科蒂集團 (COTY) 2023 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Gretchen, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's First Quarter Fiscal 2023 Question-and-Answer Conference Call. As a reminder, this conference call is being recorded today, November 8, 2022.

Please note that earlier this morning, Coty's issued a press release and prepared remarks webcast, which can be found on its Investor Relations website.

On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial Officer.

I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty'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 Coty's financial results and Coty's expectation reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release.

With that, we will now open for questions.

(Operator Instructions) And we'll take our first question from Ashley Helgans from Jefferies.

Congrats on the quarter. So to start, it was nice to see China return to growth. Can you just talk about some of the drivers in the region and your expectations for recovery for the balance of the fiscal year?

Ashley, this is Sue speaking. Yes, China is slightly positive, which is, in a way, a good news for us, even if this region of the world and this country is only 4% of our net revenue. So in a way, we are protected against all these lockdowns that we've been seeing since a few months now that are continuing and that we do not see improving in the coming quarter and probably quarter, if I may.

But at the same time, starting from a slow base -- small base, sorry, Coty is seeing a lot of potential upside in this country, of course, with the fragrance business. Again, I'd love to remind everyone that this business in this country is only 3% penetration. And our brands, if you think about Chloé, that's the #1 new brand at Sephora. Gucci, Burberry, Calvin Klein, Hugo Boss, all these brands that are doing fabulously well globally are growth engines for the near future and the, I would say, far future for the company, of course, as you can imagine.

On makeup, again, we started with Gucci makeup and Burberry makeup. And both brands had a fantastic start before lockdowns. And this is the category, I would say, that the most impacted by the recent series of lockdowns.

And last but not least, skincare, 70% of the Chinese market of beauty, huge, huge potential for the company as you can imagine. And there, we are starting with the first brand, which is Lancaster. As you see it during the presentation, Lancaster in Hainan. So its sales multiplied by 5 year-on-year, which is a great demonstration of the desirability for the brand towards the most demanding Chinese consumers. This is one.

Second, Lancaster, which is at Sephora as a niche exclusive brand until recently is the #1 niche skincare brand at Sephora in China. And this gives us a great confidence specifically after the Investors Day that we've done 1.5 months ago to start with this brand as the first, I would say, foray into the big, huge skin care market in China. So this is the way I would describe the situation in terms of how we are in a way doing quite okay in China despite all these very difficult environments.

Great. And if I could just throw in one more. We're starting to hear about some trade down in some beauty categories. We're curious if you've seen any of these trends within your consumer division and overall expectations for the consumer division if we do go into a recession.

Yes, that's a good question that we hear a lot. And honestly, we don't see any kind of trade down or slow down, by the way. No trade down at all. If you see our Prestige division, in a way, we are running after supply because the market is booming. This is what we love to call the fragrance index because our innovations are doing fantastically well, and we see it also in the way retailers are ordering from us, including sometimes ordering in advance during Q1 for the Q2 season. So on this part, we don't see this.

And the second element is that our Consumer Beauty business, as you've seen in the figures, plus 12% like-for-like, is doing also fantastically well. And this is thanks to the great work that the teams at Coty have done behind the different brands, making sure to take these brands from large heritage brand that people trust into still the same qualities. But on top of this, what we call cool brands. And I'd love to talk about smart shopping also. A lot of consumers are also shopping there, saying this brand is a cool brand. And it proposes products that are the quality of other products that are more expensive. And therefore, you can see that in both divisions, the premiumized beauty, be it the desirable one from luxury or the cool smart purchase in Consumer Beauty. These 2 premiumized parts of the business are doing great, and this is what explains in a way the results that you see across both divisions.

Our next question comes from Anna Lizzul from Bank of America.

On the mass beauty side, some of your competitors are gaining shelf space at key retailers domestically, such as Walmart and Target and the drugstores. Just as you're continuing to stabilize and gain market share, can you talk a bit about your distribution of brands such as CoverGirl? And are you happy with the current shelf space of the brand? And also, is there any opportunity to gain shelf space from struggling brands such as Revlon?

So thank you for your question. Again, when it comes to the shelf resets for the Consumer Beauty division, I would say that for spring 2023, which is the next, I would say, slot, we expect to maintain a stable shelf space for our Consumer Beauty business globally. We also expect at the same time pockets on incremental shelf space gains, particularly in the U.K. driven by the outstanding success behind Rimmel Kind & Free, new vegan and sustainable line of makeup and mascaras and powders. Also behind Sally Hansen that's seen in many, many markets, as you know, the undisputed leader of the nail business, and therefore, many countries are now giving more space to Sally Hansen.

And last but not least, Bourjois, which we have very successfully repositioned recently. Remember, Bourjois has the #1 selling mascara in a very competitive country like France. And Bourjois is reentering several markets, including recently U.K. where the brand is exclusive to Superdrug and doing very, very well over there. We also expect incremental gains for CoverGirl in a mix of tracked and nontracked channels. So this is, I would say, the overall picture that I can share with you when it comes to the shelf space future movements.

Next question comes from Nik Modi from RBC Capital.

Two questions. One is just more of a housekeeping item. I'm trying to understand what's actually happening with glass. I mean if you can just provide what's actually the derivation of the supply shortages?

And then the bigger picture question, Sue, I love your kind of big picture thoughts on this is it looks like the fragrance category is shifting away from gifting and more towards kind of self-consumption, at least from what we can see. I'm just curious how -- is that certainly -- do you agree with that statement? Number one. And how does that change your strategy as you move forward to kind of keep the momentum going?

Yes, Nik, thank you so much. These are 2 indeed very important questions that we are asking ourselves on a daily basis. And let me share with you the way we see it at Coty. On glass, this is quite factual. In fact, it's really about the reduced number of suppliers doing quality glass. And they are not a lot, and mainly European-based. So this is what explains, in fact, the tension that we are seeing today. And this tension, in fact, is exacerbated by the fragrance index, in fact, so -- for Coty by the big success behind our innovations from 2021. This is, I would say, very simply said the overall picture, small number of suppliers, booming category worldwide and booming innovations at Coty far above our best expectations from last year. So this is what explains this, I would say, tension around glass.

When it comes to the fragrance business and shifting away from gifting to self-consumption, this is absolutely true, and this is great in a way for our business because as you can imagine, our SaaS consumption of fragrances is much more relutive for us than gift sets, which are dilutive in general. So that's a great, I would say, sign of a category whose penetration is increasing. So we are less into, I would say, the classical consumption of gifting, which people do automatically year-over-year. And we are more into I'm buying something for me, I'm buying something if I am a young Gen Z that I'm going to show in social media or if I am any other consumer, I'm going to wear hopefully for the remainder of the year or for many, many years. And this shift is clearly a structural shift that we are seeing and the best demonstration is the fact that people are buying more and more, I would say, expensive items. They are moving strongly from eau de toilette to eau de parfum. Eau de parfum in larger sizes, which is clearly another demonstration of self-consumption.

And second, a lot of them are moving from the eau de parfum into what we used to call the niche category, which I do believe is not anymore a niche category given the growth and the size this category is starting to have in many, many areas around the world. And this is clearly what is at play behind the famous fragrance index. And you can relate this to, of course, social media.

But I have to say, to also heighten quality from us, suppliers of fragrances, there used to be years and years where the beauty industry, including from Prestige, was launching fragrances that were honestly not at the right level of quality. And since maybe 7, 8 years, this has been corrected probably because of niche brands showing the way to most of the other brands. And today, the heritage brand catches up totally and very strongly, and this is what we are seeing today in terms of fragrance index that some call the wellbeing index, and I think it's totally right.

Our next question comes from Andrea Teixeira from JPMorgan.

This is Shovana from -- speaking on behalf of Andrea. I was wondering with about like low single-digit pricing in the beginning of calendar year '22 mid-single pricing across the portfolio and like late summer and another round of like planned low single-digit price increases in fiscal quarter 3, are you assuming volumes will be declining in the current guidance?

Absolutely. So I mean, it's important to remind that we anticipated, and this is something that we built more than a year ago. We built a pricing office exactly to be able, indeed, to implement price increase. And this was, of course, absolutely needed to mitigate to offset inflation. And you've seen tangible results as we are growing gross margin by 70 basis points. So indeed, we did low -- mid-single digit recently, and we continue.

We are not seeing any decline. And definitely, when we are doing this price increase, we do it at a very -- in a very granular manner. And we are taking opportunity also of the great momentum that we're having on our brands and the support that we are putting on our brands and also great innovations. So it's really part of all these equations that we are doing. And the tangible result is that our volumes, fragrance, are growing and volumes in Consumer Beauty are growing.

Your next question comes from Olivia Tong from Raymond James.

I wanted to talk a little bit about the shortage hitting fragrance and where you stand relative to the past in terms of the glass quality and what have you. And to what extent you think it could impact holiday, your ability to supply gift sets during what is obviously an important period continue?

Definitely. So we confirm our guidance, 6% to 8%. So you see that there is no change on our guidance either for H1, 6% to 8%, excluding Russia, of full year. We confirm the 6% to 8% growth, excluding Russia. So -- and this is following a strong Q1, as you -- we just published. The demand is very strong. At the same time, we are monitoring very closely all the tensions that we are facing on components. Fragrance of, yes, is the #1 tension that we are seeing, but we are seeing also as all our peers, also tension on caps and, to some extent, on funds. So we are monitoring tightly. But despite this tension on components, we are confirming our guidance H1 of this year.

Can you give any color into what you think the impact of the glass shortage had on the results this quarter? And then broadly, just in terms of SG&A, I mean, this is the best performance, the lowest SG&A we've seen in several years, even prior to COVID. So can you just talk about the SG&A opportunity in front of you, what's driving that improvement this quarter, particularly against what's arguably a bit more of a challenging comp for you guys? The comps obviously get a fair bit easier as the year progresses. So just if you could talk a little bit about the SG&A opportunity in front of you, that would be fantastic.

Olivia, I'm going to take the first part, which is around the impact of the shortages on the results in Q1. Again, our mass service level is in the low 90s, which is quite good compared to what we are seeing around us. On Prestige, it's roughly under 80%, which is not good, if I may say, but in the same level of our peer set. So we're not worse than the others, but we're not better than the others. But I can just give you how much the potential of our prestige quarter would have been if we didn't face this kind of, I would say, limitations. The sellout for Prestige in the quarter was in the low teens. And the performance of the division was 7% like-for-like, excluding Russia. This gives you an idea of how strong is our fragrance business at the moment.

So Olivia, on your second question on SG&A, there is one specific element we need to consider, which is the ForEx. As I highlighted during my presentation and a few times, we have, of course, a very significant ForEx headwind on top line, and we say it's about 6% to 8%.

But on P&L side, I shared also that we have a natural hedging in Coty because we have cost of goods, which are sitting in Europe. We have factories in Europe. But it's also the case on A&CP and SG&A because we have teams in Europe. So to be more specific on SG&A, we have HQ in Amsterdam. We have also a team in Paris, so -- and we have also a sizable team in U.K. So there is a mechanical effect of currency, which is lowering SG&A in reporting numbers dollar.

Having said that, we are -- we keep working, of course, on SG&A reduction. This is completely part of our all-in to win agenda. So we keep this work. We continue. And definitely, we amplify and we have some additional initiatives, especially on support function to continue how to have nimble organization within Coty and to manage our equation.

Our next question comes from Steve Powers from Deutsche Bank.

Just on the full year reaffirmation of guidance, it sounds like you've assumed more or less current consumer demand conditions remain intact. I guess within that, I'm wondering if you have any allowances embedded for even modest demand slowing or allowances for retailers to potentially pull back in inventory. If they foresee potential slowing or alternatively, what levers you have at your disposable should those conditions arise?

Steve, so indeed, we confirm our full year guidance, top line, 6% to 8% and the EBITDA guidance, $955 million to $965 million. And obviously, we confirm our road map towards 4x leverage ratio by end of calendar '22. So indeed, we are -- as Sue shared and mentioned and you see confirmation in the numbers, we are not seeing any slowdown in the demand. And even in Q1, as we just shared, I mean, the demand and the sellout is even stronger. So definitely, this is -- there is good momentum on Consumer Beauty and Prestige. We are not seeing any slowdown and all the plans that we have in place that give us full confidence about this momentum and this dynamic. At the same time, definitely, we are -- I am monitoring, we are monitoring really all the actions that we have been all in to win are giving us also some munitions to manage and to mitigate the equation. So this is really the way we monitor.

And also to -- on your specific question about retailers, destocking and so on, what we are seeing, definitely, we are not seeing any destocking. I mean. Even in the context of supply chain tension, we are seeing more, okay, some need really to fulfill and really to push for selling. This is what we are seeing in Q1 and we see currently.

Okay. That's very helpful. And then if I could, I have to ask on Gucci because while you and Kering at this point have both acknowledged that license has a number of years left remaining, Kering, I'm sure you know, continues to talk pretty openly about work they're doing to potentially take that license, that business back in-house over time, even if years down the road. And I guess, I'm just wondering if there's anything you can additionally offer on the Kering standing of that relationship, whether renewal ultimately is at your discretion for Kering. And if it's at theirs, the question I keep getting from investors is how that impacts your willingness to continually invest in a franchise that has been central to your ambitions, especially in Prestige makeup, et cetera, with the risk that, that portfolio may one day revert back to the original brand owner. Just how you're thinking about that.

Again, first of all, again, what we have heard is that beauty is a very attractive category. And this we see it, of course, even more today, given what's happening around us and specifically the fragrance index. And it makes sense that others would do some initial work on that space. What we have heard has nothing to do with Gucci, if I'm not wrong. We have the license for the long term as confirmed by Kering themselves, and there is also no mechanism for an early exit.

The other thing I want to share with you is that this is one of the growth engines of the company. It's certainly not the only one. I can tell you that the success we are seeing behind our Prestige division is clearly widespread across the different brands. And every quarter, we have a new brand, thanks to the work we are doing, that's joining the pack of growth drivers into the company without even talking about skincare. That's the biggest upside potential for the company, I would say, in the coming years.

Last but not least, I can tell you that the relationship between us and Gucci is fantastic, I have to tell you. The results we got behind Gucci Flora Gorgeous Gardenia last year and Gorgeous Jasmine this year are unprecedented as you've seen it during the presentation today. And I was last week in Singapore together with Marco Bizzarri, and we made the opening of a beautiful, fantastic new boutique in the middle of Singapore.

Next question comes from Rob Ottenstein from Evercore.

Apologies if you covered this, this morning. But you said you're not really seeing any weakness. Can you kind of bear that down into Europe, given everything we hear, right, about increasingly strained consumer? Maybe touch on a little bit more on Max Factor and Rimmel, what you're seeing there. And then also, if you can touch on Travel Retail, your initiatives in Travel Retail. Everywhere I travel, I do absolutely see more and more of your brands. So maybe talk a little bit about that and how they see the December quarter outside of Hainan in terms of increased traveling and the impact on your business.

This is Sue, Rob. Thank you for your question. Again, I confirm that we are not seeing any weakness, including in EMEA. You've seen that EMEA is growing double digits. Part of it is, of course, Travel Retail. That's doing fantastically well. And I come back on this part later in my answer.

But on the fragrance part, Europe is doing also very well. Our brands are doing very well. Recently, we even saw France that used to be an entry Prestige market, mainly moving towards Premium or ultra premium/luxury fragrances, which is a first and says a lot about where consumers are going, including in the biggest country in Europe, which is France.

When it comes to our Consumer Beauty business, you're right to point out that Max Factor and Rimmel, these are the 2 brands that are, in a way, strongly taking our market shares up. Rimmel again, we've presented to you the plan of Rimmel, which was first to lead on clean beauty, which has done fantastically well, thanks to Kind & Free, which is today representing more or less 10% of the net revenues of the brand and a big success in many, many parts around the world opening the brand to the younger generation in a massive way, I have to say.

And remember, I spoke to you about how we are learning quickly how to create products that can become Tiktok sensations, and Thrill Seeker, the latest mascara from Rimmel is exactly the embodiment of all of this. It was created with TikTok in mind by TikTokers that we have in-house. And with TikToker in part of the TV commercial, as you've seen it a few minutes ago. And the result is that Thrill Seeker is the second mascara of the U.K. market and the biggest mascara launch for Rimmel since many, many years.

On Max Factor, the brand is gaining market share consistently and globally, and this is thanks to a strategy that's very well developed between base business and new innovation. And this brand, once it has been repositioned towards late millennials and Gen X, is doing fantastically well its job, which is to capture this audience that has the spending power, that is more sophisticated and that is looking for products that stand the test of time. And this is exactly what Max Factor is all about today.

And last but not least, the last part is about Travel Retail. Even if travel is still 20% to 30% below the levels of 2019, we see this part of the business booming at Coty, plus 30-something percent of growth. And this is thanks, of course, to our fragrance dynamism, the dynamism of our brands, the fragrance index. But also because we added 2 new legs to this business. The first one is Prestige makeup, think Kylie Cosmetics. That's doing very, very well everywhere we are opening this brand. But also skincare, thanks to Lancaster. That's, again, booming in Hainan, which is this, I would say, a central place now when it comes to Travel Retail in the Asian region, but also elsewhere. So in a way, we do not see this weakness happening. And at the moment, we are really running after rebuilding the stocks behind our fragrance products.

Your next question comes from Chris Carey from Wells Fargo.

Can you just expand on what you mean by modest gross margin expansion in Q2 and for the full year? And around just some of the puts and takes that we should be thinking about as far as tailwinds and headwinds?

Chris, I mean, first of all, I mean, we are very proud of the results we delivered in Q1 with 70 basis point gross margin expansion. And this is definitely a testament to all the actions that we have implemented. So let me give you a little more color, and this is what you're calling tailwinds and the headwinds. So definitely, the headwind is inflation. It's about 2 points of net revenue. It's in line with what we shared last quarter. So there are some positive and negative. But all in all, this is quite in line.

So how we mitigate and we more than offset this inflation? We continue the work on cost reduction -- cost of goods reduction. A clear example is we announced more than a year ago, closure of factory, Prestige factory in Germany. This is now implemented, and this is a way to increase utilization rate of fragrance. And this is definitely helping for fixed cost absorption and helping gross margin.

We are working also on market value analysis, so it's really to reduce to simplify components, platforming of our products. And this is a powerful way also to reduce costs and to improve efficiency. So this is really on the cost side. There is a big, big element, which is mix. We continue. This is what we kicked off 2 years ago. And all the initiatives, all the work we are doing is always focused on mix and the gross margin accretive. This is valid for Prestige. This is also valid within Consumer Beauty. All the new initiatives that we are launching. Sometimes some of these initiatives are even gross margin equivalent to Prestige.

And number three, which is absolutely key, is pricing. We did a low single-digit beginning calendar '22. We just implemented a mid-single-digit price increase during summer, September. And we are implementing a new price increase mid-single digit also beginning calendar '23. So you see that all these elements, thanks to all these elements, we are able to confirm modest gross margin expansion within fiscal '23.

Next question comes from Lauren Lieberman from Barclays.

I know in the press release, you'd mentioned that I think the 100th month for market share gains for CoverGirl. But I was hoping we can get a little bit of an update on performance there, some additional thoughts on skincare launch, how that's progressing or really how you'll look to migrate that to kind of even stronger performance in '23. So a lot of the prepared remarks to focus on some of the other brands.

On CoverGirl, it's interesting to give you, I would say, the overall picture and the way I see it. Remember, when we started to talk about the brand, it was somewhere around September 2020. We were, in a way, listing the difficulties this brand has been facing for years and years and years. And the work that we have done at Coty since September 2020 until very recently was to reposition the brand to reinforce the brand equity, to make this brand the undisputed leading brand when it comes to selling clean, sustainable, healthy beauty to American people. And this has been delivering fantastic results, as you've seen it until recently.

And then we got into the constraint -- supply constraints when it comes to the Lash Blast line, which is a big, big, big net revenue maker into CoverGirl, which we went out, let's say, recently, just at the end of the summer and recently, we are back in stock with CoverGirl -- with the Lash Blast, sorry.

In the meantime, what we've done is, of course, we've continued to invest behind the brand, and we invested behind a younger line called Exhibitionist mascara, which is doing fantastically well, by the way, strong market share, et cetera. But this line is not having the same halo effect on the overall CoverGirl market share as Lash Blast used to have.

So what we are doing now is now that we solve the supply constraints, we still have a few little ones here and there. But let's say that, overall, these are behind us. We are fine-tuning the media mix behind CoverGirl, which is very, very specific. And there, it's really test, learn, retest, learn, implement. And we understood what needs to be done. So hopefully, by Q3 and already starting a little bit now, we are playing the playbook of Thrill Seeker, leveraging the power of TikTok behind Lash Blast line. But the reason, I would say, come back of Lash Blast into media will happen somewhere around the next quarter.

So that's overall, the big picture I can share with you around CoverGirl. The big news and the good news is that all the fundamentals such as the demand, the penetration among Gen Zs, the penetration among the Hispanic consumers has increased dramatically versus just 2 years ago.

When it comes to skincare, skincare has done its job. The part of skincare that we launched a year ago is, as you know, it stopped in the makeup aisle. So by definition, it was for us a place where we could test, learn, fine-tune again, et cetera. And we learned a lot of things that we intend to continue to implement and progress on this part of the business of CoverGirl, probably here again in quarter 3 and quarter 4. So everything is on track when it comes to CoverGirl, and the brand dynamics and the health of the brand is intact.

And Our last question comes from Carla Casella from JPMorgan.

I have; a question on the debt structure. You've got a lot of debt maturing in '25 and '26, so I know it's not imminent that you need to do anything. And the rate markets aren't great. But any sense for how far in advance the maturities you feel you would need to address or lengthen your debt structure?

So first of all, as you rightly say, Carla, is we made the right things over the last 2 years is to extend debt maturity to '25 and '26. So we have many years to go, and we will continue to pay down our debt. And the clear confirmation is that our deleveraging agenda is perfectly on track, delivering $400 million free cash flow at a minimum earlier until '25. And on top of this, we have, as you know, the Wella stake with a value, which is $1 billion at a minimum. So all these elements -- with all these elements, I mean we are in full confidence in our deleveraging agenda. With debt maturity '25, '26, we are in a very good place.

Thank you also...

Okay. Can I ask...

Yes. I'm sorry, Carla. Please go ahead.

Just 1 business follow-up. You're doing so well in the Prestige cosmetics. You held up Gucci and Burberry and Kylie. What percentage of sales are those today?

This part of the business is in the low single digits, and so it's still a small portion of our business. Growing good, but it's small portion of the business.

Thank you, Carla. Thank you, Laurent. So thank you, everyone. I would like to close this Q&A session with some closing remarks, if you allow me. The first one is that, again, we have shown how much we are all about consistency since 9 quarters in a row now, which is a very important element for us and for you, of course. The second thing is that we will start -- you will start to hear us talking about the leverage that's going towards 3x by the end of next calendar year. This is a big step change for Coty as a company. And the third element as a closing remark is the one of ESG. You've seen recently because we've been questioned a lot by a lot of you around this element. You've seen that the company has been rated by Sustainalytics in the top quartile of personal products company, which is great news, but this is just the beginning of what this company is doing around the sustainability and ESG topic.

So I do believe that again and again, this is the best and the right moment to enter Coty's investor base. Thank you very much for your attention.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.