Coty Inc. Class A

My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to Cody's fourth quarter fiscal 2024 question and answer conference call. As a reminder, this conference call is being recorded today, August 21st, 2024 at 815 a.m. Eastern Time or 215 p.m. Central European Time. Please note that on August 20th 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 its investor website. On today's call are Sue Nobby, Chief Executive Officer, and Laurent Messer, 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 today with the SEC with the company list factors that could cause actual results to differ materially from the forward-looking statements. In addition, except where noted, the discussion of Cody's financial results and Cody's expectations reflected certain adjustments as specified in the non-GAAP financial measures section of the company's release. With that, I will now open the line for questions. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may withdraw your question at any time by pressing star 2. Once again, that is star and 1. We'll take our first question from Oliver Chin with TD Cohen. Please go ahead. Oliver, your line is open. Please check your mute function. Okay, we will take our next question from Susan Anderson with Canaccord Genuity. Please go ahead.

Hi, good morning. Thanks for taking my question. Nice job on the quarter and the year. I guess maybe just to start out, I'm curious about the global distribution expansion for Aveda, I guess, this year. I'm curious just, you know, the timeline, what countries do you expect to expand into first, and is this going to roll out pretty quickly, or should we kind of expect a slow rollout throughout the year and into next? And then also, I'm curious if you already have retail distribution in place. Thanks.

Good morning, Susan. Thank you for your question. This is Sue speaking. So regarding our skincare ambition and indeed the ultra-premium brand Orveda, the idea is that we've been readying the brand with a year and a half whisper strategy. This brand got, I think, probably one of the highest number of awards, specifically behind its Omnipotent Serum, which is a first of this kind of serums using senolytic technologies inspired by, I would say, pharmaceutical technologies. And this allowed the brand to have the highest number of awards. We've also been having the brand present in some department stores, such as Harrods in London, such as Saks Fifth Avenue in New York, several Saks locations in the US, and an own store in China, which is the Maison Orveda in Shanghai. Now is the right moment to accelerate the expansion of the brand. The brand is going to open a lot of doors in the coming fiscal, starting in the first half. This is, of course, high-end doors, niche doors. We are not talking about specialty stores. We are not even talking about classical department stores. We are talking about high-end doors where we believe the consumers who are able and ready and willing to shop a $400 serum and a $300 moisturizer are shopping more and more. And this is really what is going to happen behind the brand. So we are talking about an acceleration of the expansion of the brand. in this fiscal 25, which was really something that was long awaited.

Okay, great. That sounds exciting. If I could maybe just add one more on the innovation pipeline. You mentioned a number of launches for Fiscal 25 in the presentation. I'm curious, are there any that haven't been announced yet that we should expect as we go throughout the year, either in fragrance or in prestige cosmetics? And then also maybe if you could touch on pricing versus volume mix for Fiscal 25?

Let me start with the first part and then maybe Laurent can take the pricing versus volume mix part. In terms of innovation pipeline, as a reminder, we've been very active since Q1 of last fiscal. Fiscal 24 indeed started very, very big. Remember, the company did a growth of 18% in the Q1 of fiscal 24, and prestige was even bigger. It was above 20% of growth, and this was chapter one of Burberry Goddess. So we are adding Burberry Goddess Intense that's arriving now. which is clearly something on the huge success of the Gerdes launch, that by the way allowed us to almost double the size of the brand. This is number one. Number two, we are also having the carryover of the launches that happened in the second half of fiscal 24. So Marc Jacobs, Desi Wilde, the number one innovation in spring in the US, will continue its carryover during H1. Kylie Kosmic is also going to continue its carryover during this H1 moment. number one volume in the U.S. for this one. And we are also, you may have read it in WWD, I think, a few days ago. Chloé is doing its biggest launch ever, Chloé Intense, which is also arriving in fall. So the pipeline of fragrances, be it you know, chapter two of previous successes, adding on top of these innovations, or the carryover from H2 of Fisca24, plus new launches such as Chloé Intense, are really giving us this confidence that we are going to continue the momentum behind our track record of blockbusters and festive fragrances. Now, we are also active on other categories. We are active, of course, on color cosmetics. We have a few launches arriving without revealing these. We have a few launches arriving specifically behind our, I would say, most successful color cosmetics brand. I'm thinking about Burberry. I'm thinking about Kylie Cosmetics. We have also skincare. There is a big thing arriving behind Lancaster in Europe. So Lancaster has been doing fantastically well in China, almost doubling year on year in terms of size. Now it's the turn of Europe for this brand so that we have really both sides of the picture activated behind this brand. And last but not least, we have also consumer beauty. We've announced the launch of 3D mascara from CoverGirl, which we believe is going to be a big innovation. There is Thrill Seeker Extreme from Rimmel and many, many other launchers. Last but not least, consumer beauty is also going into fragrances in big. with the first global launch of the fragrance line called adidas vibes which we believe is clearly going to ignite the second leg of categories inside this division next to color cosmetics we now have a big fragrance launches happening in this division too

Laurent, pricing and volume? Yeah, absolutely. So, I mean, Suzanne, just to step back a little and really remind that from, I mean, fiscal 24, definitely, I mean, price was a big component of the growth, not with high single digit. It was definitely the year where we had carryover from the fiscal 23 pricing, and, you know, with the peak of inflation, we implemented on price increase. So we agree this carry over positive impact in fiscal 24. And we continued also to implement price increase in fiscal 24 at the beginning of the year, which was mid single digit, but also in second half, which was more low single digit in fiscal 24. So indeed, in fiscal 24 pricing was really a single digit. Now, moving forward to fiscal 25, definitely, I mean, our equation, our 6% to 8% growth algorithm is more balanced between volume, price, and mix. So it means that indeed the volume is absolutely key and the innovation that Sue has just shared, of course, are really driving additional volumes. Pricing, we will continue definitely in a very targeted manner because we know we have the data. We definitely know where we can implement price increase. So this is very, very granular. And the last piece is mix is very important. All the work we are doing is we need to drive mix up either in the current portfolio, because we can really upgrade the portfolio, but also innovation definitely is a strong way to improve the mix. And all these initiatives are captured under a stream, which is strategic revenue management, that now we are leading and is really to unlock value on all SKUs as possible. And of course, it's contributing to the net revenue, but also to the gross margin.

Thank you. We'll take our next question from Oliver Chin with TD Tobin. Please go ahead.

Hi, Sue and Laura. Very helpful. Thank you. You mentioned retailers are placing some order with caution in the near term. Can you elaborate on that? That would be helpful in terms of what retailers are seeing and how you're planning inventory as a result. Second, would love your thoughts on comparing or contrasting how consumers and or customers are feeling regionally, just given there's lots of cross-currents in the environment, but fragrance clearly remains very attractive. And finally, as we think more generally about investments this year, any highlights, especially in terms of the continued innovation in digital and best practices, as well as R&D? Thank you.

Or maybe you can start with the first part. Yeah, absolutely. So, Oliver, I think in your question, indeed, it's very important that you are putting this question in a very, in a way that is really depending on the regions and also categories, because indeed the dynamics can be very different. As you know, and really what we like is that we are seeing that the beauty of all, I mean, keeps growing, keeps very dynamic and really being, you know, mixing the digits. definitely, and we are seeing indeed the prestige being more in the upper end, and consumer beauty being more in the lower end. And we are seeing, I mean, natural markets being also in the middle, and we are seeing, I mean, our growth engine indeed being in the double digits. Now, when we go more in depth, which is your question indeed on consumer beauty in U.S., Yes, we are seeing that indeed the color cosmetic market indeed is challenged and we are seeing indeed that some U.S. retailers are managing their inventory indeed with caution. Definitely this is what we are seeing, but at the same time I want to highlight that this is only a portion of our net revenue. So it's really a small part. And we are seeing at the same time that on the other regions, I mean, we are seeing retailers keeping very dynamic, definitely on Prestige, but also on Consumer Beauty in the growth engines, in the gross engines market. So that's why definitely it's driving our expectation for consumer beauty to be moderately positive in Q1. So indeed we are taking this into consideration in our algorithm.

Good morning, this is Sue speaking. So your second part of the question was about how consumers are feeling in the different regions. So of course, the big region for us, the first big region for us is the US, where we clearly see that fragrances specifically prestige fragrances, but also mass market fragrances, by the way, remain bright spots. It's really a story of twofolds, I would say. People shopping high-end fragrances are continuing to shop high-end fragrances, mainly perfumes, eau de parfum, elixirs, all that kind of highly concentrated with a strong trail of fragrances. But at the same time, you also see in the same channel, Entry Prestige fragrances doing very, very well. So it's not either. It's not one or the other. It's both at the same time. And these Entry Prestige, I would say, users are, of course, towards, I would say, smaller formats, trial formats but also you know including body sprays that we saw so heavily used by a lot of younger generations so this is clearly what we see on the fragrance part on color cosmetics clearly and interestingly we see still some dynamism in this market And a lot of the consumers, now that the prices of mass market has been increasing quite strongly in the last two years, you see some trade-up, which is really a first in this kind of environment. You see a portion of consumers from mass market trading up to entry prestige color cosmetics. So that's very interesting. So we are not at all seeing trade-downs, we are seeing trade-ups, and we are seeing consumers operating in the different price brackets, so still very, very active. In Europe, the dynamism of the beauty market is still intact. Fragrances are there, also a bright spot. Color cosmetics in Europe are doing better than what they are doing in the U.S. The reason the pressure we see in the U.S. on mainly drugstore chains, this is really where we see the pressure. The rest of the distribution in the U.S. is for us less pressured. Last but not least, in Asia, so it's a twofold story here again. If you look at the outside of China, there is dynamism specifically behind fragrances. Fragrance index is at play. Penetration is very low. And there it's also a story from less than $10 to above $10. We see it in what we call growth engine markets. We got recently the news that one of our Agile Beauty initiatives is called Chanson d'eau. Chanson d'eau is a French-Spanish brand that was active 20 years ago that we reignited a year ago. We launched it in many countries, including in South Africa, under $10, and it's become the number one fragrance in this country recently. So you clearly see that whatever is the price, there is still this huge demand for feel-good look good, I would say, element. Highlights on investment in fiscal 25, best practices. I think the two best practices and two highlights of investment in fiscal 25 is to continue our best practices in blockbuster creation when it comes to prestige fragrances. We are not anymore in a catch-up phase like we used to be two years ago. Now we are becoming a trend-setting company in this area. And we've been really driving in big the gourmand slash vanilla slash banana blossom flower fragrances, which are resonating today from mass market to ultralish. So this is really something that we intend to continue. Second thing, we are also bringing up our advocacy model that we have put in place. You may have noticed during the prepared remarks that we've grown the EMV of both REMAIL and CoverGirl by 400%. That's really a huge progress. Now what we need to do is to increase the agility for innovation, putting on the market innovation as quickly as in six to nine months versus more than a year in the previous years. And this, we are going to put in place a startup organization inside the company, so that this huge progress on advocacy marketing on one side, coupled with an agile innovation startup machine inside Coty, will allow us to multiply by two the level of innovation in color cosmetics, but also in fragrances in this division. knowing that we have already multiplied this level by three. So we are really in a high-speed pace. Last but not least, we are also applying these best practices, be it advocacy marketing, faster beauty, or on the other side, fragrance momentum, to mass market with the launch of Adidas Vibes that we believe is a huge mass fragrance opportunity.

Thank you. We will take our next question from Filippo Florini. Please, the city, please go ahead.

Hi, everyone. Thanks for taking the question. So I wanted to go back to the consumer beauty business. What level of promotional environment have you seen in the U.S. market? Clearly, we've seen the category being more under pressure, particularly with low-income consumers. So are you planning more promos in certain parts of the portfolio, or how are you planning to respond to kind of adjust the value equation for some low-income consumers?

Good morning Philippe, this is Sue speaking. We've done a lot of studies recently to really understand what are the levers to, in a way, support our growth in consumer beauty, which is mainly color cosmetics for Coty in the US, to take this example. And what we are seeing is that really for a brand like CoverGirl, which is really talking to people from 18 years old or even younger up to above 50, 60, 70 years old. It's really a kind of very specific mix of still TV advertising, still a lot of advocacy marketing, influencer marketing, and a little bit of coupon. It's really a little bit of coupon. So promotionality, and prices, pressure on prices is not what is driving the consumption. Remember what I just said a few minutes ago, we are seeing some consumers trading that from consumer beauty, color cosmetics category to entry prestige category. So it's really this that we are seeing. So it's really the job of us and the job of all the players of this industry to put on the market uh i would say prestige like innovation if i may call it like this but at the prices of mass market this is the recipe that works it's not about cheaper brands cheaper brands are not taking the the i would say the the volumes it's really about this part that is shared between upper mass and entry prestige thank you we'll take our next question from javier escalante with evercore please go ahead

Hi, good morning, everyone. My question seems in Brazil, about Brazil. If I understand, on your prepared remarks, you mentioned that it could be very high double digits, gross margins increase 400 basis points. So how do you accomplish so much in just one year? What is the role of Brazil in year two? driving consumer profit margins and I have a follow-up.

Let me start with the first part and thank you very much for giving me and giving us the opportunity to highlight the fantastic, I would say, growth trajectory of the Brazilian market and the Brazilian COTI teams. So let me maybe update you on this market. So the Brazilian business has been growing very rapidly. It's more or less 20% of growth that we have seen on this market in fiscal 24. We are already a leader in many categories. We are the leader of the nail category with a brand called Whiskey. And Coty has very strong positions in body care. as we are the number one in scented body oils, which are becoming a global phenomenon, by the way, and number two in body lotions with the brand called Monanger. We are now unlocking the substantial fragrance opportunity in this country. A little bit of context, the Brazilian market is a very big market, as you said it, It's over a $2 billion market. And the penetration of fragrance usage or scenting items usage is close to 70%. So you can imagine this is paradise for a company like Coty. So while direct selling, particularly door-to-door, has been historically big in this country. The retail channel has been growing very strongly and very quickly in both mass and prestige recently. And here, as you can imagine, our company is very well positioned to win as we are leveraging our global portfolio of mass, but also prestige fragrance brand. We are leveraging our leading fragrance capabilities, our extensive distribution in this country, as well as the fact that we have a big factory where we can manufacture So only one year after launching a few of our mass fragrance brands in the Brazilian retail channel, we reached already the number six rank in this country with over 4% of market share. Of course, we will continue to drive this through additional brand introduction. it moved productivity and we are going to accelerate the expansion as a step two but it's also the story of prestige fragrances where we took over the business from distributors a few years ago and we are now reaching almost 10 percent market share up almost 200 basis points versus fiscal 21 and this is led by brands such as calvin klein and hugo boss so you can imagine that for us This is really a land of opportunities and it's just the beginning of the story. Laurent, maybe you can compliment on the profitability part expected for fiscal year.

Absolutely. The agenda for Brazil was of course that it's a strong growth engine that was really to make it in a very profitable manner. This was definitely the mandate and indeed you see from the numbers that it's even over-delivered. Starting with growth margin, A lot of initiatives. I will start first with pricing. Definitely, we implemented a significant price increase because there was inflation, number one, but also because really the pricing power was there. And again, the innovations, the strength of the brands was really allowing to do this. And there was really a deep review of the portfolio. I was talking strategy revenue management is really a fantastic case. When you open, you know, the Risqué brand, the Monash brand, all these brands, I mean, and you apply the playbook, then we were really able to unlock a lot of opportunities. So, indeed, this was really pricing mixed. Keep in mind also that in Brazil we have also our own R&D, we have our own factory. So we were really able with these additional volumes really to gain fixed cost absorption and also to gain significant improvement on procurement. So this was really boosting the gross margin and then that's really the virtual circle that we explained many times. We're able really to invest. in the new opportunities. So it means that for fiscal 25, in fact, Brazil is a creative for the equation because the additional basis points that they are gaining, in fact, is moving even faster than the company. So it shows that, you know, our growth engine market, they bring growth, but they bring profit because we have the right platform.

Thank you. We'll take our next question from Anna Lizold with Bank of America. Please go ahead.

Hi, good morning. Thank you so much for the question. I wanted to go back to the consumer beauty topic. You mentioned you're diving into innovation, doubling in the next couple of years. Just given the strength of certain competitors in the space, do you now view the mass beauty side as expanding and therefore more of a growth opportunity? And you mentioned trading up, which is very interesting, you know, from the mass space to entry-level prestige. Are you seeing any benefit here in consumer beauty, though, from trade down in a more challenging consumer environment? Thanks.

So, good morning, Anna. This is Sue. So, if I understand what the question is about, let me just read it again because someone is typing at the same time. Do we see MassBeauty as more of a growth opportunity? Yes, of course, we see this as a growth opportunity. MassBeauty is not just the U.S. market where we are doing, I would say, a fantastic job that we have been doing for the last three or four years. You've seen probably in the most recent scanners plus, you know, omnichannel vision. But CoverGirl is one of the heritage brands that is resisting the best to, you know, not only the slowdown on one side, but also in front of some very, very nimble competitors. But we are learning quickly. We are putting in place what needs to be put in place quickly. As you heard it, we have been doubling down on advocacy marketing and the full marketing that goes with it. And this is really changing the destiny of our brands that are suddenly visible with the right light, with the right innovation, towards the right consumers who are making the growth of this market. But now we are adding a second leg, which is this agile beauty startup inside Coty. It already was active. Now it's becoming something very, I would say, specialized team, multi-competencies team. Sorry, that's the word I was looking for. So you can imagine that when you couple these two together, even in a market that is pressured mainly in direct-store chains, because in e-commerce the brands that we are having are booming in fact. So it's not about mass beauty that is pressured, it's mass beauty in certain channels that explains the slowdown that we are seeing in some I would say, retailer orders, et cetera. So I believe that MassBeauty continues to have a future, assuming that we are as nimble, as innovative with a look and feel of prestige. So this is number one. Number two, this U.S. market is one market among others in our equation. And we are really growing this division worldwide. Rimmel has been gaining market share for the last two quarters globally, and we are accelerating the same playbook behind Rimmel. And on top of this, when I move away from this color cosmetics category, we are also accelerating in mass fragrances. This is expected to be the fastest growing category of the division in the fiscal 25. We are accelerating in nails, specifically in artificial nails. and we are accelerating in what we call elevated body care, because there is a huge increase of penetration in body care all around the world. So in a way or another, we will continue to grow the division because we are doing what is the right things to be done on the market that is highly competitive and under pressure like the US one, but we also have massive other areas of oxygen in the coming year, and should I say in the coming years.

Thank you. We'll take our next question from Corianne Wolfmeyer with Piper Sandler. Please go ahead.

Hey, good morning, team. Thanks for taking the question. I'd like to touch on the guidance for the year and the cadence you've alluded to. It seems like the back half is going to be fairly strong, and I would love to understand the level of visibility you believe you have into on the back half of this fiscal year and what gives you confidence in those targets. And then additionally on the well estate, if there's any color you can provide on progress there, any updates on conversations you've had with potential suitors to sell it off to. And then I believe you talked a little bit about share repurchases in the group prepared remarks. So any commentary on updated thinking around share repurchases and capital allocation would be great. Thank you.

Thank you, Corinne. So first on the guidance, so I mean, first of all, indeed, so we are confirming our mid-term algorithm for fiscal 25, which is 6% to 8%. We are indicating, as we flagged during the last earnings call, that sequential improvement in Q1, which is around 6%, and then indeed moving to the 6% to 8% algorithm in H1 and then in H2. The key reason about this sequence is also about comps. As you remember, last year there was very strong phasing. Our Q1 was plus 18%, our Q2 was 11%. and then Q310, and then lending the year at 11%. So of course, we have high cons, and we are taking this into account in our algorithm. So cons are easier in VH2. Then definitely, we are modeling that our sellout should be aligned with our selling in the H2. And of course, I mean, this is supported by all the innovations that, you know, we are piping in starting now, but we will continue in H2 both on Prestige and on Consumer Duty. So, indeed, there are all these elements drivers which are really captured in the sequencing of these growth algorithms. Then on your second part on capital allocation, first of all, I just want to remind again and again that deleveraging is the number one imperative for the company. And of course, we keep targeting towards the two times end of calendar 2025. And I want really to see that these two times is really without any Velastec divestiture. So it's really built by pure organic EBITDA expansion and cash flow generation. So that's very important. So now definitely on Velastec. So it's really, okay, we keep targeting these divestiture end of calendar 25. Now, as you know, this is definitely in the hands of the main shareholder which is KKR, so no specific news on this. And again on share repurchase, as I indicated, definitely we confirm our plan really to move towards 800 million share count really by end of fiscal 27, so this agenda is unchanged. Definitely, the last step that a teacher will be an opportunity, then you need to do it faster. This is really what we are taking into account in the algorithm. So algorithm is unchanged, and the agenda remains the same.

Thank you. We will take our next question from Andrea Tesira with JP Morgan. Please go ahead.

Hi, good morning. Thank you for taking my question. So I wanted to, so you, you, you found a very confident of the launches that you have in the company, what are you going to call for Burberry goddess and in a lot of the launches that we have for the strong holiday season. And obviously understandably you have two thirds visibility right now of the quarter. But can you help us like look through channel and more of what you have gained in terms of distribution, to give us confidence that you can call that very strong comparison in the holidays last year. And given how cyclical fragrances have been, I understand all the body oils and fragrances have been a wellness category for pretty much the last four years. But understandably, thinking about how the consumer is making tough choices as we go, in particular, in the key markets that you're in, understandably how this is going to unfold and what gives you confidence that then you're going to re-accelerate in the second half, despite the comps. I mean, the comps are the comps are, but I think it's important to see how you're planning the cadence of the launches to offset the tough comps. And also, like a clarification, as we build into your guidance, I believe you mentioned hitting EBITDA of margin of 18% and giving your guidance for EBITDA, when you back it out, it actually would give you a higher revenue number than what you're implying in your guidance. I understand that perhaps that number is effect neutral. That would give you close to a mid-single-digit increase in sales as opposed to, let's say, a 4% increase in sales for fiscal 25. I guess that's a question to all around. Thank you very much for both.

Thank you. Let me start indeed on fiscal year 24 launches. That's really a key question and we explained several times that the strategy we put in place is exactly that we are not in this trap that we launch a big innovation in year one and then year two is dropping. Not at all. So this is exactly, Burberry Goddess is a perfect example. So indeed it's a great success. which really contributed to Fiscal 24 top line significantly, but we are going to continue in Fiscal 25. So it means that Burberry Goddess will continue to grow, and we are adding also Burberry Goddess Intense, so which is going to come on top. Okay, so it's really that, you know, your point about the comp, in fact, we manage this way, and then on top, it's really we are doing this on the other franchise. You know, we are launching indeed a gucci flora orchid and it's really you know it's part of the flora range and here again you know it's really adding the growth in the flora range and it's starting very well because this is already the number one at sephora worldwide but this is the same on the bus and this is the same of course on Marc Jacobs, because Marc Jacobs also in terms of phasing, we launched in March. So in fact, we have the full impact now in Q1 and Q2. So that's why now we are also phasing these launches, but it's not only one window during the year, but we open two or three windows so that we can really phase and avoid this comp So that's definitely part of our strategy to continue really this expansion. That's the same definitely on consumer duty that we are doing this. So I will answer also your question on the guidance. So definitely what we are monitoring is really targeting the light fall, light growth. So this is a six to eight percent. What's very important is also that our guidance on EBITDA is really the dollar value. This is really the guidance that we are giving and dumping by margin expansion. And I know this is the modeling you're trying to do. Of course, it's hard to see the full year Forex impact. So I think this is definitely some fine tuning indication that we will give you as the year is going. But to help you also is definitely, yes, the margin growth could be indeed higher versus indeed what we are indicating here.

Let me maybe just quickly conclude on the middle part of your question about what gives us the confidence. as you know, of our launchers sustaining over time and continuing to grow one after the other. I think this is really the main difference between the KOTI of five years ago and the KOTI of today. We have put in place a way to select what is going to stand the test of time and to grow over time. That's very important. and every launch we are doing specifically the big launches behind the big brands are really done if and only if we have a full confidence high level of confidence that this is not going to be something that's going to be high for the first year and then go down so with three about addiction it's about positive addiction if i may say to reduce of course to the concept that make sure that this concept fits with the trends that are not the trends of the moment, but that are structural trends that are here to stay for the next decade. And the second thing is that while we are doing these big blockbuster juices that are now setting trends for the long term instead of catching up, we are also very tactical in a way, positively tactical, playing with the formats, playing with the scenting at large. The scenting is becoming a much larger piano with much more touches than the traditional eau de toilette or eau de parfum. And we are also activating other brands that we have not activated recently. You know, the beauty of the Coty portfolio is that we have a lot of brands and some of these brands are going to be activated quite strongly, specifically the brands that are positioned on entry prestige. So all together, Together with the fact that penetration is still not at the level of Brazil that I was quoting just a few minutes ago, we believe we have room not only in the U.S. but also elsewhere to continue to grow our fragrance business.

Thank you. We'll take our next question from Olivia Tong with Raymond James. Please go ahead.

Great. Good morning. Thank you so much. I'm going to sort of build on what you just said around fragrances and why you think fragrances seem to be transitioning from what historically has been more of a discretionary category within beauty to one that is clearly less discretionary, but also seeing a willingness by consumers at the low end to trade in, even though they haven't historically participated in the category. It's pretty much price discovery at the ultra-prestige end. Clearly, it sounds like there is significant momentum in prestige fragrances. Are you assuming a similar level of contribution in fiscal 25 as in fiscal 24? And what are you incorporating insofar as concerns about more volatile macros? Thanks.

Thank you for the question. So let me try to answer. Again, I hear some people saying fragrances in this questionnaire category, some other people saying that this is a cyclical category. First, it was not a cyclical category. It has always been a category that was growing more or less at the low single digits prior to COVID. And then something happened. at the coveted moment where suddenly a full industry that has been reinventing itself for the decade before was put in front of a younger generation of consumers who are both genders younger from diverse backgrounds from diverse ethnicities specifically hispanic community in the u.s and suddenly you have really the encounter of two destinies the encounter of a category that reinvented itself with more quality, more creativity, multiple layers. This was not just about entry prestige, it was all premium, ultra-premium, exclusive collections, etc. Concentration, technology, you know, the latest launch of Coty, infinimental Coty users for the first time, a patented molecule that extends the longevity of a fragrance. So you know, at the end of the day, when an offer becomes much more qualitative, much more performant, it's not anymore discretionary buying or a cyclical buying. It becomes part of your life. And we believe that fragrances are becoming structurally part of the life of millions, billions of people around the world. specifically the youngest as connection builders you know people ask each other what do you wear etc and that's a fantastic advertising campaign if i may say people are also using fragrances as mood boosters as escapism tools etc so we moved from something that was seen as a gift if you think about the u.s gift item into something i'd buy for myself because it makes me feel better, it makes me connect with others, and the quality and the intensity of choice is ever bigger than it used to be in the past. So that's the reason why I believe it's not a discretionary category, it's not a cyclical category, and beauty is not a consumer goods industry neither. So it's very, very important that I restate this at the occasion of your question.

Thank you. We'll take our next question. Linda Bolton-Weiser with DA Davidson. Please go ahead.

Yeah, thank you. I was just curious about when you talk about innovation and consumer beauty, usually when there's a big technology innovation in the nail category, that's a big driver of category growth. It's been quite a few years, I think, since a big innovation. Can you talk if there's anything being worked on there? And then my second question has to do with cash flow. I was curious if you could quantify the cash flow benefits in FY24 that won't recur in FY25. You have a number behind that. And then what is going on with cash flow in early 2025? You said the retailers are managing... something about cash and inventory, and then also why your receivables seems very, very high. It seems to be kind of a dream and cashflow. Thank you.

Yeah, so let me, hello Linda, let me start with the cash flow. So indeed, as I shared, we are lending our free cash flow fiscal 24 at a level of $370 million. Definitely, there were some elements that do not repeat. I mean, definitely, this is really a year where we are starting to pay significant cash tax. So this was around $90 million. So I would say it's really driven by that we are increasing and improving in a lot of jurisdictions. Second, as I explained, indeed, we had also this year some investments and inventory build-up related to S4M implementation, which, as I explained, we went live mid-July and very successfully, so it's a very strong asset for the company. So, of course, these are headwinds that will not repeat in fiscal 25. Now, fiscal 25, indeed, we are getting low to middle Definitely, we are really taking into account some volatility with the retailers. Indeed, we are seeing retailers now strongly focusing on cash, really either on their inventory management or payment terms management. this is embedded in our equation and definitely that really we are monitoring tightly. So definitely we keep working on other opportunities for fiscal 25, really optimizing all the levels that we have in our working capital and definitely we are building So we are absolutely confident about our cash cycle. Indeed, we are really in a phase where we are, I would say, cleaning some elements for fiscal 24, as I explained, and also there were a few positive one-offs which happened in fiscal 24 that will not recur in fiscal 25. But again, we are very confident and the year is starting well.

And Linda, to answer your question around nails, which I believe is indeed a very, very interesting category where we hold fantastic positions. You know, Sally Hansen is the indisputed leader of nail in a bottle in the US with more than 40% of share. Risqué in Brazil, which we may globalize at the moment, is also doing fantastically well. Number one in the country, above 40% of market share. All our color cosmetics brands, except CoverGirl, are also having fantastic nail offers. benefiting from the technologies of Sally Hansen. You're right, this is a category where innovation is key. We haven't seen innovation as big as the one that happened a few years ago or maybe a decade ago with gel technologies, be it in professional or in consumer. But still, this is an area that we are actively working on to increase the wear because it's about the wear using non-UV activated solutions. We are also putting a lot of energy and intelligence into how to skinnify this category. You know, what's happening in healthcare should happen also in nail. And last but not least, we are also going to be super innovative in terms of what I call special effects. Special effects are also going to bring excitement the same way it's bringing excitement on the lead category, for instance. Last but not least, we are also going into artificial nails, which is also a big focus for the company. We believe that there are really two kinds of consumers, and we need to talk to both of them. And this is an area where we are working very hard to bring innovation, because this is the rule of the game.

Thank you. We'll take our next question from Chris Carey with Wells Fargo Securities.

Hi, good morning. I wanted to ask about gross margins and one question on category growth. Regarding gross margin, you're a year ahead of plan. Fantastic. Going into fiscal 25, can you just talk about some of the drivers of gross margin expansion? It sounds like you'll have some wraparound pricing, but I'm also conscious you have some favorability issues. from manufacturing, I think phrase as well for filings. And so can you just talk about what's going to be driving the expansion and maybe dimensionalize it for fiscal 25? How much? and um and whether you think this mid-60s target was just you know a starting point and now you're running ahead of it maybe you have confidence in going farther specifically as you look to you know use pricing or premiumize more over time um and then just connected if i could do you have an outlook for category growth for fiscal 25, maybe globally. Certainly we've heard from some of your beauty peers that there's been some deceleration of category growth in Q4, still solid, but some sequential deceleration. I wonder if you're seeing that too. Are you expecting stabilization or would you just expect to outperform category at a higher clip next year? So really there's two questions there, one on gross margin and one on category growth. Thank you.

Yeah, thank you, Chris. So let me start with Gaude Margin. Yeah, you're absolutely right. We are ahead, you know, you're ahead of plan. So it means that all the actions we put in place, I mean, delivered or even overdelivered. So we are going to keep the same recipe into fiscal 25. So as I said, I mean, we will keep, you know, doing a targeted price increase. in a context where we see more moderate inflation on our cost of goods. But still, again, we keep using pricing as a lever to improve our gross margin. So then, of course, mix is a big driver. And I think we gave and we keep giving a lot of examples of premiumization, and we do it across all divisions, all markets, all categories. So this is a must. And productivity, we continue, of course, our productivity initiatives. I mean, I shared that we continue the all-into-win program, of course. We have plans next year, you know, for 75 million additional productivities. So it's part of productivity in our factories. And volume, of course, is helping really to accelerate this productivity. but it's also with procurement. We are definitely scaling up the volumes. Indeed, it's giving us really some scale and power to negotiate a better price. And also, we have a specific program to continue to simplify and really to rationalize our portfolio components. And again, fragrance is a good example. You heard from Sue that we are also accelerating mass fragrance. Here, of course, we are benefiting here from the scale of the prestige fragrance. So it means that we can launch initiatives which are already at a high growth margin. So we have the playbook. We continue. And definitely, I mean, the mid-60s is not the end game. So we will continue definitely to go beyond the mid-60s with the same recipe. And mix will be, of course, a big driver for this acceleration.

Let me take a second path, Laurent, which is around category growth, what we are seeing. Entering fiscal 25, we have seen that demand trends are remaining broadly consistent with what we saw in fiscal 24. At the same time, of course, we all have seen that prestige retailers, but also drug storytellers closely manage orders and inventory levels, which is resulting in a sellout that is tracking ahead of selling. So we anticipate beauty demand in mature markets to expand in the mid single digits, including prestige fragrance growth above this range. and mass beauty growth below this range. All of these supported by very, very strong ECOM, which is growing between two times and more faster than the company. So within this backdrop for the mature markets, we are targeting to perform in line. to a head of the market. And at the same time, we target to do double digit percentage revenue growth in what we call growth engine markets. I'm thinking about Brazil, the rest of Latin, Mexico, Africa, Saudi Arabia, to name a few, and high growth channels such as travel retail, which all together accounts for approximately a third of Coty business. So all of this will support our fiscal 25 innovation pipeline on top of it.

Thank you. We'll take our next question from Steve Powers with Deutsche Bank. Please go ahead.

Thank you very much. Good morning, Sue. Good morning, Laurent. Sue, picking up a little bit, I guess, on the idea of the growth engine markets, I wanted to ask about China specifically. Obviously not your largest market, which is an advantage right now, but it has been, you know, a growth engine market for you in part of your long-term strategy. Just a couple of questions on that. One is, what is your outlook for China this year? How are you planning for it? Two is, given what I assume is a softer outlook on China, are there specific growth engine markets? You just mentioned a few, but are there specific ones that you're reallocating investment dollars to where you hope to make up some of the gap there? And then is anything you're seeing now in China altering your medium to long-term views on what that market represents in terms of a future opportunity? Thank you so much.

Thank you. Thank you, Steve. Good morning. So first, to answer the question around China, clearly we believe that fundamentally China is or will be one of the biggest, if not the biggest, beauty market in the mid to the long term. So this is really something structural. And this really has to do a lot with prestige market, I would say, that is going to continue to grow because this is culturally rooted in this country. Now what we are seeing now at the moment is that the negative growth trends specifically in skincare in China will continue probably in the coming quarters. Prestige fragrances is really the bright spot in this country and I'll tell you a few words about the performance of the company. But let me just remind everyone that the business of coty in China is still small. It's around 3% of the revenues in fiscal 24. And at the same time, we are playing with two legs. So we are playing with the leg of prestige fragrances, which are really doing better than any other category. And the adoption curve of Chinese consumers in terms of premium, entry premium or niche fragrances is continuing to be at play. And we have the right brands. Recently Burberry, Chloé or Skyline has been doing great on this market. And at the same time, we are also pushing, preparing for the skincare, I would say, growth that will inevitably be back in this country. starting with Lancaster. Lancaster has been doing a fantastic relaunch in China. We have seen great results. Lancaster is the fastest growing skincare brand in both the June quarter with almost doubling the size of the brand and also in calendar 24 with a growth that is a triple digit growth, gaining four points of market share in year to day calendar year 24. June was a very strong month. Lancaster ranked number four brand at Sephora right after brands such as Drunk Elephant and Tatcha. And Lancaster ranks number eight on Douyin. So the very unique positioning of Lancaster that is not a traditional skincare brand, that's not the usual DNA and stem cells and hyaluronic acid, blah, blah, blah, et cetera. It's all about photo protection and photo aging. is clearly strongly resonating in China, and you may see that this is becoming also a global phenomenon. So, to really summarize on what we are seeing in China, is that we are going to continue to overdrive our fragrances because this is where growth is coming from, and we are readying our brands, Lancaster and also Orveda, for when the skincare market will be back on track, and we believe this will happen at a moment or another. Now, are we shifting resources from one market to the other? We are constantly putting resources and ANCP and money where there is growth. So, of course, there is growth behind prestige fragrances in China, so we are investing over there. But there is also growth behind prestige fragrances in the U.S., and we are also investing heavily in this area, in the Middle East, in other regions where the company is seeing, I would say, a momentum.

Thank you. We'll take our next question from Ashley Hogan with Jefferies. Please go ahead.

Hey, good morning, and thanks for taking our question. So you mentioned your innovation center and, you know, being able to get products out more quickly. Can you remind us how fast you can get ideas onto shelf today and then what the goal is in the future? And then anything you can tell us about the promotional environment and kind of expectations on the promotional environment as we head into holiday? Thanks.

Good morning. Thank you for the question. Indeed, three years ago, maybe four years ago, when I joined the company, launches could take up to 18 months to two years, which is very, really too long for the world we are living in. We were already living four years ago. Today, and we started to do it already, so it's something that could take between six to nine months. Wonderbone, the mascara, the latest success from Rimmel took us nine months. The launch of Yumi Gloss from CoverGirl, it took us as quickly as six months, if I'm not wrong, including the platforming of this innovation on other brands. So the question is not to go faster because six months is already super, super fast because we need to fit also with retailers resetting of their shelves. And this is really something that is a kind of imperative that we need to fit in. But six months is very, very fast. The idea is to do more launches in six months. So we already know how to do it. Now we are going to industrialize, if I may call it like this, our ability to put on the market launches in six months. And usually we are going to focus on areas that are not the traditional Coty R&D areas. You know, Coty R&D is doing a lot in color cosmetics, but there are areas that are very, very technologically specific. And these are the areas that we intend to overdrive in the coming months and quarters. so that we can have both speed, but also the quantity. It's a war of attention, so you need to win this war of attention with the right, surprising, exciting, innovative, and efficient products.

Thank you. We'll take our next question from Mark Astroshawn with Stifel. Please go ahead.

Yeah, thanks. And morning, afternoon, everyone. A couple of clarification questions. So the retailer reordering commentary sounds more like it was on the color cosmetics. Is that correct? And I guess if it is, how do you think about what channel inventories are from a fragrance standpoint, thinking more on the prestige side, and how you think about the puts and takes of What in demand looks like and how does that factor into the high and low end of your guidance for fiscal 25? And then just also clarification. What's baked in from an Argentina hyperinflation standpoint for the revenue growth for fiscal 25?

So, definitely to answer here on, you know, retailer order management, yes. I mean, the point is mainly cosmetics. I mean, the prestige category, programs category remains very dynamic. I mean, you saw the last numbers. I mean, prestige programs category in the U.S. is going by 10% in July. So, definitely, and you know that U.S., fragrance category is 70% bigger versus pre-COVID. So definitely it's very healthy, very dynamic, and we are bringing again strong innovations and which resonate very well in the U.S. On Argentina, indeed, I indicated in fiscal 24 that indeed due to hyperinflation, we really implemented significant price increase. Now we are really modeling for fiscal 25 more, you know, some stabilization. Okay, so there will be some impact, but not at the same level as we face in fiscal 24.

Thank you.

And there are no further questions at this time. I'll turn the call back to Sudh Navi for any closing remarks.

Thank you very much. So looking forward to talk to you at the end of Q&A.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.