mass beauty portfolio. At the same time, though, we are progressing on the market share side. While Coty's portfolio globally lost an average of 100 basis points of market share in the first nine months of calendar 20, in the last quarter, the market share declined narrow to approximately 80 basis points. Central to this share stabilization is the tremendous growth that our mass brands are seeing online, particularly on Amazon, even as performance in Bric and Mortar is more pressured. Also underpinning the improvement are multiple brand country combinations. Pally Hansen continues being strong in the U.S., U.K., Canada, Australia, and Italy, driven by franchises such as Miracle Gel or the clean Good Kind Pure line and nail treatment products. Rimmel continues to strengthen its position as the UK's number one makeup brand, seeing no less than 18 months of market share growth, while also winning in Italy and Poland. Bruno Banani fragrances continue to win in its core German market, and in Brazil, Sell-out of our portfolio of local brands has been growing in the double digits in recent months, two times the level of the market, led by brands such as Monange in deodorants and Risqué in nails. Broadly, on a brand and strategy level, we have finalized our brand equity and geographic mapping for each of our core color cosmetic brands, as well as Adidas, which we intend to share in the coming months. And the progress in stabilizing our mass market share confirms that we are starting to see results from our dual strategy of making each and every brand positioned on Coty's key drivers of self-expression on the one side and healthy, clean alternatives on the other side. Let me now turn it over to Laurent to comment on our financial results and, of course, outlook.

Thank you, Soum. Having been with Coty for the three years in different capacities, I had the pleasure to work closely with Pierre-André for the past two years. I am excited to continue building on what we started together and lead as CFO this next phase of growth and transformation. Before I go into our profit delivery for the quarter, let me first touch on how we will be measuring and discussing our performance going forward. First, we will now use adjusted EBITDA as our main KPI for profits, with EBITDA based on adjusted operating income plus depreciation and non-cash stock compensation in order to more directly drive and highlight our focus on cash flow and deleveraging, which remain key priorities. Second, we have decided to recognize or retain 40% of the last stake on a fair value basis going forward, recording only the changes in fair value in the P&L. With this in mind, let's turn to the shape of the P&L in Q2. Our Q2 gross margin of 58.7% was stable with Q1 2021 and in line with fiscal year 20 average. The adjusted operating income of $188 million for continuing operations was well ahead of consensus expectations of approximately $160 million. This translated to adjusted EBITDA of $284 million for continuing operations, with a margin of 20.1%, up 400 basis points year over year, including a VELA cost reimbursement The adjusted EBITDA totaled $294 million, or a 20.8% margin. The achievement of 6% profit growth, despite double-digit sales declined and stranded costs, was supported by the combination of A, very focused marketing investment at approximately 20% of net revenues and in line with Q1, as we continued our pay-as-we-go marketing deployment strategy, and B, strong fixed cost reduction as part of our broader cost reduction program. Looking at our cost reduction progress in more detail, in Q2, our fixed cost decreased by 12% year-over-year. We achieved approximately $80 million of savings in Q2, a level consistent with Q1. As a result, we have achieved $160 million of savings year to date. The biggest component of the savings delivered in H121 has been headcount reduction, accounting for close to 30%. Beyond that, the biggest contributors have been significant cuts in business services, including consultants, recruiters, IT, real estate, and facility management costs, followed by direct and indirect procurement savings across cost of goods and ANCP. And while not impacting fiscal year 21 savings delivery, we recently announced the consolidation of our fragrance manufacturing footprint with the closing of our German plant to be completed by summer 2022. This was a difficult decision to take, but a necessary one to address the overcapacity in our supply network. This consolidates our fragrance manufacturing into two remaining plants in Spain and France. The strong delivery in H121, coupled with the acceleration of certain projects into the year, are driving an increase to the savings target for fiscal year 21 now expected to be approximately $300 million compared to the previous target of over $200 million. And we remain on track for saving targets of $600 million by end of fiscal year 23. Turning now to EPS. We adjusted EBITDA for the quarter of $284 million less $96 million in depreciation and non-cash stock compensation, close to $60 million of interest expense, an 8.5% adjusted effective tax rate, and two months of net income contribution for Zela. The Q2 diluted adjusted EPS for total COTI ended at 17 cents. For H121, based on $450 million of adjusted EBITDA, $180 million of depreciation and stock compensation, roughly $120 million of interest expense, and an adjusted effective tax rate of 12.5%, the diluted adjusted EPS for total COTI ended at 28%. In the same period, the reported EPS came in at a negative 10 cents, impacted by the Vela transaction cost and restructuring accrued under the cost reduction program. To help frame the various puts and takes in EPS going forward, there are a few things to keep in mind. First, it's worth noting that while depreciation is likely to stay fairly steady, the stock compensation component will step up beginning in Q3. Second, on the tax line, we've had a few positive discrete items in H1-21, but for the year, we continue to expect an adjusted effective tax rate in the low 20s. Third, as stated earlier, beginning in Q3, we will not show the earnings of V-Line or P&L. but will instead record any changes in Vela's fair market value. And finally, on the convertible preferred stock, so far we have been opting to accrue the coupon, resulting in incremental dilution. However, going forward, we intend to pay the coupon in cash, allowing the diluted share count to stabilize. Looking now at free cash flow for the quarter, which came in very strong at approximately $390 million, up $26 million versus the prior year. And the pinning is solid performance with strong operating income and EBITDA for the quarter, coupled with two months of contribution from Vela. We also continued our strong working capital and CapEx management in the quarter, including material reduction in overhead use. At the same time, it's important to point out that the completion of the Vela transaction within the quarter and the finalized working capital transfers resulted in $200 million of positive working capital benefits in Q2, which will reverse next quarter. Turning now to our capital structure. I am happy to report that with the successful completion of the Vela transaction, with gross proceeds of $2.9 billion, and our strong free cash flow of $389 million, our net debt at the end of Q2 stood at $4.8 billion. This, in fact, included over $300 million of negative impact on our debt from foreign exchanges. And factoring in our retained stake in Vela valued at quarter end at approximately $1.2 billion, our economic net debt fell to approximately $3.6 billion. We also maintain comfortable headroom under our financial debt covenants. Our capital structure remains very attractive, with key maturities in 2023 and 2025, and a cost of debt below 4%. It is important to highlight that with our net debt closing below $5 billion, this is a true milestone for COTI and sets up for continued improvement in the coming years. Turning now to our fiscal year 21 outlook. Despite continued disruption to sales channels and short-term orders related to the COVID-19 pandemic, we remain focused on our strategic priorities. With cost savings expected to reach approximately $300 million for this fiscal year, and having in mind revenue trends and our intention to step up investment, we now expect adjusted EBITDA of $750 million for fiscal year 21. With a financial net debt that has now crossed below $5 billion, we will continue to derive our leverage ratio towards five times by the end of calendar year 21, in line with our prior guidance. Let me now turn it over to Sue for some concluding remarks.