Coty Inc. Class A

Hello, everyone. This is Olga Levinson, COTI's Senior Vice President of Investor Relations. Thank you for joining us today for the prepared remarks portion of COTI's first quarter fiscal 2025 earnings. On Thursday, November 7th, 2024, at approximately 10.30 a.m. Eastern Time or 4.30 p.m. Central European Time, we will hold a separate live Q&A session on our results, which you can access via our investor relations website. Joining me for our presentation are Sue Nobby, Cody's CEO, and Laurent Mercier, Cody's CFO. Before I hand the call over to Sue, I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Cody's earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Cody's financial results and Cody's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release. Thank you. I will now hand it over to our CEO, Sue Nobby.

Thank you, Olga. Welcome, everyone. As we enter fiscal 25, the microeconomic environment remains as complex as ever, and the outsized growth of the last few years is now entering the normalization phase. But one thing is very clear, consumers continue to prioritize beauty in their spending routines, even as they pull back on many other consumer segments. Within the broader beauty backdrop, fragrances remain a top performing category. As a beauty leader and increasingly as a beauty trendsetter, Coty remains at the forefront of fueling consumer desire and driving category growth through disruptive launches, new and improved formulations, and engaging activations and campaigns. Let me summarize the four key messages we want to leave you with today. First, we continue to deliver sustained life-for-life sales growth. In fact, we are further building on our multi-year track record of outperforming the leading global beauty players. Second, the fragrance market remains robust with more consumers entering the category, using fragrances more often and exploring with a variety of concentrations and formats. Third, we are step-changing our efforts to adapt Coty for future success in the ever more dynamic market environment. Not only will these efforts enable the company to lead in the beauty market of tomorrow, but they are also bringing additional savings in fiscal 25 and beyond, supporting our ability to deliver our fiscal 25 adjusted EBITDA target of close to 10% growth. And finally, we will continue to play across the full range of our brands and categories to capture growth opportunities and support sustained outperformance. Despite moderately lower than expected growth in Q1, Coty continued to outperform leading global beauty companies. Now, in nine out of the last 13 quarters, we have delivered like-for-like growth, which is ahead of global peers like L'Oreal, Estée Lauder, Shiseido, and LVMH Perfumes and Cosmetics Division. Our continued outperformance is clear on the slide shown here. In a complex microeconomic environment, Coty's consistent outperformance of our peers confirms that our growth is a result of our clear strategic vision, strong execution, and our ability to seize on and develop beauty trends in each of our core categories. The beauty market continues to grow at a healthy pace, as you can see it, particularly in the categories in which we compete. On this slide, the prestige fragrance category remains robust, even as growth has moderated a little exiting Q1. Both in fiscal 24 and entering Q1 fiscal 25, prestige fragrances grew approximately 12% across North America and Europe while in September, the combined market moderated by a couple of percentage points. This reinforces our view that the prestige fragrance category continues to be supported by structural growth drivers, which will allow it to continue to grow in line to ahead of the underlying beauty market in the coming quarters and years. For Coty, our prestige fragrance portfolio continues to perform strongly, particularly in EMEA, while in the US, both our sellout and selling growth is impacted by the very elevated comparisons of the prior year, which included the blockbuster launch of Burberry Goddess. On the consumer beauty side, the global market has slowed from fiscal 24 levels, but continues to grow at a low single-digit pace in recent months, consistent with pre-COVID levels. Within this backdrop, we see outperformance in the mass fragrances and body care categories, which are both growing strongly in the high single digits. At the same time, mass color cosmetics has moderated to slightly negative performance with the weakness concentrated in the U.S. We continue to see two main factors at play in the flattish mass cosmetics market. First, unit demand growth remains positive, but has moderated to a low single-digit level as consumer demand normalizes fast. following the post-COVID surge. Second, pricing is no longer the strong positive building block of the last few years. It's important to highlight that mass cosmetic sales growth in the e-commerce channel remains robust, and we continue to gain share in this critical channel. Against this broadly healthy market backdrop with continued though normalizing beauty growth, we have clearly seen much more cautious and risk adverse behavior by retailers in certain areas. In our US consumer beauty business, which account for a little more than 10% of our sales, retailers have been actively managing their orders, inventory, and networking capital. This was exacerbated further by the significant channel shifts in the market with direct stores embarking on door closures and overall balance sheet management. As a result, our Q1 revenue trends in the US consumer beauty were significantly below our sellout. It's important to contextualize that our exposure to the US drugstore channel is fairly small, accounting for a low to meet single digit percentage of Coty's annual sales. On the prestige side, our selling tracked well below sellout in China and Asia travel retail, each of which account for a low single digit percentage of sales as demand remained sluggish. Retailers adjusted orders further and new regulations were enacted in the Asia travel retail corridor. At the same time, in Australia, we chose to account for a low single-digit percentage of our sales. Our prestige business shipments were also impacted by substantial working capital reduction at a key retailer. The net results of these factors was a couple of percentage points of headwind to our selling in Q1, and we expect these same dynamics to extend into Q2. Combining the sell-in, sell-out dynamics with some normalization in beauty market growth and the earlier shipment of fragrance gift sets which benefited Q1, altogether, this is driving our outlook for Q2, like for like sales, to be slightly positive. However, with the gap between sell-in and sell-out, suggesting limited further runaway for further inventory cuts, we expect this inventory reduction impact to abate entering the second half. Our 4.5% like-for-like growth in the first quarter was reflective of the overall market dynamics. In Prestige, we reported 7% like-for-like growth in the quarter, fueled by Prestige fragrances growing strongly at 9% like-for-like, with some benefit in the quarter from earlier shipments of gift sets. Our prestige division delivered expansion in volumes, estimated price, and estimated mix. In consumer beauty, our growth was flat as we experienced slightly negative volumes impacted by the slower market as well as the inventory reductions in the U.S. mass channel. And by region, we saw high single digit growth in EMEA, mid single digit growth in Americas, amid single digit decline in APAC, which was a result of the ongoing pressure in China and the regional travel retail channel. Our growth engine markets, including Brazil, Mexico, the rest of LATAM, India, China, Southeast Asia, Africa, and Middle East. Altogether, these growth engine markets account for approximately 21% of our Q1 sales and grew strongly at 15% like for like in Q1, including approximately 5% contribution from the hyperinflationary environment in Argentina. And in addition to this growth engine markets, our travel retail channel, which accounts for roughly 9% of our Q1 sales, grew 4% like in Q1, driven by growth in the Americas and EMEA, while our results in travel retail Asia were challenged by tight inventory management by local retailers. Our sales in mature markets grew 1% like for like, weighed down by the sell-in, sell-out dynamics described earlier in the US and in Australia. Let me now hand the call over to Laurent to take you through our financial results and guidance.

Thank you, Sue. Our first quarter net revenue grew to 4.5% like for like, supported by solid growth in prestige fragrance, mass fragrance, and mass skincare. This mythical digit percentage growth is commendable as it comes on top of the incredibly strong 18% like for like growth in the first quarter of last year. We also delivered very strong gross margin expansion in Q1. Our Q1 adjusted gross margin grew by 200 basis points to 65.5% driven by the benefit from premiumization, pricing actions, negligible inflation, excess and obsolescence reduction, and continued supply chain productivity. We also maintained our strong and unwavering marketing support behind our brands. In Q1, ANCP investments represented approximately 25% of sales, increasing by 40 basis points from the prior year as we continue to invest behind icons and innovations. We continue to expect our ANCP investments to be in the high 20s percentage level of sales in fiscal year 25. Our Q1 adjusted EBITDA was roughly flat year over year at 360 million, driven by the combination of lower than anticipated order patterns in the second half of Q1, our continued investment in our strategic initiatives, the timing of certain operating expenses, and the profit impact from the divestiture of the Lacoste license. Our adjusted diluted EPS excluding the equity swap was 18 cents in Q1, growing 20% year over year. This growth reflected a discrete one-time non-cash tax impact of 3 cents last year. As a reminder, we expect certain drivers of our adjusted EPS in fiscal 25. First, we expect depreciation to be in the low to mid 200 million level. Second, we anticipate net interest expense for the year to be in the low to mid 200 million. Third, we anticipate the adjusted effective tax rate for fiscal 24 to be in the 28 to 29% range. Finally, on share count, we remain committed to reducing our share count toward 800 million by fiscal year 27. While we have two equity swaps in place for future share buybacks, deleveraging towards our targeted levels remains a key priority for our organic cash flow generation. Of course, the eventual divestiture of Vela will provide flexibility for more active share buyback activity, which will be further amplified in the medium term by our ongoing cash flow generation once we reach our target leverage. In the quarter, our free cash flow was slightly negative compared to over 100 million of free cash flow generation in Q1 of last year. This reflects the tight order and inventory management by retailers in several markets as highlighted earlier in the call, resulting in orders placed at the end of the quarter and therefore higher receivables year on year, as well as the phasing of payables. As a result, we ended the first quarter with net debt of approximately 3.7 billion and leverage of 3.4 times, up slightly from the end of fiscal 24, but down a significant 0.4 turns from the leverage a year ago. These leverage levels exclude our Vela stake valued at approximately 1.1 billion. In this very dynamic beauty market environment, we are future-proofing Coty's organization and processes to better capture new opportunities, respond to changes in the market with more agility, and solidify Coty's position as a beauty leader over the long term. Some of these work streams are newly initiated, while others were already underway as part of our all-in-to-win program, which has already delivered around 700 million of savings live to date, and we are simply accelerating the timeline of delivery. Through the combination of these efforts, we now anticipate fiscal 2025 savings of over $120 million, an increase of over $45 million versus our initial target. And importantly, these projects should continue to deliver savings in fiscal 2026 and beyond. Let me take a minute to review the concrete action plans as we future proof the organization and accelerate our agility, which fall under five pillars. The first pillar is establishing centers of excellence for key processes. As an example, we are implementing a state of the art demand planning solution supported by standardized data across our global multi-category business. In conjunction, we are consolidating two planning hubs into one global planning hub in Barcelona. We are continuing to ramp up the use of external business process vendors for various support functions. We are also assessing further opportunities to streamline other functional capabilities into centers of excellence. The second pillar focuses on adapting our commercial organization to the increasingly omni-channel world. With a shifting channel landscape around the world, including retailer centralization, multi-category and multi-price point offerings, and the blurring of offline and online, we are assessing the changes to our structure that are needed. The third pillar is centered on speed to market. We alluded to this effort on the last earnings call when we discussed the launch of our Agile Beauty multifunctional organization. Such an agile approach aimed at reducing your time to market for certain initiatives to a matter of months is fully applicable for each of our core categories. The fourth pillar is maximizing the benefits of emerging tech and AI. As we discussed on the last earnings call, over the summer, we successfully completed our migration to S4ANA, which was executed seamlessly and with no interruption to the business. With the migration now complete, we expect S4HANA to support better efficiency and drive savings through more automation, standardization, better controls, and global efficient processes. Additionally, we are in the process of deploying AI across a number of functions, including robotics process automation and testing, vendor invoices, procurement and content creation and iteration for marketing functions, all of which are also contributing to efficiencies. The fifth and final pillar is our regional footprint redesign, as we continue to fine-tune our end-to-end capabilities and assess the markets and channels where we have the biggest and most profitable opportunities for growth, with a focus on allocating resources from the least to the most attractive opportunities. All of these action plans are already underway with approximately 20 million of savings delivered in Q1 and further step up expected in Q2 and second half of the year and beyond. We will continue to share more details on these key transformations pillars in the coming months and quarters. Let me now share some context on our outlook for the first half and beyond. As Sue discussed, over the last several months, the beauty market has maintained solid momentum, though growth has moderated from the outsized double-digit growth of the last few years. Prestige fragrance remain an outperforming category with recent category growth around 10%. Mass beauty is now growing in the low single digits with flattish performance in the mass cosmetics category. Within this backdrop, slower end demand and significant channel shifts in US mass beauty and in Asia, we are continuing to weigh on all those levels into Q2 with sell-in tracking well below sell-out. As a result of these factors, in the first half of fiscal 25, we expect like-for-like growth of 3% to 4%, with moderate like-for-like sales growth in Q2 of 1% to 2%, reflecting the continued gap between sell-in and sell-out and the phasing of fragrance gift set shipments between Q1 and Q2. On a reported revenue basis, the lack of divestiture and forex should each represent a slight headwind of less than 1%. The combination of continued gross margin expansion and the accelerated savings is expected to fuel EBITDA growth in the low to mid-single-digit level in the first half, including mid-single-digit growth in Q2. EPS is expected to be 38 to 40 cents, reflecting low to mid-teens percentage growth. With a tight inventory management by retailers, adding some variability on cash inflow timing, we remain on track to exit calendar year 24 with leverage below three times, and we continue to target leverage close to 2.5 times exiting calendar year 24. Looking to the second half, the pace of category growth and consumer demand during the critical holiday period remains the central factor influencing the outlook for the second half, including retailer inventory levels and pace of reorders. At present, we anticipate like-for-like growth in the second half to be relatively consistent with the first half at approximately 3% to 4%, reflecting easier prior year comparisons and solid prestige fragrance performance on the one hand, and continued pressure in China, Asia travel retail, and US mass cosmetics on the other hand. We expect growth margins to be flattish year on year of the quite elevated level last year and reflecting over 150 basis points of expansion versus two years ago. The combination of sales growth, healthy growth margin, sustained strong ANCP support and significant savings delivery should support steady EBITDA growth acceleration in Q3 and in Q4. This is expected to translate to EPS in the second half of 14 to 16 cents. Altogether, this translates to fiscal year 25 like-for-like sales growth of 3 to 4%. Through the combination of continued sales growth, continuous growth margin expansion, and increased cost savings for fiscal year 25 and beyond, while maintaining ANCP in the high 20s percentage, we expect fiscal year 25 adjusted EBITDA to grow near the lower end of our prior guidance of 9% to 11% year-on-year. This adjusted EBITDA growth target, in conjunction with continued, though more moderate, revenue growth, reflects an even stronger adjusted EBITDA margin expansion in fiscal year 2025 of close to 100 basis points, following the 30 basis points adjusted EBITDA margin expansion in fiscal year 2024. We expect fiscal year 25 adjusted EPS, excluding the equity swap, to be at the low end of our prior guidance range of 54 to 57 cents, reflecting mid-teens percentage growth from last year. We continue to target fiscal year 25 free cash flow in the low to mid 400 million, driven by the combination of higher profit and lower cash taxes, partially offset by certain cash benefits recognized in fiscal year 24, which will not reoccur. And as we continue to deliver a strong free cash flow in fiscal year 25 and beyond, we will deploy this cash to our shareholder returns, further deleveraging and amplifying COTI's growth trajectory. Let me now turn it back to Sue to discuss our continued strategic momentum and significant growth opportunities ahead.