Q3 2021 Coty Inc Earnings Call
Good morning, Ladies and gentlemen, my name is Maria and I'll be your conference operator today.
At this time I would like to welcome everyone to Coty third quarter fiscal 2021 results conference call.
As a reminder, this conference call is being recorded today May 10 2021.
On today's call are Sue Natty, Chief Executive Officer, and they're all Ms Yang Chief Financial Officer.
I would like to remind you that many of the comments today may contain forward looking statements. Please refer to Coty 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 current financial results and current expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's release I will now turn the call over to Ms. Natty.
Ladies and gentlemen, with another quarter now complete I'm once again very pleased to share with you our results as well as highlight a number of green shoots we are seeing as we continue to execute on our growth strategy, which I shared with you last month.
Importantly, our results this quarter further exemplified the urgency with which we have reacted during our fiscal 'twenty one.
To ensure coty emerge from COVID-19, as a much stronger more nimble and more focused organization.
Our third quarter net revenue trends improved sequentially from Q2, despite many markets, most notably western Europe remaining under lockdown during much of the quarter.
I'm very pleased to say that our prestige business returned to growth this quarter led by China and the U S.
Building on the progress in the first half of 'twenty, one we once again delivered very strong profit.
Adjusted EBITDA increased over $118 million from last year.
This was supported by both substantial growth margin expansion and continued cost reductions.
Importantly, this allowed us to start the virtuous circle of stepping up our media spending and reinvesting behind our newly repositioned brands a little over two weeks ago Lohan I presented our strategy to accelerate sales and profit growth and today I'm excited to tell you that we are.
Rapidly executing and seeing initial results on all of our key strategic growth pillars.
The Green shoots we have seen Anchorage, Inc, and we have a strong cadence of portfolio milestones planned through the end of calendar 'twenty one.
So let me spend a few minutes reviewing other revenue trends in the third quarter before I hand, it over to Lou home to take you through our financials.
Then I will wrap it up with an update on our strategic progress.
Sales trends in the quarter were led by the Asia Pacific region, which increased 20% like for like.
This was primarily driven by the very strong performance in China.
Even when compared to our fiscal 19, the pre COVID-19 baseline sales in China Rose double digits. We are very encouraged by the momentum we are seeing in China, which as you know is a key pillar in our strategy.
In the Americas, our sales declined 3% like for like.
This decline was largely the result of softness within our mass business driven by lower cosmetics consumption.
At the same time, our U S prestige business returned to strong growth in the quarter, while our MS business in Brazil maintained its momentum.
EMEA continued to be our softest region.
With sales declining 13% like for like.
Throughout the quarter much of the region was impacted by strict lockdowns and restrictions.
Which weighed heavily on the sales performance as well as low international traffic and travel retail however, with the U K, having recently opened and many other markets putting in place for reopening plans, we remain optimistic the region will soon see an inflection.
Moving on to sales by channel now.
Our prestige business returned to growth this quarter with sales increasing 2% like for like.
As I just mentioned this performance was really driven by the U S and China with strong performance across Fragrances makeup and also skincare.
Many of our key focus brands delivered strong double digit revenue growth in the quarter, including Gucci.
Barry Marc Jacobs and fillers.
The growth in the prestige business was noteworthy as it came in spite of cookies continued active reduction of sales in low quality channels, which represented a high single digit negative impact to prestige business in the last two years.
On the other hand, the mass beauty business declined 15% like for like this was largely the result of softness within mass color cosmetics that has stemmed from the lack of use occasions.
On a positive note.
With the lapping of the COVID-19 driven demand decline in March of last year, we have seen mass beauty categories sales returned to global growth in March.
I'm pleased to say that we continue to make progress on one of our key strategic pillars of increasing E. Commerce sales further building our on our efforts during the first half of the year.
During the third quarter, our E Commerce sales grew nearly 30% the strength that we saw was fairly broad based across both regions and categories.
Actually e-commerce sales increased over 20% and penetration year to date stands in the mid twenty's percent level.
Consumer beauty e-commerce sales increased 56%.
With penetration, reaching a high single digit percentage level year to date in.
And importantly in Q3, we saw equally strong performance across E com pure players and brick and click as we work closely with both sets of strategic customers to.
To improve the consumer experience and elevate our brands in these two important channels.
E Comm sales now represent a high teens per cent of cookie sales fiscal year to date.
I will now hand, the call over to long haul to take you through our financial results.
Thank you Sue.
Our first quarter performance has proven to be another successful period of profit growth with robust profit delivery fueled by gross margin expansion and cost reductions, enabling increased marketing investment behind our brands.
Starting with gross margin delivery.
Our Q3 adjusted gross margin of 62, 2% was ahead of external expectations, reflecting a strong improvement of 450 basis points year over year, and just remember 50 basis point improvement versus the first half 'twenty one run rate.
These were.
Net worth two key drivers of these expansion, primarily 40% mix and revenue management and 60% supply chain improvement with the latter being through better demand planning and lower excess and obsolescence.
Of the gross margin improvement delivered this quarter.
We are confident that approximately half is structural and therefore can be maintained.
This is part of a multi pronged effort to steadily improve our gross margins, which contributors coming from channel category and regional mix as well as various Cogs related defaults.
As detailed during our recent strategic update we have implemented greater discipline in our agency Pete.
<unk> zone as we go process for.
For assuring nimble and highest LOI resource allocation.
Our investments have also been more concentrated in fewer but bigger initiatives.
As our sales and profit have improved we have already begun increasing our agency P ratio sequentially.
Again keep in Q3 was close to 23% as a percentage of sales.
Up from 20% in each 121.
We expect a N C P to step up further in Q4, 'twenty, one with absolute working media dollars above Q4, 19 pre COVID-19 levels.
The step up is enabled by our strong profit deliver year to date, which is allowing us to both deliver on our profit commitments frozen year, while at the same time, providing significantly more fuel for our brands right as a beauty market is in 16 and in support of strong initiatives.
Plans for the remainder of the year.
Turning to profit growth.
The Q3, adjusted EBITDA increased by 118 million year on year, reaching 183 million for the quarter and delivering an EBITDA margin of 17, 8%.
When sales decline somewhat during the quarter the substantial profit growth what's your profit by eight.
Strong gross margin improvement as mentioned earlier.
Be very focused marketing investment.
And see strong fixed cost reduction, which I will cover next.
As a reminder, with Q3, marking the first full quarter for Coty, Inc. 's below.
We have begun delivering various transitional services to villa is aligned in the transition in the separation agreement.
In the first quarter, we added certain services that we provide to villa principally I T activities for which we have been compensated by you feel are largely on a cost plus basis.
<unk>, Inc, fairly neutral impact to our profit.
In summary, the robust profit growth achieved is further evidence of our strategic yielding strong results and we expect to continue to build on this momentum in the coming years.
Focus and discipline across the business either keep out overall strategy.
Our fixed cost reduction program as well as us to redirect capital to accelerate our brands and focus on profit delivery.
In Q3, 'twenty, one fixed costs decreased 15% year on year.
And during Q3, we achieved approximately $110 million of savings.
This brings our year to date savings to over $217 million.
So the largest contributor of the savings year to date has been streamlining the organization.
In line with our pro Europe quarterly update the additional key contributors have been savings in business services, including consultants recruiters.
Real estate and facility management cost.
As previously mentioned the consolidation of our fragrance manufacturing footprint is ongoing and expected to be completed by summer 'twenty two.
Some of the some of these changes are not easy decisions to make but necessary to modernize it and.
As a business and position Coty for long term sustainable growth.
Our progress over the last three quarters put us on track to achieve our fiscal year 'twenty one of cost savings target of $300 million in fiscal year 'twenty three target of $600 million.
Turning now to EPS.
We said adjusted EBITDA for the quarter of 183 million.
Less $87 million in depreciation and noncash stock compensation.
$250 million of interest expense.
Low teens adjusted effective tax rate.
And 944 million diluted share factoring for dilution from the convertible preferred shares issued to KKR.
So Q3 diluted adjusted EPS for Coty, and Ddos zero cents, and therefore had no impact.
I suppose a fiscal year to date EPS based on 643 million of adjusted EBITDA.
268 million of depreciation and stock compensation.
Roughly 172 million of interest expense and an adjusted effective tax rate in the low teens. So.
So diluted adjusted EPS for Coty, Indeed at 10 cents.
Let me spend a minute on a few accounting dynamics impacting our EPS.
First as we described on the last earnings call. We have taken the decision to carry a 40% stake in villa as a fair value asset <unk>.
Recognizing changes in its fair value in our P&L rather than the equity income.
This quarter it was an improvement in the general market environment.
The reopening and vaccination that led to an increase in Villiers evaluation by 64 million.
While this is clearly a positive and speaks to the value accretion, we expect to see there overtime.
This is not a core activity of our business. We have therefore decided to exclude these fair value changes from our adjusted net income and adjusted EPS.
Second we were required by accounting rules to values of preferred dividend to fair value based on as of quarter end stock price.
As this far we have not paid the dividend in cash.
This increase the value of the Q3 preferred dividends by $11 million to $34 million.
At the same time when the mechanical EPS calculation would you say broad sense of adjusted diluted EPS.
Accounting rules state that the diluted EPS cannot be higher than basic EPS.
Hence the result of our Q3 adjusted diluted EPS being zero.
Looking to next quarter, we expect to pay the convertible preferred dividend for Q4 and cash.
And we therefore do not expect to have a similar adjustment for fair value.
Looking at our free cash flow for the quarter, which came in line with expectations at approximately minus $218 million, reflecting typical seasonal weakness.
And Davita related working capital reversal of over 100 million.
We also continued with our tight management of Capex and one off costs.
Looking at free cash flow fiscal year to date, we have generated 143 million.
Based on these delivery, we continue to expect Windsor year with positive free cash flow for fiscal year 'twenty one.
Turning now to our capital structure.
During the quarter, a combination of the completed kw deal for $200 million.
Approximately 100 million of organic cash outflow.
Roughly one of the median of Wheeler working capital reversal and some positive Forex resulted in a financial net debt balance exiting Q3 of $5 1 billion.
And factoring in the 64 million increase in our retained Villa state.
Approximately 125 billion.
Economic net debt at the end of the period was approximately $3 9 billion.
Additionally, in Q3, we successfully completed the issuance of $900 million.
8% senior secured notes due in 2026.
We benefited from very strong demand and increase our bond offering from several into 50 million to 900 million.
Our capital structure remains very attractive with key maturities in 2023, and 2025 and a net blended cost of debt below 4%.
It is quite clear that we have made tremendous progress over the last year in lowering our net debt balance and resetting your leverage levels.
Why Dow retained vela stake, we'd likely present significant monetization opportunity at some point in the coming years.
We will continue to be active and tactical in intensifying opportunities to monetize non strategic assets and further reduce our leverage.
Let me now turn it back to Sue for a discussion of our operational progress and for the outlook.
Thank you.
So many of you joined US several weeks ago as we walked you through our plan to accelerate sales and profit growth and what each strategic pillar and sales.
As we have hit the ground running and executing our plans and I'm excited to update you on the progress we are making and some of the early green shoots we already see Inc.
Due to the pandemic over the past year, the global consumer beauty market, particularly cosmetics has come under significant pressure. It has been quite clear that social distancing mask wearing and less opportunities to socialize have impacted consumption of consumer beauty products.
While we are not yet to a point, where we're back to a pre pandemic levels. The global consumer beauty market returned to positive growth in March even despite many markets such as western Europe being under tight restrictions.
I am even more pleased to say that <unk> is continuing to narrow its under performance relative to the overall market. We believe we are progressing towards stabilization as our brand repositioning gets underway.
This is certainly true for our first brand repositioning with covergirl.
The team has been has been working hard and their efforts are paying off the early results have been stellar with Qatar go recording the first full month of market share gains in for years.
The new brand positioning which presents a modern take on Covergirl is brand heritage.
And distinctive media assets are really resonating with consumers as you can see it importantly, it's becoming even more clear that clean beauty is what consumers demand recent Nielsen data shows clean beauty is outpacing the U S color cosmetics category by.
17 points with color doesn't go as the second clean beauty brands in America.
We are leveraging covergirl positioning as the inventor of clean beauty.
And we'll continue to lean into clean innovation.
While the early results are encouraging.
Just getting started.
Activations behind the simply Asia franchise with a new spokesperson Nikki Taylor only recently began to air.
Recall this out utilizes the power of nostalgia in promoting brand Trust post COVID-19.
Stone of cover girls 16th birthday this year.
Simply ageless Americas number one anti aging foundation.
And last but not least the self insured beauty AD with Nikki Taylor shooting the full video herself.
While cutoff Gavin maybe our first brand repositioning that is well underway. We are also moving at food speeds across our other key mass brands too.
Today I wanted to specifically highlight how we are in the process of rapidly repositioning both the remodel and Max factor brands.
These brands recently announced a new global spokespersons to beautiful women, who are strong supporters of individual expression shemale empowerment and challenging stereotypes.
Lets start with remember we last week announced that it was a boa as their global brand activists at what is an activist model and the designer as the model. She's made the cover of Vogue multiple times and in parallel built an NGO advocating for the mental health of young women.
I'll do a really personifies, the new direction for email as the brand that represents the free power of makeup.
Moving onto Max factor now today, we announced that Priyanka Chopra Jonas has been named as the global brand spokesperson for <unk>.
Young Guy is a global icon with a tremendous social media reach of over 60 million followers and has been named one of the most influential people in the world by Times magazine.
She is the perfect choice to represent Max factor is new proposed of transforming from ordinary two extra ordinary we are very pleased to have advil and priyanka joining forces with our key brands.
In the coming months, we will be deploying media assets and in store visuals behind Rimmel and Max factor featuring this new global brand spokespersons.
We see this as yet another leg towards stabilizing our mass beauty business.
Moving on to our next strategic pillar of accelerating prestige fragrance and makeup growth I'm very pleased to say that our prestige fragrance business in the U S is booming.
The prestige fragrance category continues to drive the overall performance of the United States Slippery beauty space, which is even growing compared to fiscal 19.
Importantly, coty has been growing faster than the market in recent months and gaining market share driven by several focused brands.
The exceptional performance of Marc Jacobs Perfect has helped boost the overall Marc Jacobs franchise up five spots fiscal year to date to be the fifth luxury fragrance House in America.
Burberry her was the fastest growing coty icon in the U S. Helping propel the brand up nine spots in March for women's Fragrances, We continued to see very strong growth from Gucci fragrances led by the recent Gucci guilty and Gucci Bloom innovations.
With no trees Hugo boss also outperformed in the U S markets during March.
Our prestige fragrance performance in China, and the broader Asia Pacific region was similarly impressive.
With the fragrance market, they're growing strong double digits and Coty sellout outpacing the market.
The robust sellout growth has been driven by Gucci sellout growing triple digits in China and double digits in the rest of APAC.
Burglaries sellout doubling in China, and up double digits in Australia Kathryn.
Calvin Klein sellout up double digits in China and Thailand.
While the U S has helped to lead our performance in prestige fragrances. They have certainly been very sports in markets across the globe I won't go into all of the details on this slide.
But you can clearly see that our brands are winning in various markets and with various franchises.
Moving on now to prestige makeup, where I'm quite pleased to say that both Gucci and burberry are delivering very robust performance across the globe in the U S. Gucci makeup sellout is growing in the triple digits. This fiscal year. This has been supported by the recently launched <unk> beauty.
Brazil powder and continued momentum for the lead products in the Asia Pacific region, Gucci, and Burberry are seeing triple digit sellout growth with particularly strong trends in China led by face products.
And in EMEA. Gucci makeup is now a top 10 prestige makeup brand in Sephora stores, where the brand is present.
Touching on our third prestige makeup brand KD cosmetics as we discussed last quarter Kathy cosmetics sales in recent months has been limited by the completion of the former manufacturing contract and transitioned from <unk> previous manufacturing supplier, even as demand for cosmetic broadly remains weak.
However, the launch of the new Kylie cosmetics line remains on track for this summer and in fact, you may have already seen and began to see E sports on the brand's social media channels hinting at this one.
While we cannot reveal many details just yet we are excited about this new initiative builds on the true collaboration between Kt and Coty, which will include an updated cosmetic product assortment and omni channel approach and.
And our best in class website, and platform, which will allow consumers to seamlessly shop, the full assortment of Kylie cosmetics and skincare products Inc.
In sum why do we are still in the very early stages of building out our prestige makeup portfolio. The trends. We are seeing today are very encouraging and give us confidence that we have the right brands to meaningfully expand our footprint in the very profitable prestige cosmetics.
During our strategy call last month I told you that Gucci has over 220, Skus and Burberry has just over 150, Skus, which compares to industry leaders that have over 600, Skus, we have therefore, a multiyear integration roadmap.
To continue building out the Assortments of both brands in conjunction with our innovation pipeline. We also have plans to selectively expand distribution of our prestige makeup brands, though with a focus on ensuring we are in the right doors and listed on the right websites.
Oh, Gucci beauty, we plan to end the fiscal year with a presence in approximately 250 doors and e-commerce sites.
We expect to grow this by approximately 150 doors and e-commerce sites in fiscal 'twenty to <unk>.
Bringing the total to approximately 400 doors in websites with Asia Pacific as the leading region.
Now moving to our third pillar of building out our skincare portfolio.
One of the ways by which we want to accomplish this is by further elevating one of the jewels in our portfolio non cash there.
In Hainan, where we are positioning long cash that is not just a son cab brand, but the full skincare offering we have recently set up Lancaster with a temporary counter which utilized generic fixtures with no media support behind the brand and despite these limitations the strong heritage of the brand.
And superior product performance have a load long cash their sales in the high nine goofy location in March to be on par with the top 20 skincare brands with sales further doubling in apparel needs.
Needless to say, we are very excited to be opening on cash. They are very beautiful dominant counter at the end of May here you can see a visual of what this counter will look like we will support the opening of the counter with a grand opening ceremony in June.
We will then followed this up with additional dedicated Lancaster counters in the remainder of calendar 'twenty one.
This represents the first steps, we are taking to leverage loan cash theft monarch, all routes and long history of leading skincare innovations ranking from retinitis for skin repair and position it as a full fledged premium and credit.
Efficient narrative salary focused skincare brand in Asia.
Here you can see some of loan cash sales, leading skincare lines, including its top selling 365 serum.
As well as the latest sense sensitive lotion, which was recently certified clean and Osha and friendly.
If he doesn't see is another skincare assets, we own which will play an important for as we build we further built out our skincare portfolio.
This is work there is work ahead as we reposition the brand to being a leader in clean Green physical skincare. However, even now because of this fee is showing some bright spots for instance in the U S. Coty skincare grew twice the market in March and almost 10% compared to.
<unk> 2019, driven by Felicity skincare.
After launching on Amazon. This past summer philosophy is now the second luxury skincare brand on Amazon with sell out growing in the triple digits. In this strong position because there's a fee has surpassed many leading in the skincare brands, who are also present on Amazon.
Our third skincare asset is Katie scheme.
On <unk> one of our key focus has been on enhancing the platform, which we really view as being the model for other Coty brands.
I used to say that some of the Kpis that we track are showing good progress with social media followers and traffic rising. We also continue to see a solid balance of both new and existing customer customers.
On the brick and mortar side of kg scheme. We have also seen strong launches in both Russia, and France with sellouts ahead of targets.
Now onto our fourth strategic pillar of E Commerce.
The digital team has been put in place and quite honestly, we are continuing to build out.
Has once again utilize some very innovative digital activations to support our online performance.
Some of our recent digital Activations in crude during Q3, our sales on Amazon doubled the performance was supported by Livestream events hosted by current go and Sally Hansen. These livestreams Edens helped to drive double digit sales growth following the event.
We sponsored and promoted the micro Influencers tictoc person for Covergirl simply ageless, which led to a very strong sellout growth at key accounts.
We also use premium site placements for Covergirl last last clean, which boosted the franchise to the number one position at these key accounts.
Covergirl also.
The 30 minute screen clean beauty event on Instagram with linear in heart and Mega scheme, Influencer Hiram Yarbrough day.
Even had record viewership for covergirl and resulted in a product endorsement from Hiram.
I'm also pleased to announce that Kt scheme is one of the first brands to test social Commerce features on Tictoc, leading this fast growing social media platform and its transition to make shopping more seamless.
The digital organization that Coty has been tasked with moving us closer to the consumer.
Because this social listening and the goal is to help us better understand the consumers in real time.
These recent digital Activations are examples of what could feed into our social listening and the lowest to harness data to move closer to the consumer and ultimately of course drive sales.
Now moving onto our fifth strategic pillar of strengthening our presence in China.
As I highlighted earlier, both verbally and Gucci beauty, so very strong performance in China during the quarter Gucci.
<unk> beauty was launched on Tmall during the quarter and performance remains stellar with Gucci beauty being a top for luxury beauty brand launched on Tmall since 2018.
The other he also so magnificent performance during the third quarter exceeding our internal expectations as much sell out grew over 600% supported by the new newly launched Burberry cash and foundation, which has sold out in multiple retailers in.
In fact on this slide you can see the absolutely beautiful Burberry makeup for Jim and displays which have been recently unveiled in day Malibu Department store in the heart of Shanghai, which is our number one door in China.
Why do we are in the process of repositioning long cash that is a skincare brand starting with high nine I would like to highlight that is sun care range continues to resonate with consumers in China.
And he is now the number one son cab brand in Sephora, China. This is an important milestone our sun care has the deepest penetration in the China market.
Finally, <unk> remains the number one productivity in China, Sephora amongst artisanal fragrances.
As part of our expense and strategy in China. We are also growing our footprint in high line through additional doors and a larger presence on e-commerce.
As you can see on this chart, we have seen exponential sales growth in high line over the past year today prestige makeup from Gucci and Burberry contributes over 20% of ourselves in Hainan.
And our fragrance sales in Hainan are being led by Gucci, Burberry, Chloe and new Mew Mew.
I would now like to briefly touch on our fiscal 'twenty, one outlook, which we presented during our strategic update in April.
For fiscal 'twenty, one we continue to expect total sales of $4 five to $4 $6 billion with adjusted EBITDA of approximately $750 million.
Importantly, our virtuous circle of reinvestment has commenced during Q4, we plan to meaningfully increase our asap to support our key focus brands and growth initiatives.
This means that we expect our working media dollars to surpass that of the fourth quarter of 2019.
We have multiple brand repositioning in place and this increased investment will help to fuel them, ensuring we are of the best footing as more markets move out of Dropdowns and beauty demand recovers lastly.
We remain very focused on continuing to deleverage and are committed to exiting calendar 'twenty, one with a leverage ratio moving towards five times.
Having detailed our growth strategy and with another quarter of sales trends improvement and solid profit delivered behind us it should be coming clear that the new day is upon us at Gucci.
During the fourth quarter, we will be ramping up our working media investment to support our focused brands and key growth pillars.
Please recall that we are focusing on our top 15 top 20 brands, our media will be supporting these brands behind fewer but bigger and better beds. Importantly, the cycle has now started as we move into fiscal 'twenty. Two we fully expect our reinvestments to be founded through.
Both gross margin expansion and further cost reductions.
This means that we do not view increased profitability and sales growth as tradeoffs, we see a clear path towards achieving both sales and profit growth even as we continue to steadily reduce sales in low quality channels.
Today, we reported a quarter that shows great improvement compared to where we were just four quarters ago.
And we outlined that the number of green shoots, which we're pleased with however, much work remains ahead and we will continue to act with a strong sense of focus and urgency.
I must say that I continue to be very excited for the many opportunities ahead and cannot wait to share our future milestones and achievements with you.
Thank you all for your time today, we are now happy to take your questions.
Thank you the floor is now open for questions if.
If you wish to ask a question at this time simply press Star then the number one on your telephone keypad that is star one.
If at any point your question has been answered and you wish to remove yourself from the queue.
Pound key.
Our first question comes from the line of Nik Modi of RBC.
Yes, Thank you and good morning, everyone.
So I have two questions I guess I guess given the.
Fluid nature of what's happening with COVID-19 and vaccinations, especially in Europe and Asia I was just hoping you could give us some context on how things have been maybe in April.
A lot of developments in terms of restrictions and lockdowns.
So any color there would be helpful and then.
The bigger picture question is really around shelf space I mean, one other thing that has played play coty, especially in the U S and mass has been shelf space losses, and so given some of your investments and from the momentum that it looks like Youre seeing right now curious on how your discussions with retailers are looking in terms of shelf space. Thank you.
Yes.
Hello, Good morning, Nick. Thank you for your question so to give you some context on how April has been I can say that you know the region that was under the strictest Lockdown was their European one and we started to see some improvement in countries such as UK that started to open back the stores early in March.
So we are starting to see some great signs from there and we see hopefully will see hopefully the same kind of things happening in France, and Italy, and Germany in the coming weeks, if I may say, so we clearly see that this region that was the most impacted by the lockdowns ease going into another story and hopefully during Q4, we will have.
You know better I would say vision of how this is giving to act when it comes to the shelf space that you are referring to in mass you remember.
During the first earnings call I've been doing the great news was that because of the success of clean fresh makeup in America that started somewhere around Q3 of last year last fiscal year I may say.
We had this great news to share with you that for the first time since many years Costar Gal shelf space was stable and it's likely to be the case in fall and again. Thanks to these green shoots that I'm very proud and very happy to share with you today, which for the first time have shown cutoff they'll growing its market share.
Since what for five years, now and significantly growing the market share. We believe that this is clearly another element that's strongly building even stronger confidence in the turnaround. We are doing on this brand in America and the reactions from retailers Beach in the U S or in Europe has been has been has been very.
Positive to the plants that we've been presenting please remember that the success of Chicago in the clean beauty area is strategic for our key partners and retailers. This is an area in which retailers are betting our investing and cover girl and Coty more largely is leading the game in this area you may have heard.
This category is trending seven point 17 points ahead of the cosmetics category in America. So the bet that I've been sharing with you early year is clearly the right one when it comes to where coty needs to invest its money and west coast El Gallo needs to invest and again. This is a win win situation between us and our partner retailers.
Yeah.
Great. Thank you I'll pass along.
Thank you Nick.
Our next question comes from the line of Steph Wissink of Jefferies.
Thank you good morning, everyone.
Question is on the working media and if you could talk a little bit about what's brand, which channel how youre thinking about leaning into some of the momentum you're seeing already and then is there any working media plan in Q4 and into Q1 that would be on brands that are not already seeing momentum.
You.
Thank you Steph good morning, again, so when it comes to the working media you've heard that we are very happy to say that the fourth quarter.
Our working media dollars in absolute value is going to be higher than the one we had during the fourth quarter of 2019. So this is clearly a significant ramp up versus what you have seen during the first half and again a significant progress versus the Q3. So clearly Q4 will be an area, where we'll be back at the front of the scene if I may say.
In terms of brands clearly you know we'll be investing behind current go you've heard that we've made announcements recently.
Around Max factor and around retail will be investing behind these brands benefiting of course from the reopening so that we are seeing in Europe for these brands, we'd be investing so heavily on in China, specifically behind Gucci Burberry to really fueled the T margin expansion, but also the brick and mukhtar momentum were.
In there. So is there are there brands that behind which we are going to invest more during Q4, clearly we will start to put more money behind skincare. He doesn't see on one side in America of course, Katy skiing in America, but also non cash there in APAC and specifically in China. So these other areas.
Where we see the next I would say story around cookies.
And so are you willing to quantify the percentage of sales our working media are on total A&P.
What do you mean by quantifying the percentage of sales you mean, how much is going to is it going to be in terms of percentage not in absolute dollars.
Yeah just.
Absolute dollars higher than Q4, 19 that are you willing to give us some range or percentage range to kind of think about.
A level as.
As you know, it's Stephanie we don't disclose this elements of ANC day today are nothing what I said to you around.
What we are going to do in terms of absolute dollars honestly gives a sense of how strong. This will be because you know you have to imagine that the fourth quarter of 2019, the absolute media dollars were invested behind the much broader number of brands a number of franchises. What we are going to do doing this for culture is going to be much more focused.
And therefore, the share of voice of each and every brand slash product, we'd be investing behind will be much stronger and again, we don't know what the competition is going to do but for sure. We are prepared for this.
Very helpful. Thank you too.
Thank you Steffen.
Our next question comes from the line of other online at.
Deutsche Bank.
Yes, hi, good morning.
Questions for me I guess the first one is I just want to put your fiscal 'twenty one.
<unk> perspective.
And maybe if you can comment on.
Whether you're just being cautious on that for <unk>, because you talked about so many exciting green shoots. So many initiatives you have but then when I look at Europe for Q by then compare it to 2019 in the same quarter.
Sales are sequentially the rate of change is sequentially decelerating. So I wonder if there's any perspective around that.
From Orange here, just being cautious.
And then my second question was just I was hoping.
Expand a little bit around his gross margin comment and.
I think he said that roughly half that structural and half is temporary.
Just more color on that would be helpful. Thank you.
Hi, Good morning. Thank you for your question so again.
To put a little bit more fiscal 'twenty one guidance in perspective as you know that we are of course very cautious because I think this is normal with what surrounding yesterday, but again, if I may say, if you compared to fiscal 19 again, it's not that's not the same company. We are comparing with COVID-19 had you know unique that was.
Part of the company with being as you know have you you've heard it strongly working on lowering low quality sales and this had an impact for high single digit over the last two years and again, we are focusing on a smaller number of Brent. So in a way we are creating the new baseline of the new Coty and therefore.
For fiscal 19 is not meaningful for me if I may because it's not the coty that we intend to build an income in the coming years to give you a little bit more color on the gross margin I'll, let it I'll, let lal to comment on this one which is indeed, a great news for US yeah. So Hello Pedro Thanks for your question. So indeed gross <unk>.
Improvement in Q3.
It's very important for model three.
This is really the way we are going to generate fuel.
And invest in the brands. So indeed, as we say highest fee structure road. So it means that no. We can say that 60% is a new base looking for world.
How we are coming to the sort of structural gross margin improvements. So I explained, but I can elaborate a little more on those as the big drivers. So number one is definitely the mix management.
So without disclosing precise numbers, but we discussed last time that equal near Cedar Creek Tivo as a new strategy. We are implementing skincare prestige. So these activities create.
<unk> gross margin and then we say that even within the mass we are really working in depth to make sure that innovation, new any new initiatives you are accretive. So each detailed work that we are going to with the markets with each brand to make sure that all the initiatives are accretive in <unk>.
So that we invest and we are creating gross margin in Europe fueling shootings a model. So as he said number one number two is <unk>.
What we are calling revenue management. So here is we need to review ease of trade terms.
How to.
Optimize.
What is a book promotion, so he's really again to be more in depth more detail related to.
It was a pricing strategy to really being very to nail down on these promotional strategy to optimize returns which is sometimes.
Beginning meant in our equation. So here again, it's back to the focused security and unit optimizing these regions.
Really pre tagged element, which are structural vote and we remain on we'd even exceed our rate and last but not least is of course on supply chain.
Reducing excess and obsolescence.
Again very detailed work 360 degree, we do with the brand with the markets being better than forecast accuracy and and of course for more efficiency from a supply chain standpoint, and procurement teams. So again. These are really the street peers, we are pushing and we need to beat the 60% gross margin as a new base looking for it.
Alright, great. Thank you both greatly appreciate it.
Youre welcome.
Sure.
Our next question comes from the line of Andrea Teixeira of Jpmorgan.
Good morning, I would just wanted to follow up a bit on the shelf space comments Sandy last and if you can also elaborate in Europe I.
I do understand obviously, the puts and takes of the new closures.
Thinking of overall distribution for Coty going forward.
And also like I can see as you embedding your guidance I understand you're in for a lot of.
And a lot of.
Separate changed from being built there, but can you comment a little bit more what are you seeing in terms of like coming back to opening reopening everything in in the UK for seeing some buildup of inventory.
Enter that market. Thank you.
So thank you it was running on there also to comment on the shelf space in the U S and Europe again, clearly what I've said is that we are securing everything we're doing everything to secure the shelf space of our brands be it in the U S and in Europe, and the Green shoots that we are sharing with you and again plans have been shared with retailers.
There was also some some months ago to really show what what is the direction for each and every brand what are the new innovations and what other new images and how us and retailers are going to work hand in hand with a portfolio of brand that's clearly bringing added value to their current portfolio. So this is clearly an <unk>.
Area that has very very positive feedback if I may say and it's super helpful. For the teams here insides Gucci to see serenely, the future and to build the brands and innovations that are going to come when it comes to how are we expanding if I understand what your question the distribution in mass. This one is clearly.
Broadly stable, where we are extending the distribution is clearly on the on the prestige side, especially in Asia, you've heard our plans to increase the distribution be it online or brick and mortar for Gucci of course, you've heard how much we intend to strongly increase the distribution.
<unk> of our skincare alone cash that brand in Asia. So this is clearly the path I would say of the business that's going to see strong.
Distribution gains.
Last quarter for your question was about the inventory in trades entering the fourth quarter and again, what we are seeing is that retailers has been very vigilant in controlling inventory, which is pretty lean today and in fact U S retailers have been struggling to keep up with the demand for luxury fragrances to give you. An example, so.
So we are not worried about that are building stock building, it's not at all like this there is a kind of I would say a consistency between sellouts and settings.
That's encouraging I just for one less day since you mentioned Asia and I think it's a pretty good point about Lancaster.
But in terms of Kylie skin.
Also kw in the U S can you comment a little bit more on the skincare side, because I know that's one area that you see a lot of potential. So can you comment on the financing.
Net skinny is clearly one of our key brands in America is clearly a brand that has been doing great. Our figures and we are continuing to build the brand in the near future. As you may have heard and he is going to be a first for the slot for the for the brand. We are going to have probably around you know beginning of the summer.
For me that this summer we'll have for the first time, one unique platform with Kylie I would say fans are going to be able to shop from skin care to make up on the same I would say platform and on the same website, which is really new and with the lowest for the first time to benefit from you know, creating what we call cross sell.
This is super Super important in the world the beauty in general and Moreover, in the world the beauty online to be able to sell you know our foundation lip color, but also a makeup remover moisturizer or in SPF. So this is clearly going to give us strong growth for progress in America for Katie.
Scheme when it comes to the kw line as you've as you've heard it's Keith.
<unk> team is working very diligently on her skincare line behind the scenes at the moment. She says I have said it several times. She is clearly at the forefront of every new trend that's happening in the beauty and in the skin care Arena and we are super excited to be working with her and we are all looking forward to the upcoming launch that is <unk>.
In fiscal 'twenty, two as we already announced to date and of course scheme will personally share more details when she'll be ready too.
Okay. Thank you.
Our next question comes from the line of lending Nicholson of Citi.
Hi.
First thing can you give us a sense going forward.
Spending more money on anti P is terrific, but what's your thinking in terms of the next between digital and traditional.
Yes, so hello Wendy.
Indeed, so we continue the journey that.
I mean digital is really where we are investing the most and we continue so it's already majority of our media spending was already took 18. Each one is located in Q3 and will remain in Q4.
Got it and one day Tech company met.
Alright, sorry go ahead.
No I think I'm, sorry, wondering because particularly for some of the mass brands.
Like a covergirl I would think that traditional media I mean, we've seen some of the TV ads with Nikki Taylor I'm, just wondering if someone like a priyanka chopra.
She is so well known I wouldn't I would wonder if TV isn't a great medium for that as opposed to digital.
Absolutely Wendy and that was what I was about to say you know when I interrupted you in fact youre totally right digital is clearly the area in which we're investing the majority of our money, but the great news is that we are back on television and by the way the great market share progress we've seen on covergirl during this quarter at the end of last quarter.
Q3 is because it was clearly also driven by the return of Covergirl on TV and as you've said, it's very truly these brands have such a deep distribution in the middle of America. The T. V's mandatory so it's really a mix of day to clearly digital driving I would say the excitement driving the awareness, making sure we have support.
And the fact that we are doubling our sales at Amazon, but at the same time, specifically for example for simply ageless, which is going to be a TV campaign with the return of Nikki Taylor as you imagine this campaign has to reach you.
No.
Erica in every part of the country.
Perfect that sounds great.
Then if I can just follow up on two brands Lancaster.
Talk very specifically about the early success in China can you just clarify if you have any plans to spend or district spend behind our district Lancaster outside of China is that a brand that you're focused on in Europe I know, it's all there.
But is that a growth platform as well and then same thing on Max factor.
Max factor has struggled in the U S for a long time priyanka as such a global.
Celebrity I'm wondering if if she doesn't play and if it doesn't make sense to expand that brand on a more global basis.
Thank you again, one day for your questions. The first question about loan cash there I would say that the focus today is really to reinvent long cash there is a skincare powerhouse in China, we're going to build you know on our number.
Number one position at Sephora in China, when it comes to Sun care as it as you can imagine a brand. That's so strong on Sun care in a country like China, where putting in SBA for on a daily basis is you know part of the daily routine is going to be a great baseline for us to build this brand on and you remember we've share together several times that the.
Brand is already seeing a level of sales that position. It you know in high line, but we can do a kind of extrapolation. It gives us an idea that this baseline could be around the top 20 skincare brand in China, which is I think a long journey and an exciting journey to stop but it doesn't mean, we're not supporting the brand in Europe. The brand is a European.
Neither in UV protection European Innovator recently, having you know these certification for the first Sun care that cradle to cradle silver certificated, which is the first in the world of Sun care. So it's really one brand two stories from the different regions skincare is huge in China.
So we will need to benefit from this I would say big trend and of course in Europe. We are continuing to build the brand around its a sun care I would say brand equity of course, the future no. One knows we see what happens in China, sometimes there is what we call reverse innovation, but that's not the plan at the moment to answer your question on Max factor, which is almost the same.
Kind of progression, we are concentrating the investments and the announcement around Priyanka Sherpa to really take Max factor as the premium brand of the European markets, but not just their European markets. It's a brand that's highly popular in China too is the brand that highly popular in the middle East. So I think we have some homework to do in Europe and in.
The rest of the world before going back to America.
Got it thank you so much.
Our next uhm.
Our next question comes from the line of Lauren Lieberman of Barclays.
Great. Thanks, good morning.
I guess I wanted to ask about just sort of math that we've been battling and tail and the Investor day, you talked about.
R&D expense to grow in talking about those areas going from about 12 per cent of sales towards 30 per cent of sales by fiscal 'twenty five.
That implies something like a 30% compounded growth rate on those businesses, which in the near term it would certainly seem achievable, but as you get further out in that period Youre talking about law of large numbers kicking in so.
Wanted to one just get a sense if that's the right way of thinking about it.
Two.
Anything you can kind of talk about <unk> and why you would have the degree of confidence to maintain that level of growth further out in metairie, particularly just on an organic basis. Thanks.
Good morning, Ryan. Thank you for your question. So yes, we expect to continue to grow the growth and to grow given how small is in fact, we are today. So in fact, it's true that starting at this level of after sales today, we have a long term and I would say a long big potential in front of us given the size of what we.
Have today think about Gucci makeup and again the potential is infinite I think skincare the potential at Coty is clearly infinite and of course imaging, adding Kim skincare on top of this.
What we are doing today with non cash there in China. So again, there is big potential there and of course. This is not limited to these that these growth areas of those on which we're going to focus our investment to make sure you know we walked the talk.
When it comes to the second part of the question. It was about what you meant you meant if I understand well the growth will be 100% organic is that the question yeah.
Yes, we do have what we need in Coty, you know, that's what I, usually say when I'm asking questions about potential acquisitions et cetera, I think what what was nice when had been presenting in April the the plan for the company for the next years for me. The most important part of this I would say Strat plan was.
Remember the pyramids, we've been sharing with you beat on the cosmetics side or on the skincare side and you could see clearly that we can build a skincare portfolio from the entry price level to the super premium price level without the need for any kind of acquisition and same thing when it comes to our makeup portfolio that.
Make a portfolio, especially on the prestige side is super comprehensive with Gucci, the elderly and Kylie cosmetics that we intend to relaunch that's going to be relaunched this summer you've seen probably what's happening on <unk> social media she's been doing something great deleting all her past Bose announcing in a way in a very strong.
Teaser, what's going to happen during this summer. So so we think that we have what we need to achieve the growth that we've shared with you several times now.
Okay. Thank you very much.
You're welcome.
Our next question comes from the line of Robin <unk> of Evercore.
Great.
Thank you very much.
A couple of <unk>.
Questions just to get a little bit more color on results.
One can you quantify at all.
The amount of sales.
Sales that were cut from low quality channels as you term it just kind of get it set for what sort of headwind that is that's number one.
Number two.
One of your competitors remark that because of increased seasonality in China.
Their sales were a little bit depressed in the quarter because of the strong impact of 11 11.
So wanted to get a sense if that was something that impacted you as well and then finally.
The slides and in the discussion when you talk about the that the fair value of bylaw <unk>.
Increasing $64 million.
Can you discuss to what extent at all that you are involved in that asset any color about the turnaround there and and the ultimate outcome and how that would affect you. Thank you.
Good morning, Rob. Thank you very much for your questions I'll pass it over to the omni beef you won't go on to answer a few questions and I'll try to complement on the on the other one about China, Yeah. So indeed, hi, Hi, Robert.
On low quality sales and indeed, we sue gave already some some element. It's amines impact is you know high single digit over two years.
Uh huh.
Please yeah.
For a month we have.
On your second question, which is and indeed in year seasonality year increases in net ETE impacting China.
We say you know at this stage China is still small for us. So you know China is a great opportunity and we don't see.
In Europe.
From the from that.
Your first question on on Veda.
As I explained seek immediate impact.
Impact on fair market value is more than external.
Impact due to zone to the economic.
The macroeconomic context, who knows that alone is a reopening and so on and this is what is included in.
And the fair market value. So there is no element about the organic performance of of Veda.
And is it at this stage as you understand that the new team.
Each video workings of whole model and so there is nobody else.
Indications from the organic performance in these fair market value.
You cut out or at least for me you cut out on the low quality sales you said high single digits over two years, so should we be thinking in this quarter or something like 3% to 4%.
I would say again is really you know high single digit over the last two years.
No more no more precision unit for these quarters. He sees video on average what you you have to consider for the last quarter, including this quarter.
Okay, and then and then given.
What you just said on Vela do you have any insights that you can give to us in terms of what's actually happening at the business.
Oh I think it's you know it's too early to.
To give you more elements at this stage again zone.
The team is working.
We're taking the business model. So you know no more elements that we can we can share with you.
Definitely as an impact of the fair market value is is again that you know the healthcare segment back to growth. So no now reopening.
And of course, very quickly and if he tuna to the organic performance of veto.
Thank you.
Thank you Rob.
Yes.
And we have time for one more question. Our final question will come from the line of Mark Astrachan from Stifel.
Yes, thanks, and Hello, everyone.
I guess, maybe just a broader question building on five minutes earlier, so how do we think about or how should we benchmark your sales growth progression versus peers obviously.
Where trends are sequentially accelerating growth.
So better but still below peers.
Whether you look at year on Europe.
To your implied guidance kind of the same thing for the June quarter.
And.
You talked about increasing spend in fiscal for Q. So should should the market start holding you accountable relative to the peer group do you think its too early given all the changes that are going on in the business and you have sort of seen do you think you can get back to a rate of global growth and then obviously you had some broad comments if you could talk specifically within our categories.
Prestige versus mass etcetera. Thank you.
Good morning, Mark So again, how do should you think about us in terms of benchmark versus peers I would say that you should start looking at US you know.
Fiscal 'twenty two on a year on year basis, because again. This is a new company. If I may say that we are a reshuffling today.
And the mix part of it should be a key factor for asbestos P. S.
When you benchmark us in fact, so this is the best way I can if I can.
To give you you know the ability to compare it versus peers of course, we are not with the same exposure in terms of regions et cetera. So it's really the progress that needs to be assessed rather than the part of the business. That's done today in the different parts of the world because we don't have I told the same footprint today. So again I think that's it.
'twenty two should be a growth inflection for us. So that's really the year and the way you should look at this.
What was the second part of your question I'm, sorry, because I didn't understand very well.
Yeah. It was more in the broader context of how do you think about it on a segment basis as well so the broader question, but specific to prestige versus mass. So all the improvement that youre talking about there would come in fiscal 'twenty. Two is that how we should think about it.
Again, you know what ive share during the Investor's day was what we think is clearly the winning strategy for Coty first stabilizing our mass business, we're starting to see green shoots over there and that's really an important part of the story even before growing the brand just stabilizing is a key element of.
The company's second thing accelerating the prestige business, which is highly accretive which will allow us in a way to go stronger in APAC and in China, but also in America and of course, the rest of the world as soon as Lockdowns are behind us prestige fragrances, concentrating more a focus on creating top selling.
Female fragrances building artisanal fragrance houses.
Force. The prestige makeup story of share it with you several times and we do have the right brands and last but not least building a skincare portfolio across both divisions. These are things in which hopefully will be.
Showing a new things new innovations and you'll be able to assess the progress of the company on this areas last but not least E com, which was not part of the questions that again.
AECOM has being growing again, 30% during the quarter.
Both divisions, both businesses, if I may say mass brands and prestige brands have been growing very very strongly and coty is leading the game in many many areas such as at Amazon doubling the sales at a T mall in China, Thanks to Gucci and Burberry, but also on our own DTC. Thank you again for your questions.
And very very happy that we've been able to share with you. This results in first green shoots.
Thank you for.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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