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 third quarter fiscal 2021 results conference call. As a reminder, this conference call is being recorded today, May 10th, 2021. On today's call are Sue Naby, Chief Executive Officer, and Laurent Monsieur, 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 report 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 will now turn the call over to Ms. Naby.

Ladies and gentlemen, with another quarter now complete, I'm once again very pleased to share with you our results as well as highlight a number of green shoots we are seeing as we continue to execute on our growth strategy, which I shared with you last month. Importantly, our results this quarter further exemplify the urgency with which we have reacted during our fiscal 21 to ensure COTI emerged from COVID-19 as a much stronger, more nimble, and more focused organization. Our third quarter net revenue trends improved sequentially from Q2, despite many markets, most notably Western Europe, remaining under lockdown during much of the quarter. I'm very pleased to say that our prestige business returned to growth this quarter, led by China and the US. Building on the progress in the first half of 21, we once again delivered very strong profits as adjusted EBITDA increased over $180 million from last year. This was supported by both substantial growth margin expansion and continued cost reductions. Importantly, this allowed us to start the virtuous circle of stepping up our media spending and reinvesting behind our newly repositioned brands. A little over two weeks ago, Laurent and I presented our strategy to accelerate sales and profit growth. And today, I'm excited to tell you that we are rapidly executing and seeing initial results on all of our key strategic growth pillars. The green shoots we have seen are encouraging and we have a strong cadence of portfolio milestones planned through the end of calendar 21. So let me spend a few minutes reviewing our revenue trends in the third quarter before I hand it over to Laurent to take you through our financials. Then I will wrap it up with an update on our strategic progress. Sales trends in the quarter were led by the Asia-Pacific region, which increased 20% like for like. This was primarily driven by the very strong performance in China. Even when compared to our fiscal 19, the pre-COVID baseline, sales in China rose double digits. We are very encouraged by the momentum we are seeing in China, which, as you know, is a key pillar in our strategy. In the Americas, our sales declined 3% like for like. This decline was largely the result of softness within our mass business driven by lower cosmetics consumption. At the same time, our US prestige business returned to strong growth in the quarter, while our mass business in Brazil maintained its momentum. EMEA continued to be our softest region, with sales declining 13% like for life. Throughout the quarter, much of the region was impacted by strict lockdowns and restrictions, which weighed heavily on the sales performance as well as low international traffic in travel retail. However, with the UK having recently opened and many other markets putting in place reopening plans, we remain optimistic the region will soon see an inflection. Moving on to sales by channel now. Our prestige business returned to growth this quarter with sales increasing 2% like for like. As I just mentioned, this performance was really driven by the US and China with strong performance across fragrances, makeup, and also skincare. Many of our key focus brands delivered strong double digit revenue growth in the quarter, including Gucci, Burberry, Marc Jacobs, and Philosophy. The growth in the prestige business was noteworthy, as it came in spite of Coty's continued active reduction of sales in low-quality channels, which represented a high single-digit negative impact to prestige business in the last two years. On the other hand, the mass beauty business declined 15% like for like. This was largely the result of softness within mass color cosmetics that has stemmed from the lack of use occasions. On a positive note, with the lapping of the COVID-driven demand decline in March of last year, we have seen mass beauty category sales return to global growth in March. I'm pleased to say that we continue to make progress on one of our key strategic pillars of increasing e-commerce sales further building on our efforts during the first half of the year. During the third quarter, our e-commerce sales grew nearly 30%. The strength that we saw was fairly broad-based across both regions and categories. Luxury e-commerce sales increased over 20%, and penetration year-to-date stands in the mid-20s percent level. Consumer beauty e-commerce sales increased 56%, with penetration reaching a high single-digit percentage level year-to-date. And importantly, in Q3, we saw equally strong performance across e-com, pure players, and brick and click, as we worked closely with both sets of strategic customers to improve the consumer experience and elevate our brands in these two important channels. Overall, e-com sales now represent a high 10% of Coty sales fiscal year to date. I will now hand the call over to Laurent to take you through our financial results.

Thank you, Sue. Our third quarter performance has proven to be another successful period of profit growth with robust profit delivery fueled by gross margin expansion and cost reductions, enabling increased marketing investment behind our brands. starting with gross margin delivery. Our Q3 adjusted gross margin of 62.2% was ahead of external expectations, reflecting a strong improvement of 450 basis point year over year and a 350 basis point improvement versus the first half 21 run rate. There were two key drivers of this expansion, primarily 40% mix and revenue management, and 60% supply chain improvement, with the latter being through better demand planning and lower excess and obsolescence. Of the gross margin improvement delivered this quarter, we are confident that approximately half is structural and therefore can be maintained. This is part of our multi-pronged efforts to steadily improve our gross margins with contributors coming from channel, category and regional mix, as well as various COGS-related efforts. As detailed during our recent strategic update, we have implemented greater discipline in our ANCP as part of our pay-as-we-go process for ensuring nimble and highest ROI resource allocation. Our investments have also been more concentrated in fewer but bigger initiatives. As our sales and profit have improved, we have already begun increasing our ANCP ratio sequentially. ANCP in Q3 was close to 23% as a percentage of sales, up from 20% in H1-21. We expect ANCP to step up further in Q4-21 with absolute working media dollars above the Q4-19 pre-COVID levels. This step-up is enabled by our strong profit delivery year-to-date, which is allowing us to both deliver on our profit commitments for the year, while at the same time providing significantly more fuel for our brands, right as the beauty market is inflicting and in support of strong initiatives planned for the remainder of the year. Turning to profit growth. The Q3 adjusted EBITDA increased by $118 million year-on-year, reaching $183 million for the quarter and delivering an EBITDA margin of 17.8%. While sales declined somewhat during the quarter, the substantial profit growth was supported by, A, strong gross margin improvement, as mentioned earlier, B, very focused marketing investment, and see strong fixed cost reduction, which I will cover next. As a reminder, with Q3 marking the first full quarter for Coty ex Vela, we have begun delivering various transitional services to Vela as aligned in the separation agreement. In the third quarter, we added certain services that we provide to Vela. principally IT activities for which we have been compensated by Vela largely on a cost plus basis, resulting in fairly neutral impact to our profit. In summary, the robust profit growth achieved is further evidence of our strategy yielding strong results, and we expect to continue to build on this momentum in the coming years. Focus and discipline across the business is a key part of our strategy. Our fixed cost reduction program has allowed us to redirect capital to accelerate our brands and focus on profit delivery. In Q3 2021, fixed cost decreased 15% year on year, and during Q3 we achieved approximately $110 million of savings. This brings our year-to-date savings to over $217 million. The largest contributor of the savings year-to-date has been streamlining the organization. In line with our prior quarterly update, the additional key contributors have been savings in business services, including consultants, recruiters, IT, real estate, and facility management costs. As previously mentioned, the consolidation of our fragrance manufacturing footprint is ongoing and expected to be completed by summer 2022. Some of these changes are not easy decisions to make, but necessary to modernize the business and position COTI for long-term sustainable growth. Our progress over the last three quarters put us on track to achieve our fiscal year 21 of cost savings target of $300 million and fiscal year 23 target of $600 million. Turning now to EPS. We adjusted a bid for the quarter of $183 million, less $87 million in depreciation and non-cash stock compensation, close to 50 million of interest expense, a lot in adjusted effective tax rate, and 944 million diluted shares factoring in full dilution from the convertible preferred shares issued to CACAIR. The Q3 diluted adjusted EPS for COTI ended at zero cents and therefore had no impact. As for the fiscal year-to-date EPS, based on $633 million of adjusted EBITDA, $268 million of depreciation and stock compensation, roughly $172 million of interest expense, and an adjusted effective tax rate in the low teens. So WOT adjusted EPS for COTI ended at $0.10. Let me spend a minute on a few accounting dynamics impacting our EPS. First, as we described on the last earnings call, we have taken a decision to carry our 40% stake in Vela as a fair value asset, recognizing changes in its fair value in our P&L rather than the equity income. This quarter, there was an improvement in the general market environment. due to COVID reopening and vaccinations that led to an increase in Vela's valuation by 64 million. While this is clearly a positive and speaks to the value accretion we expect to see in Vela over time, since this is not a core activity of our business, we have therefore decided to exclude these fair value changes from our adjusted net income and adjusted EPS. Second, we were required by accounting rules to value the preferred dividend to fair value based on the quarter end stock price. As of far, we have not paid the dividend in cash. This increased the value of the Q3 preferred dividend by $11 million to $34 million. At the same time, while the mechanical EPS calculation will yield several cents of adjusted diluted EPS, the accounting rules state that the diluted EPS cannot be higher than basic EPS. Hence, the result of our Q3 adjusted diluted EPS being zero. Looking to next quarter, we expect to pay the convertible preferred dividend for Q4 in cash. And we therefore do not expect to have a similar adjustment for fair value. Looking now at free cash flow for the quarter, which came in line with expectations at approximately minus $218 million, reflecting typical seasonal weakness and a Vela-related working capital reversal of over $100 million. We also continued with our tight management of capex and one-off costs. Looking at free cash flow fiscal year to date, we have generated 143 million. Based on this delivery, we continue to expect to end the year with positive free cash flow for fiscal year 21. Turning now to our capital structure. During the quarter's combination of the completed KKW deal for $200 million, approximately $100 million of organic cash outflow, roughly $100 million of Vela working capital reversal, and some positive forex resulted in a financial net debt balance exiting Q3 of $5.1 billion. And factoring in the $64 million increase in our retained Vela stake, to approximately 1.25 billion. Our economic net debt at the end of the period was approximately 3.9 billion. Additionally, in Q3, we successfully completed the issuance of 900 million 5% senior secure notes due in 2026. We benefited from very strong demand and increased the bond offering from 750 million to 900 million. Our capital structure remains very attractive with key maturities in 2023 and 2025 and a net blended cost of debt below 4%. It is quite clear that we have made tremendous progress over the last year in lowering our net debt balance and resetting our leverage levels. While our retained Vela stake will likely represent a significant monetization opportunity at some point in the coming years, we will continue to be active and tactical in identifying opportunities to monetize non-strategic assets and further reduce our leverage. Let me now turn it back to Sue for a discussion of our operational progress and forward outlook.