Coty Inc. Class A

Good morning, ladies and gentlemen. My name is Brittany, and I will be your host today. At this time, I would like to welcome everyone to Cody's first quarter fiscal 2022 results conference call. As a reminder, this conference call is being recorded today, November 8th, 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 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. Navi.

Ladies and gentlemen, with our Q1 now complete, I'm very encouraged by the success we are having, further building on the strong foundation we put in place last year. The results we have delivered this quarter truly exemplify the virtuous circle that we have set out to create. In essence, it's a simple one where strong revenue growth combined with growth margin and cost initiatives simultaneously fuel profit expansion and strategic investments, which in turn drive future growth momentum. There are some key takeaways that I would like to first highlight. First, our Q1 revenue growth surpassed our expectations and guidance, with growth coming from both our prestige and consumer beauty segments. We continue to see very strong demands for prestige products, particularly fragrances in the U.S. and China with an impressive rebound in travel retail. This was further supported by our exceptional lineup of fragrance launches. Meanwhile, we continue to see a recovery and improvement in consumer beauty with particularly strong trends at both CoverGirl and Max Factor. This resulted in like-for-like revenue growth of 21% above our guidance of high-teens growth. Second, we reported very strong profit growth during the quarter. This was fueled by a significant gross margin expansion of nearly 500 base points, as well as further cost reductions. The substantial gross margin expansion we have seen is a true testament to the strength of our business model as we double down on our creative innovation and continue to premiumize our portfolio. Importantly, we continue to step up our investments in marketing. In fact, our working media doubled versus last year. Despite this, our adjusted EBITDA increased almost 70%, equating to 550 base points of margin expansion, evidence that our virtuous circle is now in motion. Third, we continue to execute and make progress across our strategic growth pillars. I will, of course, be sharing some milestones with you today. However, I'm even more so excited for our investor day next week when I will be joined by additional members of the COTI leadership team to provide a more in-depth update on the progress we have made on our strategic pillars as well as our medium-term trajectory. Fourth, we see the momentum continuing into the year. We are on track for a great fiscal 22. Our growing confidence in the momentum drives our increased sales guidance for the year, supported in particular by our initiatives across fragrance and cosmetics. I will now take a few moments to cover our revenue trends during the quarter before Laurent takes you through our financials. Then I will finish with an update on our strategic progress and our outlook. Our Q1 revenues increased 21% like for like. The prestige segment grew 34% on a like for like basis, even as we continue to reduce sales in low quality channels, which represented a low single digit negative impact in the quarter. We continue to experience very robust prestige fragrance trends, particularly in the U.S., China, and travel retail, with nearly all brands exhibiting strong growth in the quarter. Our growth was further aided by our very strong launch calendar in the first quarter. This included Gucci Flora Gorgeous Gardenia, Burberry Hero, Calvin Klein Desai, and the relaunch of Kylie Cosmetics. Meanwhile, our prestige cosmetic sales more than doubled in the quarter. Our consumer beauty segment increased 3% like for like as the global mass beauty category returned to growth, and we are seeing stabilization in our market share. Q1 growth was led by CoverGirl and Max Factor as both brands continue to benefit from the new brand positionings. Moving to sales by region. We saw growth across all regions, though the US and China continued to be standout performers, and travel retail saw a true resurgence. The Americas region grew 23% like for like in the quarter, supported by double digit growth in the US, as well as growth contribution from Latin America, Canada, and Brazil. EMEA sales rose 17% like for like, with the most impactful contributors being the UK, Russia, as well as local travel retail. The Asia-Pacific region increased 29% like for like, with local travel retail tripling year on year, and China seeing nearly 50% growth in the quarter, proving our efforts in turning this market into a powerhouse are bearing fruits. We are particularly pleased with these results in China and the broader market, particularly given some incremental restrictions that occurred in the quarter due to COVID. I will now hand the call over to Laurent to take you through our financial results.

Thank you, Sue. I am very pleased with our first quarter results, which continued our very strong pace of profit growth. Importantly, our virtual cycle of growth is now in motion. Our profit was driven by strong gross margin improvement, allowing us to continue to reinvest in our strategic growth initiatives, thereby further fueling top-line growth momentum. Starting with our gross margin performance, our Q1 adjusted gross margin of 63.4% increased by nearly 500 basis points from last year and 250 basis points from last quarter. This marks our third consecutive quarter of gross margin above 60%. Our gross margin performance was driven by favorable mix both from the outside growth of Prestige as well as favorable product mix within the category. Lower excess and obsolescence, fixed cost absorption on the increased sales, pricing and revenue management, supply chain productivity, and material cost reduction program. We continue to be very focused on further driving growth margin expansion both this year and in the years to come. As such, we have a very clear multi-pronged, multi-year growth margin attack plan in place. while we also expect we will continue to benefit from positive channel, category and regional mix shifts. The growth margin expansion is key towards the virtuous cycle we have created of sales and profit growth. While the topic of inflationary pressure, supply chain bottlenecks and component shortages are dominating conversations across all industries, I am pleased to say that so far, Coty is navigating through this uncertain environment quite well. This is a result of both the agility of our supply chain and procurement teams, as well as the structure and drivers of our business model, where we are overdriving gross margin of creative channels, categories, and innovations. While we have seen isolated constraints in certain components, such as fragrance pumps, silicone, and paper, our teams proactively increased safety stocks to protect our key consumption periods, as well as implemented dual sourcing initiatives, all of which is proving to be effective. On freight, the vast majority of our freight is under contract, rather than spot market. which has largely protected us from the excessive price hikes of recent months. At the same time, our teams proactively increased transportation lead time and secured freight capacity in advance to avoid potential freight constraints. And in the context of global supply chain bottlenecks and port congestion, it is important to note that the majority of our inventory is manufactured in the region when where it is sold which likewise protects our business the net result of all these proactive efforts and business design decisions is that our service level in q1 was very strong in the mid 90s and actually higher than the prior year which has allowed us to both over deliver on our sales guidance for the quarter and deliver close to 500 basis points of gross margin expansion year on year. And our outlook for Q2 service levels is in a similar range, despite higher than initially anticipated demand, which is also enabling us to raise our full year sales guidance. While we do expect the impact from inflation in materials and freight to be somewhat higher in H222, The impact is quite manageable, and we continue to expect our gross margin to expand in fiscal year 2022, fueled by revenue management initiatives in both prestige and consumer duty. The mixed benefit of prestige, expanding as a proportion of the mix, improved absorption from higher production volumes, and broader productivity efforts. During Q1, we maintained our stepped-up marketing investment. ANCP was approximately 26% of sales, consistent with the level of Q4, and significantly above the 20% level a year ago. The year-over-year increase was primarily driven by working media, which more than doubled year-on-year. Importantly, we remain vigilant in investing in the highest ROI opportunities and being nimble in our resource deployment. You will hear more from Sue regarding the details of our success and progress in driving growth during the quarter. However, let me highlight a few areas where we were putting our marketing dollars during the quarter. First, we had a very busy launch calendar in the quarter, particularly within Prestige. We launched Gucci Flora Gorgeous Gardenia, Burberry Hero, Calvin Klein Defy, and the relaunch of Kylie Cosmetics, among others. These launches showed tremendous success in the quarter and contributed to our strong performance. We continue to fuel our expansion into new categories and markets, including Prestige Makeup and Overall Asia. Finally, we continue to invest behind the repositioning of CoverGirl, Rimmel, and Max Factor, which also from missing results, supporting consumer beauty business stabilization. We continue to help fund our marketing investment and drive profit growth through further cost reduction. During Q1, our fixed cost declined by 8% year over year. We achieved approximately $60 million of cost savings during the quarter with a front-loaded delivery of our fiscal 2022 savings target to enable sufficient flexibility in the P&L to deliver profit yet reinvest in our brands during this critical holiday period. The primary drivers of this were cost savings, lower fixed costs, and trade investments. we remain well on track to achieve over 90 million of savings in fiscal 22. Recall, this is net of cost inflation, reinstating bonuses, and structural organizational reinvestment behind our growth pillars. So it's important to note that this does not include our intended reinvestment in AMCP. We have now achieved nearly 400 million of total savings and we remain well on track to reach our fiscal 23 target of a total of 600 million of savings, while we also continue to identify savings projects beyond fiscal 23. Moving to profit delivery in Q1. Our adjusted EBITDA performance was exceptionally strong in the quarter, increasing 67% year-over-year to 279 million. This resulted in a margin of over 20%, up 550 basis points above our first quarter last year. This significant improvement was driven by strong sales growth, robust gross margin expansion, and fixed cost leverage. We believe the stellar performance this quarter is further evidence of the strengths of both our strategy and business model, and we continue to target both revenue and profitability growth in the years ahead. Turning now to our EPS, which included the following drivers. Adjusted EBITDA for Q1 of $279 million, depreciation of $78 million, income tax expense of $40 million, which equates to a tax rate of approximately 29% in line with our expectations. As we previously noted, we expect a higher tax rate this year, given our global principal jurisdictions are now in Amsterdam and in the US. $8 million of other items and $29 million of adjusted preferred dividends. Please note that the preferred dividends were higher than typical in Q1. At a very high level, this was due to accounting role requirements associated with KKR's conversions of accrued dividends into common shares as part of their first transaction in September. As a result, our Q1 diluted adjusted EPS ended at $0.08. While not included in our adjusted EPS, during the quarter, Vela's fair market value rose by $390 million. Looking ahead to Q2 and fiscal 22, I would like to provide some context of the different drivers of our adjusted EPS. First, consistent with what I said last quarter, we continue to expect interest expense in the mid-200 million for fiscal 22, reflecting a lower net debt balance offset by somewhat higher cost of debt post the recent refinancing. Second, as I previously mentioned, we anticipate an adjusted effective tax rate for fiscal 22 in the high 20s percentage. However, we note there is a high degree of uncertainty with effective tax rates projections in the current environment. Third, on the preferred dividends, following today's announced transactions with KKR, we anticipate a roughly 7 million quarterly run rate going forward following this transaction and assuming no further conversion of preferred shares. Now moving to free cash flow for the quarter, which was strongly positive despite Q1 typically being a seasonally weaker cash flow quarter as we build inventory for the key holiday consumption period. Importantly, working capital improved significantly in the quarter. We also continued strict management of capex and one-time costs. As a result, our Q1 free cash flow was 241 million. As we head into Q2 and beyond, we remain intent on further bolstering our cash flow as well as driving a steady reduction in our net debt. Turning to our capital structure, we ended Q1 with a financial net debt balance of approximately $4.96 billion, which is a decrease of over $200 million from Q4. This is largely the result of our strong free cash flow. Factoring our 40% stake of Vela at quarter end, valued at approximately $1.65 billion, we ended the quarter with economic net debt of around $3.3 billion. Please note that with the completion of the sale of an approximate 9% stake of Vela to KKR in October and today's announced sale of another 4%, we now own 26% of the Vela business. Based on our current ownership stake in Vela, our economic net debt at the end of Q1 2022 will have been closer to 3.9 billion. We continue to view our retained 26% stake in Vela as a financial stake. The recent transactions prove the valuation upside in this business, as well as the liquidity of this stake. We will continue to be active and tactical in identifying opportunities to monetize this non-strategic Vela asset and further reduce leverage. Additionally, we are continuing to make progress in improving the maturity profile of our debts. We have secured commitments to extend our revolver maturity to fiscal 25 and reduce revolver capacity to 2 billion from previous 2.75 billion. This is on the back of our recent successful issuance of over $1.6 billion of senior secure notes, showing our strong progress in minimizing refinancing risk. In fact, we have recently made some tactical decisions by monetizing some non-core assets to help further our debt averaging. During Q2, we are executing several real estate divestitures, resulting in approximately $115 million of cash proceeds the majority of which will flow in Q2. The sizable cash inflow for these transactions, coupled with the expected strong free cash flow in Q1, reaffirm our confidence in ending calendar year 21 with financial net debt to EBITDA towards five times, as well to end calendar 22 with leverage of four times. In the meantime, we remain committed to the partial IPO of our Brazil business. In light of the current economic volatility in Brazil, we continue to monitor the market conditions to identify an opportune window to execute our partial IPO. Due to local Brazilian regulation, we cannot offer further details at this time. Before I hand the call back to Sue, I would like to quickly touch on the recent transactions regarding our preferred shares and the simplification effect they're having on our capital structure. For some time now, we have seen three keys to further unlocking shareholder value at Coty. Growing our sales and profits, deleveraging our balance sheet, and the last being simplifying our capital structure. We have made great progress on the first two of these and have a clear path towards further improvement. During the first half of this year, our capital structure has become significantly more simplified through KKR's conversion of approximately 50 million preferred shares, combined with a subsequent redemption via two transactions of around 75 million KKR preferred shares in exchange for roughly 14% stake in Dela. Make no mistake, these are positive developments for COTI. We understand these events, particularly the secondary offering that took place in early September, led to questions and volatility. However, these developments were a net positive for Coty, as well as for our shareholders, including significant even further reduce the overhang of KKR's preferred shares ownership, confirmation of the significantly higher value of Vela, with approximately 40% appreciation versus the initial valuation, while also proving the liquidity of the asset. Freeing approximately 65 million of cash on the lower preferred dividend that we can use to further reinvest behind brands or use towards deleveraging. And the redemption of these convertible shares implies several cents of EPS accretion annually. Let me now turn it back to Sue.