Coty Inc. Class A

Good morning and good afternoon, everyone. My name is Todd, and I'll be your conference operator today. At this time, I would like to welcome everyone to CODI's first quarter fiscal 2024 question and answer conference call. As a reminder, this conference call is being recorded today, November 8, 2023, at 7.30 a.m. Eastern Time or 1.30 p.m. Central European Time. Please note that on November 7th at approximately 4.30 p.m. Eastern Time or 10.30 p.m. Central European Time, Cody issued a press release and prepared remarks webcast, which can be found on his investor relations website. On today's call are Sue Nobby, Chief Executive Officer, and Lawrence 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 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. With that, we will now open the line for questions. If you would like to ask a question today, please press star 1 on your telephone keypad. You may remove yourself at any time by pressing star 2. Once again, that is star and 1 to ask a question. Our first question will come from Nick Motey with RBC Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning and good afternoon, everyone. I actually had a bigger picture question. You know, Sue, when we recently met in person a few weeks ago, you were very excited about the innovation program at Cody. And I wanted to ask a more broader question about skincare and how you think about skincare holistically in the sense that, you know, topicals is one thing, but what about ingestibles and injectables? And I'm just curious on philosophically how you think about the category going forward.

Okay. Hi, Nick. Thank you for your question. Indeed, that's, as you say, the bigger and the broader picture. I think what we have shared with all you guys several times is that the skincare market, and by the way, the beauty market, generally speaking, is going in the direction of the, you know, medicated beauty. This is something that we see very, very strongly. That's the reason why we have decided to reposition some of our brands quite strongly on this area. If you allow me, may I remind everyone that we just did the launch behind Orveda Skincare of the first serum that uses technologies inspired by the medical world that we call senolytics, which is the first time a skincare brand is using this kind of technology in a topical cream, as you say it. On Lancaster, the story that is really resonating very well is the story of using these vectors, liposomes, that penetrate deep inside the skin, and this is really what is making the brand resonate with the Chinese consumers. and also on philosophy in the U.S., we've decided that the brand will stand for the brand that's going to bring a bit of wisdom in the craze around dermatologic ingredients. So as you hear it from my words, it's all about a kind of medicated beauty. In the beauty world, we are using ingredients and formulations that are acting on the upper layer of the skin and we are not allowed to go lower. So if you think about injectables, You clearly see this booming with other companies selling products that are going to release the muscles without coating any brand, products that are all about injecting hyaluronic acid inside the skin, vitamins, or sometimes medical devices allowing a faster penetration of the active. So you're right, this is the direction that the overall market is going into, but we have some limitations when it comes to selling skincare from a beauty brand that does not require any kind of long-time testing like a medication or a drug would require. But that's more or less the direction we are seeing. Ingestibles I mean, ingestibles is like male skincare. It has been a kind of, you know, everyone says this is the year of ingestibles and the year after nothing has happened. So again, there my gut feeling is that this category needs a bit of strong R&D because a lot of people believe that what you are going to ingest is going to be digested by your stomach enzymes. And at the end of the day, what's the difference between eating good food and having ingestibles? So that's also something we hear from consumers, that ingestibles need to demonstrate their ability to bring to the right place the right ingredient, knowing that they come into your digestive system. So that's the big picture I could share with you. I hope I'm answering part of your question.

Yes, thank you very much. I will pass it on.

Thank you.

Thank you. Our next question will come from Oliver Chin with TD Cowen. Please go ahead. Your line is open.

Hi, Sue and Laurent. You made a lot of great progress with your digital marketing in the studio we toured was remarkable. What's ahead in terms of how you're thinking about a digital center of excellence and key principles and platform occasion as you'll continue to build this capability across your portfolio? Also, as we look forward, what are your thoughts on pricing and the environment? We're seeing a lot of cross-currents in the consumer in many regions. However, you've been on a really good pace with all the fragrance momentum. Thanks a lot.

Hi Oliver, thank you for your question. So again, on the digital centers of excellence, you're totally right. We started, you know, since 2020 to really create a center of excellence that's based in Paris, that's the global center of excellence, really in a kind of catch-up phase, because the company was a bit behind competitors in this area three years ago. And this we made it happen in Paris. And now it's exactly the right time to have these centers of excellence benefiting from the global know-how being created in key regions around the world, namely the U.S. or China, to take two examples where the digitalization of the beauty world is quite advanced and fast-paced. So this is exactly where we are standing now. On consumer beauty, you know that we are also accelerating in our ability to create locally in the different countries, because this can only be local, because you need to fit with the culture, you need to fit with the language, you need to fit with the local trends. So we are creating studios, let's call them like this, in the US, in UK, and elsewhere. I think we created something like 15 studios, which are TikTok or YouTube, call them the way you want, studios where we are creating together or co-creating with influencers content. And we are also beefing the machine. Just to give you an idea, until recently, we were working with a few dozens of influencers behind the key launches of the consumer beauty and makeup brands. And then recently we moved to hundreds and we saw the results immediately. If I take the example of UK, where we moved from nowhere in terms of ENV and EIT to top five, top six brands, sometimes ahead of best in class brands that have been doing this for years and years. And now the objective is to multiply this number by three to get above the threshold of the thousand influencers reached by our brand. So this is exactly what's happening in terms of centers of excellence first built globally in Paris, and now growing in the different countries in New York, in London, and in Shanghai, where we are today talking to you from. Laurent, maybe you can take the second part of the price.

Yeah, absolutely, on pricing. First of all, just to remind that, indeed, We implemented, I mean, several price increase over the last two years at the level of a mid-single digit. And these price increase, I mean, went very smoothly and were very successful. The clear demonstration is what you are seeing is that our volumes keep growing and definitely that you are seeing that in Q1 our volumes are growing. So this was really a very important thing now. in our strategy to make sure that there is no elasticity on volumes and this was the case. So now looking ahead, of course we are very conscious that there is, especially on COGS, inflation is starting to soften. So what definitely we are really focusing on is mixed management. This is definitely a number one driver to continue to improve our gross margin. And mixed management, you are seeing some concrete examples. The innovations that we are launching, all of these innovations are really mixed accretive, so are really driving the average price up. Number two, we are opening, and we shared also last time, a big stream of SRN, which is strategic revenue management. And it's really an approach where now we have dedicated teams. It's really to open the value analysis of all the products and really making sure where we can extract some value. So concretely, it's really to review in depth all the promotion policy, the trade terms. In some cases, it can be also about the format. And again, this is really a way for us to improve the average unit price. And last but not least, we will continue definitely to implement some very targeted price increase. I would say more at a level of a low single digit, but definitely we have this pricing team, pricing office, very expert, and really we are very granular, and I repeat every time, so we will continue in a very, very targeted manner.

Thanks. The innovation sounds quite exciting. Best regards.

So innovation, of course, is part of the game. So it's definitely part of the mix management. And of course, we are making sure, again, and you have a very concrete example in this Q1, that high quality of the innovations. Also, as you know, there is a shift to higher concentration on prestige fragrance mostly. And this is, again, a way for us to drive the average unique price. So absolutely.

And on consumer duty, Oliver, you have also the same thing. What is really driving the market is premium innovation, not entry pricing. And that's very important for everyone to hear. And this is the area where we are going to accelerate the pace of innovation. It used to be high single-digit levels required in terms of innovation, and we are more today targeting high teams level of innovation in terms of percentage of the net revenues. It's accelerating, but premium innovation is driving the market.

Thank you. Our next question will come from Rob Ottenstein with Evercore. Please go ahead.

Great, thank you very much and congratulations on the continued great work. Sue, given that you were in China, I'd be remiss to not ask you what you're seeing on the ground in China and in Henan, if you're there, both in terms of how the consumer is and the beauty market is recovering, if it is recovering, and then maybe additional details on your execution, you know, what's going particularly well. Thank you.

Hi Robert, thank you very much for your kind words. So again, you're right, we are in Shanghai. We've been here since a few days and we'll be here until the end of the week. And indeed, it's very interesting to see how the market is evolving quite fast, I have to say, specifically on the fragrance category. Again, you know, we shared with you that a few months ago, maybe a year ago, we shared with you that we start to see Chinese getting very, very interested in this category. And this is accelerating at an incredible pace. Even the taste are accelerating, to give you a few ideas. We launched Burberry Goddess in this country, a little bit after the rest of the countries. because we thought that the scent of this innovation was really a bold scent, etc., and the reception has been outstanding. The line is already a number six line at Sephora, which is a ranking that we never achieved in this country with any of our fragrances. So it's really this fragrance category that's, by the way, growing, and it's growing by 6%. And Coty in the country, this is beauty research latest results, is growing more than two times faster than this level of the market. And Burberry Goddess is just starting in this country, and we believe it's going to be a game changer. The other element we are seeing is the premiumization of the market, and I would even say the bigger part of niche fragrances. These fragrances represent almost a quarter of the market today in China. This is two and a half times bigger than what you see in the rest of the world. So this premiumization going in the direction of more niche brands, really selling in freestanding stores, and when you enter the boutique, you don't have the impression you are in a store that is selling fragrances. you have the impression that you are visiting a concept store or sometimes a museum. So this is something that is going very, very quickly. That's the reason why I've been sharing with you how much we are eager to develop this kind of expertise inside the company to understand, of course, how to create winning winning niche brands, but also to understand the world of retail when you are operating a freestanding store. We also did the CIIE inauguration two days ago. It was a fantastic moment, especially for infiniment Coty Paris, that was not fully disclosed to the Chinese audience, We did a teaser, and what was incredible is to see all these young men and young women entering this booth where they had giant flowers that they could put their nose in and smell the fragrances and try to guess, you know, the name of the fragrance, how will the bottle look like, etc. and the way they welcomed this was absolutely outstanding. So we are very, very confident about this line that is going to meet the Chinese consumers. The other market that's doing very well in China today is makeup. Makeup is growing by 10%, and there we are growing faster than the makeup market, mainly thanks to Gucci makeup and Burberry makeup. There it's all about face makeup, because again the makeup category is skinifying, and anything that's a good mix between pigment and skin benefits is clearly what people are looking for, on top of the fact that everything has to be long wear. Last but not least, skincare market, which is the immense majority of the sales. This market is slightly negative in the most recent period. I think it's not that Chinese are using less skincare. They are probably shifting from some brands to other brands. Maybe the level of promotionality that this market reached in the last quarters and years is a kind of maximum. And then there is a kind of, they are looking for what are the new brands that can speak to their needs. without being too promotional, without being too much into this world where you buy only if there is a promotion. And there, our brands are doing well, specifically Lancaster, which is the main brand that we have in this country, specifically online. The brand is continuing to see momentum because it's growing month after month. We have started, as you remember, with Ligne-Princière, and now we are adding, next to Ligne-Princière, a focus on sun care, because this brand is really seen as the epitome of what is high-end sun care protection is. And we are also adding new innovations that are about to land in the market in June 2024. So that's a bit long, but that's what we saw since a week now in Shanghai. Hainan, we did not go there, I have to say, not this time. But our progression over there, you've heard it and you've seen it during the script and the earnings release, is very, very strong, in fact, specifically behind Lancaster, but also behind brands like Cluid.

Thank you. Our next question will come from Filippo Filoni with Citi. Please go ahead.

Hey, good morning, everyone. So clearly a very strong start of the fiscal year with 18% for sales growth. So maybe, Sue, can you comment on what drove the upside relative to the guidance you provided in September? You mentioned a lot of drivers in your prepared remarks, but maybe you can rank them in terms of category growth, innovation, contribution. And then thinking ahead of your guidance for the first half, It does imply a bit of a slowdown in fiscal Q2 to 4% to 8% for like sales growth. So maybe what is the driver? Was there any pull forward of shipments in Q1 versus Q2? Any call or that would be helpful. Thank you.

Yeah. Good morning, Siddipo. So in fact, what drove this... you know, upgrade of the guidance during the quarter is the fact that the number one, the market continues to be very, very strong. 10% of growth of the fragrance market. This is really a fantastic figure on top of 10% in Q1 fiscal 23. So again, when we discussed it several times since the beginning of this fragrance index phenomenon, we really tried to explain as much as we could that this is everything but something that's a one-time event, and everything has to do with a very profound shift in terms of who are the people who are buying, what they are buying, how they are premiumizing, and how social media, in a way, is holding this consumption globally in the different regions around the world. So the market continues to be very good, very strong, and very dynamic. And the best way to see it is also in the performance of the company. So on the market that was 10 percent, Coty fragrances, Prestige fragrances grew by 25 percent, so two times and a half the growth of the market. Of course, there is a lot of pipeline of new innovations, but these innovations they are all delivering very strongly. Of course, there is everything we told you about Burberry Goddess that has become a top six fragrance in the US. I said it recently, top six in Sephora in China. In many markets, it's inside the top ten, and this is for sure the number one innovation in all the key markets around the world. But it's not the only one. In fact, you have to know that we don't have one brand growing in the high 20s, not two, not three, not four, we have seven brands inside that are growing in the high 20s, some of them with innovation and some of them without innovation. So this is also the, I'm sorry to say it, but I'm not sorry, I'm proud to say it, this is the good work we are doing at Coty at creating incredible, exciting, highly performing innovations in this area of the fragrance world. So that's what really explains the upgrade of the guidance. We knew that Goddess would be big, but the jury was debating, is it going to be big, very big or extraordinarily big? So this is what we are seeing is that this is going to be quite big, if I have to say. So second element is the question around how Q2 will land. So you have to know that Q1 is typically a pipe in a quarter, where we pipe the Burberry Goddess, we've been piping also a Gucci Magnolia Innovation, and also a Boss Elixir innovation. Q2 is really a quarter of sell-out, as you know it. And the picture that is implied means that we are going to continue to have a very good performance, probably in line with the market or slightly above of the market. So that's more or less what we believe is going to be. Hopefully we'll have a good surprise, but so far it does not mean there is a deceleration. It just means that we are all about sell-out. versus sell-in to sell-out in the first quarter.

Our next question will come from Corinne Wolfmeyer with Piper Sandler. Please go ahead.

Hey, good morning and thanks for taking the question. Congrats on the quarter. So I'd like to piggyback off of the China Hanan question. I'd like to better understand what are you seeing with sell-in versus sell-out for both China and Asia travel retail? And if it's not normalized yet, when do you think that should normalize? Also, any early reads from 11-11 pre-sales? And then lastly, I'd like to see if there's any commentary you can share on any potential pressure with some of the Middle East tensions that we're seeing. Thank you.

So when it comes to Hainan, today our inventory levels are okay. There is not any kind of flag to be done in terms of having inventories going up. Of course, we are in front of an easy comparative, if I may say, but still the growth of the fragrance business we're having there and our skincare also business is very high. It's a triple digit growth. So that's good in a way. When it comes to China inventory levels, they are healthy also on the prestige side. The only part that we stocked, by the way, during the script and the earnings, even if this is a very small portion of our business, is around CB. It's not to do with the market or anything like this. This has to do with... Moving from one line to another line at retailers, we revamped the Adidas Chauvelier lines, and we changed it from one factory to another, so we had to build a bit of stock that was pushed to the trade. And then because of the slowdown of the market, this trade went up, and this delayed the arrival of the renovation of the Chauveliers. So this is the only thing we've flagged in all the communications we have done. regarding an increase of inventory. But again, this is a very, very small part of our business. given that you know cookie china business is what 90 percent prestige and 10 percent cb more or less so this is number one what do we see on 11 11 you know the dynamism of the fragrance category is confirmed this is really something that is confirming month after month specifically as i said it before on the high end part and more than ever people exploring, you know, scents or juices that are unexpected for a market like China, which is a great, great, I would say, news, because this means that the ability to create full lines for the Chinese consumers is crystallizing now versus what used to be the case just two or three years ago. which means that you could launch only two or three flour iterations and you were done with the Chinese market. So there is the diversity that you see everywhere else around the world in terms of taste that's starting in the country. And on the last part of your question regarding what is happening in the Middle East, This business is a mid-single-digit business at Coty. So far, we are not seeing any negative impact on our business, but that's the situation. But honestly, I have to say that on a personal level, as you know it, I'm very saddened by the violence, and we continue to hope for the peace and an end of the suffering. That was an important point to make after your question. Thank you.

Our next question will come from Anna Lutul with Bank of America. Please go ahead.

Hi, good morning, and thanks so much for the question. I wanted to ask on the quarter, you had a good deal of operational leverage to help drive the adjusted EBITDA beat, and I was wondering if you could elaborate on the drivers of this and how you see it progressing through the year. Thanks.

Yeah, absolutely. Thank you, Anna. So indeed, I mean, we continue definitely, you know, strategies, really making sure, you know, this flywheel, definitely top-line growth, focus on productivity, and then making sure that we are allocating resources to support our strategic initiatives. and we keep growing your EBITDA. This is definitely what the equation you saw in Q1 and indeed is driving us to deliver an EBITDA which is higher than expectations. Now, when looking ahead, what are the components? Number 1, of course, we continue the top-line agenda. As you saw, we are raising the top-line guidance. Number two, growth margin. Definitely, we are seeing Q2 where our growth margin should be flattish, and then growth margin expansion in our H2, which will be the combination of the mixed management, as I just shared, productivity that we continue targeted pricing and also we are starting to see some softening on cost of goods inflation and also transportation inflation so then we will continue of course to inject some of these gross margin expansion into the strategic initiatives the innovations, investment in the capabilities, as we say about digital, also about R&D, and definitely keeping improving our EBITDA margin as we confirm our EBITDA margin full year, growing from 10 to 30 basis points. So the flywheel is fully in motion, and of course with high discipline on the cost and really making sure that it's fully, fully consistent with the strategic imperatives.

Our next question will come from Olivia Tong with Raymond James. Please go ahead.

Great. Thanks. Good morning. Good afternoon. My first question is around your view on margin contribution by segment this year and whether you think one division is expected to show more extension than the other. Are you expecting both divisions to grow margins in light of Q1 trends? You know, prestige margin obviously increasing, but consumer beauty still still down on a year-over-year basis. And then just broadly in terms of your plans to raise price another round in early calendar 24, if you could just talk about elasticity and your view on the volume trajectory for this year as you implement that next round of pricing. Thanks.

Yeah, thank you, Olivia. So just to give you a few elements as you shared indeed. So, I mean, price is showing, you know, strong, strong improvement on profitability and ncb is starting at a lower pace what's riding this is that we have you know in the 10 percent top line growth and consumer beauty we have you know strong performance and body care uh which is weighing down the gross margin so again it's it's a you know very positive an absolute value but definitely there is some impact on gross margin. But at the same time, I can tell you that there is a very strong work and huge work to improve the gross margin in consumer beauty. And when I was referring to body care, it's definitely Brazil is driving this growth and we have significant gross margin expansion. in this category and this in this market so definitely you will see that gross margin in consumer beauty will improve quarter after quarter and this is again with combined with the strong productivity plans that we are putting in place in consumer beauty a big one is being platforming we are really making sure that now innovations that we are launching across you know the different brands in fact have the same technology and it brings a significant savings. So it's going to contribute significantly in the coming quarters. We keep working as I shared before on the strategy for the new management. So we have really a deep review detailed review on all the value analysis of consumer beauty and we are really identifying significant value. So definitely strong focus and there is a clear trajectory to improve our consumer beauty profitability definitely in the coming quarters and in the coming years. So then your second question was definitely on pricing. As I said at the beginning, we have a strong pricing of it working on the stream, so they are very precise, very granular, and it went very smoothly over the last quarters. So now we will do very targeted price increase. So when I'm saying very targeted price increase, That's exactly the answer to your question. It's really that when we have all the elements, all the analysis, that we do this, and it has no impact on the volume. So what are the drivers is really when we know that it's about products where there is high demand, there is high success, And definitely, we know that we can, or there is a gap between channels or between competition. And definitely, we have room to increase price, and again, without impacting volumes. And we made very clear, and I repeat, and you saw it in Q1, we are making sure that our growth is well balanced between volume, mix, and price.

Thank you. Our next question will come from Andrea Teixeira with JP Morgan. Please go ahead.

Thank you for taking my question, and good night there in China. So just on the – I mean, again, congrats on the top-line delivery. But on the consumer beauty, Lohan, you were just mentioning some of the efforts. And we saw some improvement in market share. Should we expect some velocity? And so I think you mentioned when we saw each other recently in terms of like how you're seeing the shelf space looking ahead and the spring resets in particular in the US and the UK. So how should we be thinking as we see consumer beauty recovering there and in particular in those key countries? Were we seeing more like velocity and then as retailers see that improvement, they would decide on shelf space into probably calendar 25? And then on the investment side, if you can help us, like, of course, there's so much reinvestment that I think investors appreciate. The overhead in SG&A total dollars in the shoulder month has been around $740 million per quarter. And then you obviously ramp up to around $800. Is that the way and the level of dollars that we should be working with? And, sorry, lastly, on the clarification on deciding to sell or to postpone the well sale, it seems that you have not reached an agreement on the pricing, I think, and I understand that. But just to think about how we should be thinking that becomes a put into KKR in calendar 25 and how that negotiation is that assessed valuation that you're looking to do or Is that something that should be negotiated by the time we cross that bridge? Thank you.

Andrea, I'm going to let Laurent answer on the two last questions, which have short answers, and then I'll take the question on CB, which is a little bit longer in terms of answers.

Yeah, absolutely. Hello, Andrea. So indeed on Vela, yes, it's important I give you a full picture. So what are the elements? Number one is definitely that we are seeing a very strong cash flow trajectory in the first half fiscal 24 and the full fiscal 24. So definitely this first element is giving us full confidence to reach our leverage ratio. Number two, as you know, we implemented our dual listing end of September and we made an offering which was very successful. And again, this is a second element which is accelerating or deleveraging. So definitely. And number three, just to be very clear, I mean, the point is not about pricing. I mean, I can tell you the due diligence which was made on Zela fully confirmed, you know, the great value of the company and the pricing. There was just, I mean, if I make it, you know, some small misalignments on pricing, indeed on minority rights. And, you know, these things happen. But again, based on the first two elements, we came to the decision that, okay, it was better to stop the transaction. But be very clear that it doesn't change our agenda, that we are targeting really the full divestiture of Vela by end of calendar 25. The value of Vela is absolutely confirmed, and you saw it in our books. And the relation with KKR is excellent, and Vela is a very good business. So yeah, there was your question on SG&A. I mean, the key element is definitely that we are reinvesting but still growing our SG&A. So we are growing our SG&A below sales growth, but it's important also that you keep in mind that in SG&A, We are making sure that we are investing on our digital capabilities. We are investing in our R&D capabilities. So we are making sure also that within the SG&A, we have productivity on cost where we don't see value for the business. But we are also investing on SG&A capabilities, which are creating value for the business. So that's the way we are driving also our SG&A equation.

So now on the consumer beauty question regarding what's the trajectory of the division in terms of growth, two things. The first one is that we are diversifying our sources of growth in consumer beauty. The majority of our sales are coming today from color cosmetics. And I will say a few words about this in a few minutes. But we are also building the machine to make consumer beauty a maker of massive fragrances. Here in China we just had a meeting and what we see is that there is potential all around the world. In every country people are craving for fragrances. from the lowest price possible to the highest price possible. So this is an area that is very important for the division is to diversify the sources of growth and to diversify ideally in categories that are highly relative and fragrances are highly relative to the gross margin of the consumer beauty division. Makeup is quite high also in the 60s, if not higher. And this area, what we are doing, as I said it several times, is that we are accelerating the pace of innovation. specifically what I call premiumized innovation. So you've seen recently some innovation coming under CoverGirl and now platformed quite instantly, I have to say, because this is coming six months after, eight months after, now under email, we are platforming these premiumized innovations and this is going to help us a lot. to drive, of course, the profitability higher, but also to attract this younger generation. So what we have done so far, if I take the example of Côte d'Ivoire, is that we have solidified the foundations of the company, of the brand, sorry, towards, I would say, Millennials and Geniques and Boomers. This is something that is not seen in other indie brands. They have mainly a Gen Z business. The one we have is big and now we are going to build on top of this a more younger Gen Z, mainly digital influencer and advocacy driven business behind this innovation. So the things I can share with you and which will take me to the shelf space is that CoverGirl is closing the gap versus the market. We are closing the gap while growing quite strongly. It happens that someone is growing much stronger, but the reality is that we are part of those who are still growing, but closing the gap versus the market. In BRIC and Mortar, the gap was of eight points in the last nine months. and it's six points in the last three months, and now it's less than three points. On Amazon, the brand is driving the growth of the category. The gap was 1.4 for CoverGirl above the category at Amazon in the last nine months. In the last three months, CoverGirl is 20 points above the category at Amazon. and in the last month it's still 20, 18, 19 points above the category. So it's clearly there that it's happening, it's clearly there that the advocacy influencer marketing plan signs, and we hope to see this translating also on the BRIC and MORTAR side of the market. Regarding the shelf space, We believe that the shelf-place resets of spring, the shelf-place of our brands would be stable. Hopefully, it will grow in 2025, as you are suggesting it, thanks to our very, very strong plan of innovation. More innovation, quicker, beefed by a strong influencer and advocacy teams around the world, which hopefully will give us the ability to start to increase our share space again. Keep in mind that it's expected to be stable.

Our next question will come from Charles Scotti with Kepler. Please go ahead.

Hello, good evening. Thank you for taking my questions. I have three, actually. The first one, I was pretty impressed by your performance in Asia-Pacific. What was behind the strength of your business there, unlike most of your competitors, and more specifically in the travel retail channel? It was apparently very strong everywhere for you. And also, if you could give us an idea of the breakdown of the travel retail business by geographies. Second question on inventories. One of your Paris-listed competitors said that retailers have now rebuilt their inventories with supply chain tensions easing. Do you have any view on the level of inventories in the trade in Europe and in the U.S.? And is the expected deceleration of the growth in Q2 related to potential destocking impact? And finally, just a follow-up question on the question of one of my pairs. Your H1 guidance suggests 5% to 8% organic acid growth in Q2. I guess you may have been cautious again, but why would growth decelerate so much going forward? And do you have already some indication on the sell-out in October and early November pointing to a deceleration? Thank you very much.

Hi Charles, this is Sue speaking. So again, regarding the performance that you're referring to in APAC and indeed travel retail part has been very, very strong. To answer in small, specifically in travel retail, this company was mainly an entry prestige fragrance seller two or three years ago. And we've decided that we're going to play on the full scope of what fragrance market is about, entry prestige fragrances, where the company has always been very strong and this is continuing to grow very, very fast. One of our fastest growing brands in this channel is Calvin Klein, which is an entry prestige brand that's doing very, very well. We've added on top of this premium brands like, you know, recently Burberry Goddess, Clouet, etc. And we added also niche offering on top of this. Next to this, I would say, full lineup of brands occupying all the different price tiers of the fragrance market. We have also three makeup brands. We have the Kylie Cosmetics, Gucci makeup, Burberry makeup, and these are doing very, very well. So this is a second leg of growth engine. We are added to this channel. And number three, last but not least, it's also about skincare. And there we have Lancaster that is quite doing very well in this area. I said to you that the brand is having double digit growth, for example, in Hainan. But we are also starting in mainly in domestic markets in the southeast part of the asian continent with philosophy skincare that is a brand that is present in a sephora environment which we believe has a role to play in this in this skincare market so that's more or less what explains this over performance we did a year fiscal 23 at plus 30% in travel retail. We are continuing to grow at plus 20% in this channel. And this, again, despite the fact that we are still far under the level of travelers in Europe, specifically Chinese traveler, we believe that only 30% of the levels of Chinese traveler pre-pandemic are now back outside of China. So there is still some room over there if this happens one day. Now when it comes to the questions around Q2 but also inventory.

Yes, so maybe to start on your second part is on data. So we are not seeing any slowdown in categories or sell-outs in October. So these are definitely strong elements and this is what we are focusing on. Then number two on trade inventory. The inventory is very healthy. This is what I can tell you. The only element I will add and which will answer this phasing Q1, Q2 is that, of course, as Sue mentioned at the beginning, is that our Q1 was very strong on innovation and there is a natural, you know, pipe fill from our retailers on the great innovation that we are launching and, you know, with very, very strong results, which is Burberry Goddess, you know, Hugo Boss Elixir, and we have also Gucci Magnolia. So there is really a mechanical effect of pipe fill for retailers, but which will translate in very strong sell-out in Q2. So this is really the way you need to model the equation. You know, it's between selling, pipe fill, and Q2 is always a quarter of a strong sell-out, especially for Prestige.

Our next question will come from Chris Carey with Wells Fargo. Please go ahead.

Hi, everyone. Just a few quick follow-ups, hopefully. So just on the mix line relative to pricing, Laurent, I was under the impression pricing would be something like mid-single-digit incremental in February, March. I think you said low single digit earlier in the call. I may have misheard you, but is there an expectation for less pricing because you're getting such strong performance on mix and also that inflation is decelerating? Maybe you're seeing less need to price or it's possible? I may just misheard you. And then on the small question, but just on the obsolescence, was that just you had built up so much inventory because you wanted to be ready for the sell-in, and it was just a little bit less than you were expecting, and you had to take that on the gross margin in the quarter? And so maybe just any perspective on that, of course, in the context of strong delivery and Q1. Thanks.

Yeah, of course. So let me clarify the first point. I mean, we never say that we will do mixed single digit in February. So I want to make it very clear. So now, indeed, we are seeing low single digit. But then you made the point is that we are really monitoring in a very targeted manner and granular manner. Indeed, because also we have favorable effect from the mix. And the favorable positive effect from the mix is also driven by the accretive innovations we are putting in place. So in a way, it's really where you put the frontier between pricing or mix. And of course, we are putting the accretion from the innovation in the mix part. But of course, at the end of the day, the objective is that all these initiatives, mix, targeted pricing and also strategic revenue management are here really to increase the average unit price. This is really what we put under the umbrella of strategic revenue management. Second element, yes, we are seeing inflation, starting to ease, especially in cogs and transportation. So we are making sure also that we are adapting our growth equation in a smart manner. But I want to be very clear that we keep focusing on value creation and really implementing all the levers uh that we have uh we have in our in our hands so um yeah your second question was on uh on on you know no just to be very clear i mean the demand the demand is here there is just you know some pure mechanical and i will say accounting effect that indeed last year due to a service level issue with uh in this inventory was pretty low we rebuilt inventory this is a strategic decision we are making really to have a service level, which is a good service level. Now we are 96 percent to service level, which is a great achievement, and also to make sure that the sell-out, which is strong, is really successful and we have the product. It's, again, mechanical accounting treatment, but no concern at all in terms of inventory, and that's why now I'm telling you that we are seeing a flattish gross margin in Q2, and there will be some acceleration of gross margin in H2 fiscal 24.

Our next question will come from Ashley Helgens with Jefferies. Please go ahead.

Hi, this is Sydney on for Ashley was just wondering if you could give kind of any color into what you're seeing or expecting for the promotional environment heading into holiday. Thank you.

Do you want to take this question?

Yes, but overall I can confirm you and what you see that the sell-out is very strong and the sell-out is very strong with premiumization. This is what we are seeing both in Prestige and Consumer Beauty. and again the clear demonstration is that the innovations that we are launching, which are with higher value, higher price, definitely we are seeing very high demand. So no, we are not seeing any increase in promotional. Maybe to give more specific item, I mean last year due to the service level issues, a shortage of components, we reduce drastically our gift sets. Gift sets is usually in the mid-teens ratio. Last year was much lower. So this year, we are bringing back to a normal level of gift set, but this is a normal way of animating the category. It's very fancy. But OK, leave this question that we are not seeing, indeed, overall increase of promotional activity in our categories and in our activities.

So as this was the last question, please allow me for some closing remarks. So first of all, thank you everyone for joining us. To sum up, I would say a few things, few important things. Number one, we are very pleased with the strong Q1 results, which really sets us a great trajectory for the fiscal 24. And we are very excited by the many opportunities that are still ahead for the company. We are also, I have to say, extremely grateful for the continued confidence and support from all our analysts and investors as the recently published institutional investor results. Again, position Coty as number one amongst mid-cap companies in our sector. So thank you very much. Thank you again for your trust, and we look forward to speaking with you all very soon.

Thank you. This does conclude today's call. We appreciate your participation. You may disconnect.