Q1 2022 Coty Inc Earnings Call
Okay.
[music]. Please standby your program is about today.
I would like to welcome everyone to <unk> first quarter fiscal 2022 results conference call.
Reminder, this conference call is being recorded today November eight 2021.
On today's call are skewed Nabi, Chief Executive Officer, Rob Murphy, a chief financial Officer.
I'd like to remind you that many of the comments today may contain forward looking statements. Please refer to <unk> 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 financial results. Thank God, he's expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's relief.
I will now turn the call over to Mr. Nabil.
Ladies and gentlemen, with our Q1 no complete I'm very encouraged by the success. We are having further building on the strong foundation, we put in place last year.
The results we have delivered this quarter truly exemplified the dust your circle, but we have to set out to create.
It's a simple one with strong revenue growth combined with gross margin and cost initiatives.
The midstream is huge perfect expansion and strategic investments, which in turn drive future growth momentum.
There are some key takeaways that I would like to first highlight.
First our Q1 revenue growth.
Surpass our expectations and guidance with growth coming from both our prestige on consumer beauty segments. We continue to see very strong demand for prestige products, particularly fragrances.
The U S and China with an impressive rebound in travel retail. This was further supported by our expected exception a lineup of fragrance launches.
Meanwhile, we continue to see a recovery and improvement in consumer beauty with particularly strong trends at both covergirl and Max factor.
This resulted in like for like revenue growth of 21% above our guidance with high teens growth.
Second we reported very strong profit growth during the quarter.
This was fueled by a significant gross margin expansion of nearly 500 basis points as well as further cost reductions.
The substantial gross margin expansion, we have seen is a true testament to the strength of our business model as we double down on our cricket innovation and continue to compromise our portfolio.
Fortunately, we continue to step up our investments in marketing and in fact, our working media doubled versus last year.
Despite this our adjusted EBITDA increased almost 70% equating to 550 basis points of margin expansion have you done that's our virtuous circle is now in motion.
Third we continue to execute and make progress across our strategic growth pillars.
Of course, we'll be sharing some milestones with you today.
However, I'm even more so excited for our Investor Day next week when it'd be joined by additional members of the Cookie leadership team to provide a more in depth update on the progress we have made on our strategic pillars as well.
As our medium term trajectory.
We see the momentum continuing into the year, we are on track for a great fiscal 'twenty two.
Our growing confidence in the momentum drives our increased sales guidance for the year supported in particular by our initiatives across fragrance and cosmetics.
I would note I will now take a few moments to cover our revenue trends during the quarter before launch takes you through our pregnant shows that I would finish with an update on our strategic progress and our outlook.
Our Q1 revenues increased 21% like for like.
The prestige segment grew 34% on a like for like basis.
Even as we continued to reduce sales and low quality channels, which represented a low single digit negative impact in the quarter.
We continue to experience very robust prestige fragrance trends, particularly in the U S, China and travel retail with nearly all brands exhibiting strong growth in the quarter.
Although growth was further aided by our very strong launch calendar in the first quarter.
This included Gucci saw a gorgeous gardenia goodbrey hero targeting trying to decide and the relaunch of <unk> cosmetics. Meanwhile, our prestige cosmetics sales more than doubled in the quarter.
Our consumer beauty segment increased 3% like for like as the global mass beauty category returned to growth and we are seeing stabilization in our market share.
Q1 growth was led by Corona and Max factor as both brands continue to benefit from the new brand positioning.
Moving to sales by region.
Feel good across all regions, though the U S and China continue to be standout performers and travel retail so a true resurgence.
The Americas region grew 23% like for like in the quarter.
Supported by double digit growth in the U S as well as growth contribution from Latin America, Canada and Brazil.
<unk> sales rose, 17% like for like with the most impactful contributors being the UK, Russia as well as local travel retail.
The Asia Pacific region increased 29% like for like with local travel retail tripling year on year, and China see nearly 50% growth in the quarter.
Our efforts in turning this market into a powerhouse are bearing fruit.
We are particularly pleased with these results in China, and the broader markets, particularly given some increments of restrictions that occurred in the quarter due to COVID-19.
I will now hand, the call over to the hall to take you through our financial results.
Thank you Yossi.
I'm very pleased with our first quarter results, which continued our very strong pace of profit growth.
Importantly, our virtuous cycle of growth is now in motion.
It was driven by strong gross margin improvement.
Joining us to continue to invest in our strategic growth initiatives.
Further fueling top line growth momentum.
Starting with our gross margin performance.
Q1, adjusted gross margin of 63, 4% increased by nearly 500 basis points from last year, and 250 basis points from last quarter.
This marks our fifth consecutive quarter of gross margin above 60%.
Our gross margin performance was driven by you.
Abel mix, both from the outsized growth of prestige as well as favorable product mix within the category.
Lower obsolescence.
Cost absorption on increased stages.
<unk> and revenue management.
Light chain productivity and material cost reduction program.
We continue to be very focused on driving gross margin expansion, both each year and ease of years to come.
As such we have a very clear multi pronged multiyear gross margin.
In place while we also expect we will continue to benefit from positive channel category and regional mix shifts.
The gross margin expansion each key towards a virtuous cycle, we have created a sales and profit growth.
Why is the topic of inflationary pressure supply chain bottlenecks and component shortages of dominating conversations across all industry.
Pleased to say that so far quickie is navigating through uncertain environment quite well.
This is a result of both the agility of our supply chain and procurement teams as well as the structure and drivers of our business model, where we are also driving gross margin accretive channels categories and innovation.
While we have seen isolated constraints in certain components, such as such as fragrance pumps.
On paper.
Productivity increased safety stock to protect all key consumption periods as well as implemented dual sourcing initiatives all of which is proving to be effective.
I'm afraid the vast majority of our freight is under contract rather than spot market, which has been largely protected us from.
If price hikes of recent months.
At the same time, our teams proactively increased transportation lead time and secured freight capacity in advance to avoid potential freight constraints.
And in the context of global supply chain bottlenecks and port congestion.
It is important to note that the majority of our inventory is manufactured in the region win where.
Food, which likewise protect our business.
The net result of <unk>.
These proactive efforts and business design decisions is that a fairly stable in Q1 was very strong.
<unk> 19, and actually higher than the prior year.
Which has allowed us to both over deliver on our sales guidance for the quarter and deliver close to 500 basis points of gross margin expansion year on year.
And our outlook for Q2 service levels in a similar range despite higher than initially anticipated demand, which is also enabling us to raise our full year sales guidance.
While we do expect the impact from inflation materials and freight to be somewhat higher in <unk> to 'twenty. Two the impact is quite manageable and we continue to expect our gross margin to expand in fiscal year 'twenty two fueled by revenue management initiatives in both prestige.
Consumer beauty, some mix benefit of prestige expanding as a proportion of the mix improved absorption from higher production volumes and broader productivity efforts.
During Q1, we maintained our stepped up marketing investment.
<unk> was approximately 26% of sales consistent with the level of Q4 and significantly above the 20% level a year ago.
The year over year increase was primarily driven by working media, which more than doubled year on year.
Importantly, we remain vigilant and investing in the highest ROI opportunity and being nimble in a resold you're pregnant.
You will hear more from suit regarding the details of our success and progress in driving growth during the quarter.
However, let me highlight a few areas, where we were putting our marketing dollars during the quarter.
First we had a very busy launch calendar during the quarter, particularly within prestige.
Launched which is a gorgeous gardenia theyre very slow Calvin Klein's five.
The relaunch of Kylie cosmetics among others.
These launches showed tremendous success in the quarter and contributed to our strong performance.
We continue to fuel our expansion into new categories and markets, including prestige makeup and although in Asia.
Finally, we continue to invest behind so repositioning of Codell Gail.
And Max factor, which also promising results supporting consumer beauty business stabilization.
Okay.
Thank you Nikki.
Our marketing investment and drive profit growth through further cost reduction.
During Q1 of <unk> cost declined by 8% year over year.
We achieved approximately 50 million.
At the end of cost savings during the quarter with a frontloaded delivery of a fiscal 'twenty two savings target.
Enabled sufficient flexibility in the P&L to deliver profit yet we invest in our brands. During these critical 40 day period.
The primary drivers of these where cost savings lower fixed cost and trade investments.
We remain well on track to achieve over $90 million of savings in fiscal 'twenty two.
We call. It is net of cost inflation, reinstating bonuses and structural organizational reinvestment behind our growth pillars.
Important to note that this does not include our intended reinvestment.
We have now achieved nearly $400 million of total savings and we remain well on track to reach our fiscal 'twenty three targets of a total of 600 million of savings. While we also continued to intensify savings projects beyond fiscal 'twenty three.
Moving to profit delivery in Q1.
Adjusted EBITDA performance was exceptionally strong in the quarter.
Creasing, 67% year over year to $279 million.
This resulted in a margin of over 20% up 550 basis points above our first quarter last year.
This significant improvement was driven by strong sales growth.
Gross margin expansion and fixed cost leverage.
We believe the stellar performance. This quarter is further evidence of the strength of both our strategy and business model and we continue to target both revenue and profitability growth in the years ahead.
Turning now to our EPS, which included the following drivers adjusted EBITDA for Q1 of 279 million depreciation of 78 million income tax expense of $40 million, which equates to a tax rate of approximately 29% in line with our.
Patients as we previously noted we expect a higher tax rate this year, given our global principal reductions are now in Amsterdam and in the U S.
8 million, although the Eitan and 29 million of adjusted preferred dividends.
Please note that the preferred dividends were higher than typical in Q1.
At a very high level. This was due to accounting requirements associated with KKR convictions of accrued dividends into common shares.
Part of that first transaction in September.
As a result, our Q1 diluted adjusted EPS ended at eight.
While not included in our adjusted EPS during the quarter Villa fair market value rose by $319 million.
Looking ahead to Q2 and fiscal 'twenty, two I would like to provide some context of the different drivers of our adjusted EPS.
First consistent with what I said last quarter, we continue to expect interest expense in the mid 200 million for fiscal 'twenty, two reflecting a lower net debt balance offset by somewhat higher cost of debt post the <unk>.
Recent refinancing.
Second as I previously mentioned, we anticipate an adjusted effective tax rate for fiscal 'twenty two.
The high <unk> percentage.
However, we know there is a high degree of uncertainty with effective tax rates projections in the parent on government.
Harold on the preferred dividends following today's announcement actions with KKR, we anticipate roughly $7 million quarterly run rate going forward. Following this transaction and assuming no shares of conversion of preferred shares.
Now moving to free cash flow for the quarter, which was slightly positive. Despite Q1, typically being a seasonally weaker cash flow quarter as we build inventory for the key holiday consumption period.
Importantly, working capital improved significantly in the quarter.
Also continued strict management of Capex and one time cost.
As a result, our Q1 free cash flow was $241 million.
As we head into Q2 and beyond we remain intent on further bolstering our cash flow as well as driving a steady reduction in our net debt.
Turning to our capital structure we.
Indeed, Q1 was a financial net debt balance of approximately $4 96 billion, which is a decrease of over 200 million from Q4.
It is largely the result of our strong free cash flow.
Factoring a 40% stake of villa at quarter and valued at approximately 165 billion. We ended the quarter with economic net debt of around $3 3 billion.
Please note that with the completion of the sale of an approximate 9% stake of data to KKR in October and today's announced sale of another 4%, we now own 26% of the Vela business.
Based on our current on our ships taking data our economic net debt at the end of Q1 'twenty two would have been closer to $3 9 billion.
We continue to view, our retail 26% stake in <unk> as a financial stake.
The recent transactions proves the valuation upside in this business as well as the liquidity of this stage.
We will continue to be active and tactical in the <unk> opportunities to monetize non strategic assets and further reduce leverage.
Additionally, we are continuing to make progress in improving the maturity profile of our debt.
We have secured commitments to extend our repos or maturity to fiscal 'twenty, five and reduced revolver capacity to $2 billion from previous $2 75 billion.
This is on the back of our recent successful issuance of over $1 6 billion of senior secured notes showing a strong progress in minimizing refinancing of it.
In fact, we have recently made some tactical decisions by monetizing some non core assets to help further our deleveraging.
During Q2, we are executing several real estate divestitures, resulting in approximately $115 million of cash proceeds the majority of which will flow into Q2.
The sizable cash inflow for these transactions.
Paul we expected strong free cash flow in Q1, reaffirm our confidence in and in calendar year 'twenty, one with financial net debt to EBITDA was five times as well too and calendar 'twenty two with leverage of four times.
In the meantime, we remained committed to the partial IPO of our Brazil business.
In light of the current economic volatility in Brazil, we continue to monitor market conditions to indemnify, an opportune window to a week to execute our actual appeal due.
Due to local Brexit on the regulation, we cannot offer further details at this time.
Before I hand, the call back to Sue.
I would like to quickly touch on the recent transactions regarding our prescript shares.
The simplification effect they are having on our capital structure.
For some time now we have seen street key to unlocking shareholder value adequate.
Growing our sales and profits.
Hey, Dave bridging our balance sheet.
And the last being simplifying our capital structure.
We have made great progress on the first two of these and other key attached towards further improvement.
During the first half of each year, our capital structure has become significantly more simplified some kick <expletive> conversion of approximately 50 million preferred shares.
Combined with the subsequent redemption get two transactions of around $75 million kick out preferred shares in exchange for roughly 14% stake in data.
Make no mistake. These are positive developments for cookie.
We understand these events, particularly the secondary offering that took place in early September led to questions and volatility.
However, these developments were a net positive for quality as well as for our shareholders, including.
Significant even further reduce the overhang of <unk> preferred shares ownership.
Confirmation of the significantly higher value of Vela.
Approximately 40% appreciation versus the initial valuation while also improving the liquidity of the asset.
Bringing approximately $65 million of cash on the lower preferred dividend, but we can use to further invest behind brands are used towards deleveraging.
And the redemption of these convertible shares implied several cents of EPS accretion annually.
Let me now tell me back to suit.
Thank you very much wrong. So we'll continue to make strong tangible progress across our six strategic pillars in the first quarter with many more milestones planned for fiscal 'twenty two and beyond.
I will now walk you through some of the key corporate one sorry highlights and as a reminder, we will be covering each of these pillars and future initiatives in.
In much greater detail next week November 18th at our Investor Day in New York City.
Starting with our first strategic pillar stabilizing our consumer beauty brands.
Jeremy we hope many of you recognize however, we believe it's important to remind each of you of our core consumer beauty brands and where they stand.
I'm proud to say that we have clarified view of the portfolio with each brand position in the clear price tier and competing against a defined competitive brand.
Okay.
And the corollary in Germany, the Manhattan ground compete directly against <unk>, Max factor and boudoir compete against L'oreal, Paris, and Sally Hansen holds the unique position of.
Providing an affordable alternative to nail Salon services.
As you all know cover girl has been our first area of focus within consumer beauty.
I am very pleased with the success we are seeing today.
<unk> is the inventor of <unk> makeup needs. This high growth area in the U S, which is nicely accretive to our cosmetics portfolio.
This has been supported by our strong launch cadence of key vegan and cruelty free beauty products, including clean fresh makeup and last blast mascara.
In fact, we believe this renewed focus on key makeup is further supporting our gains with key demographics as well as key retail partner such as Airtel, who is elevating cutoff down as amusing example, and establish a mass brand leading the path to clean beauty.
I also want to note that clean beauty has the additional benefit of being margin accretive.
These key innovations carrying a higher price point.
I am proud to say that since our reboot that cut off at the end of March the brand has gained market share in four of the last seven months.
And we expect the momentum to continue.
Importantly cannot guarantee finally, gaining shelf space in the total in total in the U S led by our key retailer where the brand is significantly outperforming the cosmetics category and also improving productivity.
And just as we discussed during our strategic update in April we are reapplying, the covergirl turnaround playbook to other consumer beauty cosmetics brands. We just launched our first clean makeup trends at female called trying to treat.
This makeup line is 100% vegan cruelty free free from fragrance mineral oils and animal derived ingredients on this slide you can see a brief AD showcasing the manifesto of this recent launch.
Here's the way I fear that the clean beauty out there and it works sometimes.
I would tend to all of us as our new way of creating makeup that's kind of why and Panama kinds of skin free from Franklin.
Kind of animal feed from protein, we collect kind entry.
Yes.
Let's get behind this claim.
A clean base of makeup.
Kind of strange from Remo, London.
<unk>.
<unk> is our biggest consumer beauty launch in fiscal 'twenty two.
Along with our retail partners. We believe this will truly be a game changing innovation and we have been very excited with the recent test results, while Kansas free is only in prelaunch phase with a full national rollout and food need their support going live in John we are already beginning to see retail sales.
At key retailers picking up in recent weeks.
So Max factor, we are seeing very positive trends as the visuals and new assets have now gone live.
Starting in the U K Max factor gained 20 basis points of market share in September across all customers Max factor is stable or gaining market share, which is a first for the brand in years.
Similarly in the Netherlands, the brand gained 50 basis points of share.
With the new brand positioning and campaign with Priyanka Chopra join us on this starting in a couple of months ago. We are really encouraged to see that the brand is already stable or growing market share in over 75% of its markets.
We plan to keep the momentum going in December as we continue to invest in media behind Max factor.
Moving to our next strategic pillar of accelerating luxury fragrances as previously mentioned, we have some outstanding fragrance launches during the quarter further supporting our success in these key categories Gucci store a gorgeous gardena is one of these great launches estimate.
Our goal is to sell and this fragrance within the top 15 global scheme mass fragrance icon.
And the result of recent months across geographies channels and customers suggest that Florida is on track to reach this.
Hopefully this is a first for us with a key innovation seeing such strong immediate success across major geographies.
In the U S. Its already ranking number one since its launch across many of our key U S. Retail partners. Similarly in the UK. The fragrance is number three among female fragrances since its launch and supporting which as far as the number eight overall CNET fragrance line in UK.
In two of our key markets in Continental Europe, Germany, and each of them for US is also very strong supporting the throw airlines. The number 80 in Germany, while gorgeous gardenia is the number one see men's fragrance in Italy.
The fragrance is also gaining strong traction in China, where it has been ranking as a top 10 CMS fragrance, among our key brick and mortar retail partners as well as on T model.
Within men's fragrances will answer burglary hero during the first quarter, while the fragrances. Similarly, seeing great success across all key regions and the fragrance remains on track to be a global mail icon in the U S. T. Rowe has been the number one men's fragrance launch at many of our key retail partners.
Since the launch with its sellout results far exceeding our initial plans.
<unk> hero has been a top 10 men.
And stones, ensuring the hero line is the top 10 overall mens fragrance line in Germany Hero is already a top 20 mens fragrance line.
China Hero is also now a top 10 men's fragrance since launch at many of our key brick and mortar retail partners and on Tmall.
Also encouraging to see that hero is ranking <unk> in key travel retail locations whether launches presence.
Moving on to the exploration of our prestige makeup portfolio.
We launched Kylie cosmetics during July together with <unk>, we updated all of the cosmetics products assuring that each product was vegan cruelty free with clean formulations. We have been very pleased with the performance of Katy both across channels and geographies. Since this relaunch in fact, we have had launched.
Numerous connections that exceeded our initial targets during the first quarter. The birthday collection dropped and was one of the most successful collections ever at <unk>.
Since the launch of Nightmare on M Street collection also turned out to be one of the best ever kv cosmetics corrections can be also introduce her highly anticipated baby line during the quarter.
This collection, so very strong sellout trends within the first moments of becoming available online leading to over delivery.
Let's move to our initial plans importantly, these launches and drops growth in a very significant amount of consumer.
New to the brand.
It's also important to note that with the relaunch we have made kylie cosmetics significantly more productive than the.
The initial range with fewer skus, but delivering very high set out.
The success of <unk> does not stop with this recent connections, but can be further extended to the performance in brick and mortar both in the U S and the growth in Europe.
Paddy cosmetics is performing exceptionally well in the UK at our retail partners, including the recent relaunch at boots.
Meanwhile, the recent launch across a number of Scandinavian markets with our retail partner kicks was one of the best ever day, one launches in U S. But he can muster and brake master both skin and cosmetics sellout.
Strong double digits year over year all of this confirms the true Omnichannel nature and global appeal of the <unk> brand.
Moving to another of our prestige makeup brands Gucci beauty.
The growth continues to be phenomenal.
<unk> makeup sales in the quarter tripling year on year.
At the same time set out in the U S and China continues to grow in the triple digit trends as.
As we've continued to build the Gucci makeup assortment phase represents a very important opportunity for the brand.
During the quarter, we launched the Gucci cushion foundation with beauty squad and distinctive packaging as you can see on this slide.
The launch anchors Gucci beauty and the most loyal most profitable and largest makeup category across Asia.
This has proven highly successful as in China. The <unk> Foundation was one of the top ranking luxury questions with chemo and that's a key brick and mortar retailer.
Moving to our next strategic priority of growing our skincare portfolio.
Our vet, our rapid revitalization strategy, sorry for lung cancer remains on track, while we saw some slowdown during <unk> and high <unk> due to a coverage resurgence in China as cross border restrictions eased during September we saw.
So a rebound in both traffic and of course sales.
Im also pleased to say that we are seeing a further strengthening of the skincare portfolio, which now makes up the majority of non cash they are set out in China.
We view this as further evidence that the repositioning of Lancaster afterwards.
<unk> is taking hold on this all important prestige skincare market.
Moving to our fourth strategic priority of building E com and direct to consumer.
We continued to experience very strong growth with E com rising 23% year over year.
Both prestige and consumer beauty, so growth exceeded 20%.
On a total company basis ecommerce represented mid teens percent of revenue at the end of the first quarter.
But from a low teens percent from last year's first quarter.
One of the key E Commerce highlights during Q1 was our performance at OTA, driven, particularly by the strength, we are seeing on luxury fragrances.
Our prestige fragrances set out growth online that rose strong double digits with penetration in the high teens during.
During the quarter, Marc Jacobs Perfect had outstanding performance. This icon was chosen as the fragrance crush in August she profit.
Seeing triple digit set our growth for the month, despite lapping last year's launch as we build on our e-commerce momentum.
Our multi pronged focus on fueling growth at pure players brick and click and DTC is clearly bearing fruits.
Now to our fifth strategic priority of expanding in China.
As I previously mentioned the country did some did see some resurgence of COVID-19 during the quarter, primarily towards the end of July and August with improvements in September.
Pleased to say that despite the mixed backdrop, our China sales grew close to 50% in Q1.
And amongst the top 10 prestige beauty companies in China could you sell out was again the fastest growing.
This is in part supported by the momentum of Gucci and Burberry on Tmall, which led to seven times growth in our Tmall revenues.
In addition, clearly continues to be a standout performer with sellout doubling year over year led by the ultra premium fragrance collection attribute this scale.
Achievement is particularly notable given the limited amount of media support that we have given clearly attribute the flow. However, we remain very committed to further building on this success to become a more significant player within ultra premium and artisanal fragrances in China as well as across the globe.
That now brings me to our outlook for the year.
Starting with our view on first half of fiscal 'twenty two.
As we have detailed we feel very strong revenue growth in Q1 at 34 like for like percent growth, which in particular was amplified by the shipment of the key fragrance launches I have just discussed yet at the same time, we estimate our prestige set out growth in Q1 was closer to the.
Mid teens.
In consumer beauty, we estimate selling and sellout, we're relatively aligned in the low to mid single digits. As a result, the total could you set out in Q1 was a little over 10%.
Given the strong cost reductions and profitability in Q1, we intend to reinvest more in marketing spend in Q2 to further boost our sellout during this critical holiday period capitalizing on the unprecedented momentum our brand succeed.
We therefore expect our prestige sell out in Q2 accelerated to high teens growth with selling a bit below sellout for lowering the Q1 pipe steel.
We also expect consumer beauty set out to accelerate to mid to high single digits with fairly in line to better.
In total this should drive low teens like for like growth in Q2 with sell out a bit higher from.
From a profit perspective, our strong gross margin and profit growth in the first quarter as further enabling guests to fuel the growth investments in Q2.
As a result, we expect to deliver first half of fiscal 'twenty to EBITDA growth in the low twenties year on year with EBITDA margins of approximately 100 basis points versus the first half of fiscal 'twenty one.
It's important to stress that our key brands in both prestige in consumer beauty.
Accelerating and in a unique momentum, which happens once in a decade, and we will not meet this unprecedented opportunity to gain market share and to lead and preempt new businesses in key regions. We therefore need to invest to secure our near and mid term growth that could be more.
And more profitable given the high margin nature of these new businesses and our outstanding profit delivery in Q1 is allowing us to do just that.
Moving to full year guidance now, we now expect fiscal 'twenty two like for like growth of low to mid teens above our prior guidance of low teens growth.
Keep in mind, our guidance assumes no significant deterioration in regard to a resurgence of COVID-19 and resulting restrictions or lockdowns. As we previously noted while we have managed inflation in supply chain related headwinds quite well to date, we will of course continue to monitor this situation.
We are confident that our gross margin attack plan that creative innovations, we are introducing such as renal kinds in three of Gucci flora and the continued premium amortization of our portfolio with Hugh gross margin expansion for the year as compared to fiscal 'twenty one.
Together, we expect fiscal 'twenty to adjusted EBITDA of $900 million at a minimum as we are intentionally reinvest in our gross margin gain in cost savings in our brands to maximize value and drive sustained momentum for the business into second half and of course beyond.
I'm also very pleased to announce that with significant progress made in simplifying our capital structure that we are now in a position to provide EPS guidance.
We've been very focused on getting a more solid handle on our underlying EPS and believe providing this level of guidance is an important milestone as we work toward becoming a more simplified company.
With that said, we target adjusted EPS of Zero point 19, two zero point 23 for fiscal 'twenty two.
Lastly, we continue to expect to end calendar 'twenty, one with leverage towards five times and further reduce this with leverage of around four times by the end of calendar 2022.
To conclude we are.
Entered fiscal 'twenty two with the goal of further building upon the great success. We delivered last year. We ended Q1 with sales ahead of our guidance. While also delivering very strong gross margin expansion, both sequentially and versus last year in the volatile inflation and supply chain backdrop.
As a result, we were able to not only reinvest in our growth initiatives, but also drive adjusted EBITDA growth.
Our Q1 exemplifies what we intend to do through this year as well as the debt Youre circle cycle, we have created with strong sales and gross margin excusing, our profit and Reinvestments.
Of course, we have no intention of slowing down our progress and we remain committed to aggressively executing on our strategic priorities. We intend to continue to demonstrate the tangible strides we're making across each pillar. We believe our brands are in a very unique position, which does not come around often.
And we fully intend to invest behind these brands and capitalize under amendment, we are seeing today.
Very much look forward to providing even more detail on our strategy and our objectives at our Investor day on November 18th to be held at the New York Stock exchange. Thank you very much for your time today, we are now happy to take your questions.
At this time, if he would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing the pound key.
Again that is star one if you would like to ask a question. We will take our first question from Stephanie with Nick with Jefferies. Your line is now open.
Thank you good day, everyone and we wanted to just unpack gross margins at that more came in quite a bit stronger than we would've expected. So maybe a question for you is as you look across the portfolio can you give us a little bit more insight into where you're seeing that margin strength and then I think as a follow up Loren. If you could just talk through some of our help us quantify some of that.
Key drivers I think you've listed five or six items that were contributing to the strength that you could just help us contextualize, where the bigger pieces of art maybe versus some of the minor pieces. Thank you.
So let's start with the first half. Thank you. So again, we are pleased very much with this gross margin performance in the quarter with as you've said, it's 500 basis points of improvement year on year and up 250 basis points from last quarter. So this performance was driven by a number of different I would say factors.
Of course, the first one and it's something that I've been insisting on since mid January 31 year ago, and more favorable mix, both from outsized growth from prestige as well as a favorable product mix within the different categories. If you take the example of consumer beauty, we have been operating in makeup.
On Mascara, which are more accretive and more profitable categories. Then lip color for example.
We've done a good work in terms of flowing you know and this is clearly in sync with the ability to say these are the projects behind which we're going to put our money in terms of media. So let's raise the volumes and we will meet this I would say new volumes raise because we are precisely investing behind what's what's doing well.
The other initiative that helps US a lot is the high ROI initiatives as Noel mentioned.
Fixed cost absorption on the increased sales. This is another element pricing and revenue management supply chain productivity and of course material cost reduction programs. So all these elements altogether hyper desk to do with this I would say strong improvement on gross margin.
Yeah.
I cannot if you work through it in detail.
So explain.
I mean, we are very disciplined in visa gross margin under <unk> and indeed, there are two two b category.
Number one is exactly what was explained so it's really what we are doing on the IMU on productivity on fixed cost and use already as a result last year because last year. We were already back you know even better versus fiscal 19 and above 60%. So we are really continuing the stream, but where we are winning.
<unk> is what I would call is video as a value part of the gross margin, which is really unit is above a bulb where exactly what sweet thing is really the mix and this is really something to continue and which we will amplify is a revenue management and obviously he is also pre.
So the recipe.
Of course part remains the same the disconnect in terms of value pump. This is what we are we are really amplifying we started and we will do even more in the in next to just one one last element to keep in mind is that we are going to continue this gross margin expansion.
All across Europe still keep in mind that gross margin in <unk> is always lower versus each one which is a typical seasonal.
Patterns that we have in the industry.
Yeah.
And so we will take our next question from Robert <unk> with Evercore. Your line is now open.
Great. Thank you very much and congratulations on a terrific quarter.
I was wondering if you could talk.
A little bit about.
Hum how 11 11 is shaping up.
You know a lot of seasonality in China, and despite that you did extremely well so how that shaping up.
As well as a.
Travel retail and then just just on the the cash flow side, perhaps.
Perhaps talk about the.
The seasonality of the cash flow and the fact that even in Q1.
The cashless cash flow is so strong do you expect that to continue throughout the year. Thank you.
Good morning, Robert Thank you for the question so again.
You've seen the results we posted around China, 50% of growth. This is really a great I would say a demonstration and TPI in terms of.
We have put in place in terms of the number of brands, we're going to focus on in terms of our ability to take you know a significant amount of sales on tmall, creating the right content behind the right brands with the right media investments, but I can tell you is that the sales momentum that we've seen during the first quarter is tracking.
In line to better than Q1 in the second quarter. So clearly this will help us to do a strong execution into 11 11 in China. So on the free cash flow you or maybe you can take the.
Absolutely.
And Youre right <unk> two to focus on this and as I mentioned, indeed, usually Q1 I would say is a weaker quarter in terms of cash flow generation because indeed this is a quarter, where we are building.
Inventory for Q2 and yes. This is what we are doing that at the same time.
You see in Q1 as a result of all the initiatives.
That we have kicked off for redeem.
Year ago, which is really a full program on cash flow optimization. We are working on 10 specific stream. So I will not go into all the details, but it's really that Greece will all the working capital items one of them is inventories where no one is better.
Breaking data monitoring is the forecast accuracy on the demand.
Doing that.
In fact, we were able to optimize.
Our inventory level, while keeping at the same time with very good service levels. So this is really something we are doing the same on the receivable with optimization on the overdue.
So <unk> and also on the working capital. So this is really that you see here you see the results in Q1 of all these initiatives and indeed each season.
Very great output and it confirmed thats why we are confirming that.
I'll start yet to know to move towards the five times leverage by end of calendar 'twenty one.
We are fully considered.
His objective is going to is going to be rich.
Total year of fiscal year 'twenty two.
We are not giving guidance on on free cash flow.
Additionally, based on what I have just explained and combined of course with the growth and combine them. So with the EBITDA that we are delivering.
We feel good that fiscal year 'twenty, two free cash flow should be nicely higher than fiscal 'twenty one.
Yeah.
And so we will take our next question from Andrea <unk> with J P. Morgan. Your line is now open.
Yes, hi, Thank you. Good morning, So just a clarification on the gross margin bridge I remember when you were talking about pricing.
As you saw opportunity should take more accidents, even prior to Covid, where states are jam initiatives, how much lease pricing should you take in the quarter and what do you like when you start to lap those price increases and my other real question is the SG&A ratio that they've come in below expectations understand.
I understand it that the team has emphasized the training reinvestment remains a key focus for the company is there any seasonality we should be.
Thinking of as you guide us for it to at least $900 million in EBITDA and and what is driving these SG&A leverage overall.
Yeah.
So definitely yes on pricing. So these are indeed, the initiatives that we kicked off already last year because I mean these are.
We'll say commodity inflation is not coming as a surprise so we and we flagged it already a few quarters ago. So that's why we initiated definitely some.
Price increase.
Sue explained several times and we are really in the industry, where you know a highly desirable brands and also the.
All the investments that we're doing on all the great assets. Thanks to that I mean, we can afford and we can implement indeed, some some price increase.
And the key in our business. So we continue this and we are on track to take even more pricing initiative in extreme and again all this is really plan.
As I said, we knew that.
There will be some material nutrition, and we know that it's still too continuing niche too. So we are also the plan is really to intensify and to accelerate <unk> price increase in extreme.
So on the SG&A.
So ratio below expectations, I will really make it into two parts. So number one is really to continue to tease out of the work we kicked off last year. So it means that we are very strict plans and it's possible in between so really optimizing a lot of of our fixed costs are not.
People cost or so like business services. So here we are continuing at the same time, we are making sure that even in the G&A that we are reallocating some resources and we are investing.
In the growth pillars iser markets I mean, we mentioned about China. For example, so we are making sure that we are investing also in the G&A.
In China or I'm, sorry in the key strategic pillars that Suez as explained so.
Again, it's not only when you go sweep G&A.
It's not only one the kit, we are making sure that our different areas and we are keeping good discipline, but at the same time investing where we need to we need to tune. The so this is definitely the way, we we monitor our fixed cost and mcps. The plan is to maintain.
Roughly similar to Q1.
Mid to high twenties.
For the year.
And so we will take our next question from Steve powers with Deutsche Bank. Your line is now open.
Yes, Hey, good morning, Thank you very much.
Maybe picking up on that thread a little bit.
The momentum on the top line.
And it's very evident.
Positive mix you talked about is also evident.
Making progress on productivity.
So on the cost side of the ledger.
Other hand.
Cost inflation is real.
Cost of I'm, assuming both of your supply chain is also.
Picked up a bit so when you talk about.
Investing incrementally.
And in the year can you frame for us how much additional flexibility.
And increments, how many you have.
In the plan as it stands today versus where you were when they first started giving them a message.
I'm a little bit.
Just trying to understand how much.
Incremental.
Again, the flexibility you have to invest behind brands to fuel further growth. Thank you.
Yeah.
Hmm I can't.
I can start really to give you a frame and indeed, the suits who can build on this.
Again.
To give you a frame and you see the Q1 results that we are over delivering on.
On EBITDA, we are over delivering on profit because as we have just explain thanks to gross margin and thanks to SG&A discipline. So so we are delivering a very strong quarter.
We are not giving guidance quarter by quarter, we are giving a guidance on this fiscal year on the total year.
And we say that we will deliver in <unk>.
<unk> $900 million EBITDA at minimum.
Because we are very intentional on reinvesting behind.
Brands, and where we have stronger Hawaii, so what I'm, telling you is we need to to answer your point is that yes, we have the flexibility and we are creating our same store owned flexibility and usage in Q1, and then we decide we soon and we as a management team on a regular basis, Okay, where we are.
Hawaii and we are allocating our resources when there is very strong at Hawaii and I can tell you of course and this is what sue was explaining that now we have a lot more and more initiatives with a very strong year, Hawaii and wear on Joes and sometimes we can see that.
Some tests and so on and not at the level. We are expecting we are also very disciplined that we keep the money and then we reallocate to activities, where you know there is a better return on investment. So again, let's be very clear we have the flexibility we are creating.
Flexibility and we are very intentional on reinvesting behind our brands.
And we'll take our next question.
Lauren Lieberman with Barclays. Your line is now open.
Great. Thanks, Good morning, Adam.
You went through a bunch of the recent successes in consumer beauty and the success, you're seeing early indications of what the relaunch of the major brands and repositioning.
Sales are still tracking kind of like I think eight ish percent of where they were in the first quarter of 'twenty, while prestige is comfortably above where you were back then so.
Just just curious if you could share whether its recent performance of some of the other brands that are not growing as fast as those have been repositioned or is it market recovery related about kind of what you see as impediment to getting back up to that.
Fiscal 'twenty benchmark for consumer beauty. Thanks.
Good morning, and thank you for the question and in fact, what I would what I would like to say is that I think we are we are in a way having figures that are in parity with what peers with consumer beauty businesses in mascara cosmetics businesses have been posting.
What we are seeing today is that the momentum.
Behind <unk>, which is the largest brand of consumer beauty is holding and I would even say is accelerating carvajal is growing both in sell in and sell out during the quarter and recent weeks of Nielsen's that you may have seen post quarter or.
Showing four weeks of market share gain including a strong <unk>.
<unk> eight market share gains recently and there is a lot more to come behind current girl for Q2, and probably for the remainder of the year.
On Max factor again, I've been describing the success we are seeing.
Just the beginning because we are just starting to see the visibility in stores and online and on television of the new I would say repositioning and already with this we are seeing market share improvement in 70% of our markets and Reno, which has secured its number one position in UK are ready with.
You know prior to the relaunch of the brand has been doing fabulous staunch with wonder extension in Mascara that's.
One of the best selling mascara on Venus since many many years and we just put on the market few weeks ago kind in three which is the I would say.
Implementation of the recipe of success of corrupt girl into retail, which is the number one brand in the UK and in many countries and kind of three starting outstandingly well. We just received the test results of the advertising that I've been sharing with you assuming it's ago and again, we are constantly and that's the good news.
Taking I would say the recurrence in terms of beating the best Kpis. So we're super confident that we're going to see an acceleration in Q2 in consumer beauty. That's for sure. So there is nothing today that I can share with you that would be in the way of disappointment versus what we have ambition or versus.
The work that we have been putting behind the brands every time, we put the repositioning advertising.
Media pressure et cetera, we see to deliver its just a question of time and you will see an acceleration in Q2.
And once again that is star one if you would like to ask a question. We will take our next question from Olivia Tong with Raymond James Your line is now open.
Great. Thank you.
So innovation really progressed volatile driver comprehend, particularly in prestige. So can you just talk a little bit about the innovation pipeline and how the development process has changed in recent years and then I just wanted to follow up.
Steve's question, a little bit can you just quantify how much cost how much higher our costs versus our plans coming into the year end and then to the extent there are profit upsides as the year progresses are there do you have bigger projects planned.
For that upside because youre already at 26% of channels on ANC piece, So I imagine, it's not going to come much higher than that thanks.
Yeah. Good morning, So let me start with the first part of the question around the innovation pipeline and how the process has changed in the recent tier as you know.
No we've been putting in place a <unk> strategy.
Two first points of this strategy, where number one stabilizing our consumer beauty business, starting with our cosmetics brands in Europe and in the U S and the <unk>.
In part was to how can we accelerate the growth in the prestige division, which we have demonstrated during this first quarter at over 30% of growth and this had three parts number one accelerating our fragrance momentum building.
Top 10 top 15 fragrance, which since going to be the case with Gucci thorough confirming our leadership position in mail prestige fragrances. This seems to be also the case with the hero <unk> hero and Calvin Klein decide big successes, adding a new growth engine, which is good she makeup burger.
Kathy cosmetics and the three brands are outstandingly growing if you think about Gucci makeup is triple digit growth. So in a way what you are seeing today in terms of growth and the way. We are operating behind innovation is very very easy to understand if you look back at the two.
Key first points of.
Strategic pillars. So we are really delivering behind what we have been describing in April and that will be describing in much more details next week in New York on November 18. So this was for the first part of the of the question around how we are dealing with innovation into the into the company.
Maybe if you want to take the second part which is around.
Our inflation inflationary impact on costs, yes, absolutely. So what are you guys. So indeed on the <unk>.
Again.
I explained.
A few times.
A few quarters ago. So what we raised is that indeed, we were assuming a 50 basis point impact related to cost in our gross margin.
And this is what I explained before so that's why we already implemented some price increase already in each one because we knew that <unk> headwind.
Edwin will come now what we are seeing indeed is that there is some amplification as we all know on this inflation and now it's about.
Size of 1.1 hundred basis points in our gross margin equation Makiya same story, we have.
Have all the plans in place and what they explained before is that we are a proactive efforts on pricing.
That we are going to implement in extra fiscal 'twenty two to keep mitigating inflation.
Inflation, but also.
Completely consistent with our journey of value creation, with our creative innovation and building, a better and healthier business and to complement Lauren's point I would really say that the pricing power of the company has been very well demonstrated during the quarter.
As most of the innovations be behind the clean beauty in mass or behind you know.
The new fragrance launches makeup theyre, all very very strongly accretive to the to the to the profitability of the company.
Really there, even sometimes being very very premium to the market.
Innovations are highly delivering in terms of sellouts are truly is a great confirmation of the desirability and the ability to price of our brands.
And so we will take our last question from Carla Casella with Jpmorgan. Your line is now open.
Hi, I just wanted to see how much for the cost savings that you achieved in the quarter and if you've got any kind of timeframe is a $600 million.
Cost savings achievement and then also does your leverage target.
By the end of calendar 'twenty, one and 2010 and it does include the add back for the go forward the remaining cost savings.
Okay. Thank you Kayla.
So on cost savings.
Indeed, so the 600 is the feeling is that we delivered last year as you remember 313 million savings. This year, we are confirming to deliver the 19 million savings and the rest will be in fiscal 'twenty three.
The 600 million savings will be delivered by <unk> and fiscal 'twenty three.
This is a plan we announced.
More than a year ago as you can see we are perfectly on track even better on these savings with a very strong Q1, we delivered $60 million.
In Q1, and we are confirming the 94 for this year.
I want to insist pursue related to the savings is also with one off costs, which are lower versus the initial plan and this is also a big lever.
Flavor to optimize our cash so perfectly on track and with very strong actions on fixed cost.
On trade terms and.
And also on all the items on covenants, we need to and it's part of the gross margin. So on number two which is the leverage target. So yes very good question too when we are seeing two five times.
Is it just an EBITDA net debt. So there is no add back in this calculation.
The add back is something that we are using only for the covenant calculation and then it's a different number but im insisting here that and it's two five times end of calendar 'twenty, one and towards four times the end of calendar 'twenty two.
Excluding add backs from these savings.
Great. Thank you.
And we have no further questions on the line at this time I will turn the call back over to MS choppy for any additional or closing remarks.
Thank you very much.
<unk> for your questions and we are Super Super excited to see you next week in New York on the 18th.
Not a lot of things that are new that you'd be super happy to discover about.
Our potential growth in the coming months and years. Thank you very much.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
And we are clear.
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Yeah.