Q2 2022 Coty Inc Earnings Call
Okay.
Good morning, Ladies and gentlemen, my name is Britney and I'll be your conference operator today at this time I would like to welcome everyone to Coty second quarter fiscal 2022 results conference call.
As a reminder, this conference call is being recorded today February eight 2022.
On today's call are C Darby Chief Executive Officer, Rob Murphy, a chief financial Officer, I would like to remind you that many of the comments today may contain forward looking statements. Please refer to <unk> earnings release and the reports.
And the FCC, where the company lists factors that could cause actual results to differ materially from these forward looking statements.
Except where noted the discussion of <unk> financial results and Cody expectations reflect certain adjustments as specified in the non-GAAP financial measures section of the company's relief.
Ladies and gentlemen, with the completion of the first half of fiscal 'twenty. Two it's clear that we are delivering on our short term objectives one unit.
Strengthening the foundation to achieve the medium term objectives, we outlined during our November Investor day as you recall, our objective is to make <unk> into a true beauty powerhouse, which includes sustainably growing our sales ahead of the PC market growing our profits ahead of sales.
And secondly.
Deleveraging our balance sheets.
The results of the last six months first confirm that we are well on track with these ambitions.
The virtuous cycle, where strong revenue growth combined with gross margin and cost initiatives.
<unk> profit expansion and strategic Reinvestments, which in turn drive future growth momentum.
There are a few takeaways I want you to live with our first half fiscal 'twenty, two revenues and fit out both grew in the mid teens.
Distance with our expectations, we had flagged last quarter that our focus in Q2 was on driving sell out as revenue trends in Q1, and Q2 were impacted by the timing of launch.
And this is exactly what has played out and importantly, the growth we've achieved in the past six months as well.
<unk> had very strong growth in consumer beauty as we saw clear signs of turnaround in our key mass cosmetics brands second we had great performance on profit and cash we saw exceptional growth in our gross margin this quarter with close to 600 basis points of growth.
Year on year, another 100 basis points of growth versus the first quarter.
Achieving this against an increasingly difficult inflationary backdrop speaks to the strength of our business model and the many levers we have at our disposal.
Steadily drive our gross margin higher in the coming years.
At the same time, our strong focus on cash generation and deleveraging has allowed us to reach leverage below five times.
Of expectations.
Third we continued to execute and make progress across each of our six strategic growth pillars.
The particular highlight this quarter was consumer beauty, where for the first time in five years the business grew market share on a global basis.
Additionally, as part of our strategic focus on becoming a leader in sustainability.
To share that we've recently completed our first production run using sustainable up cycle of ethanol, putting us ahead of schedule against our goal to integrate sustained about ethanol into a majority of our fragrance portfolio by 2023.
I will share more details on our progress across each of our strategic pillars later on the call.
For the strong and steady set out growth in the mid teens through the first half of 'twenty two sets the stage of our revenue growth to accelerate in the second half of 'twenty two and we are already seeing this play out in the Costar to date sales trends in Q3. This in turn drives our increase.
22 sales outlook, coupled with higher EPS.
I will now take a few moments to cover our revenue trends during the quarter before the Opex you through our financials and then ill finish with an update on our strategic progress and our outlook.
Our Q2 revenue grew 12% like for like in line with our guidance.
Following the strong Q1 impact when we launched with our key initiatives Gucci floor, a gorgeous Gavin and Burberry CLO as we discussed on the last earnings call. While the revenue trend was expected to be choppy the underlying sellout trends were consistent and our goal was to set up our <unk>.
Investments in the highest.
Opportunities during the critical Q2 holiday period to huge acceleration in our sellout and prepare for a strong Q3 results played out as expected. Our overall has set out to improve from the low to mid teens in Q1 to mid to high teens.
In Q2, resulting in full alignment between our first half fiscal 2002 sell in and sellout in the mid teens.
And these selling and say those results were achieved even as we continued to reduce low quality sales underpinning. This six months trend is 21% like for like growth in prestige fueled by the tremendous success of Gucci across fragrances in makeup.
And Marc Jacobs.
The sales growth level, we saw over the past six months as in prestige brings us on par with other key prestige beauty players showing that <unk> is executing.
Executing on par with the industry, even as we remain under indexed to skin care in China.
At the same time consumer beauty also registered strong 8% like for like growth in the first part of 'twenty two.
Driven by broad based growth and a clear turnaround of our key personnel big brands Covergirl, Rimmel, Sally Hansen and Max factor.
Moving to sales by region.
We saw growth across all regions over the past six months says, though traffic retail the U S and China continued to outperform the Americas region grew 15% like for like in the first half and 9% in Q2 supported by strength in the U S, Canada and Mexico.
Net sales rose, 14% like for like in the first half and 13% in Q2 with growth in all key markets as well as local travel retail the Asia Pacific region increased 22% like for like in the first half and 16% in Q2 fueled by China and local.
Travel retail.
It's worth noting that we are.
We have now a new growth engine materializing in Asia Pacific as clearly aggregated is becoming a key brand next Gucci in Asia Pacific travel retail as a reminder, the pricier phasing dynamics in Q1, and Q2 impacted the cost or the sales dynamics in each of.
Our region as well.
I will now hand, the call over to the hall to take you through our financial results.
Thank you Sue.
I am very pleased with our second quarter results, which continued our strong pace of profit delivery.
EBITDA coming in nicely ahead of our guidance.
This quarter again demonstrated yet to call we set out to create.
Starting with gross margin.
Our Q2 adjusted gross margin of 64, 6% increased by nearly 600 basis points from last year, and 120 basis points from last quarter.
This marks our fourth consecutive quarter of gross margin above 60%.
Our gross margin performance was driven by margin improvement in both the prestige and consumer beauty business.
Which were supported by favorable mix.
Pricing and revenue management.
Pvt, and IMU improvements.
And higher absorption on increased sales volume.
As we have previously detailed we continue to be very focused on further driving gross margin expansion. Both this year and in the years to come.
However, please note that we do not expect to experience a similar level of gross margin expansion in the back half of the year.
We did in the first half for a number of reasons.
First seasonally so second half is a lower gross margin given the lower sales volumes as compared to the first half.
Second in the <unk>, we will be lapping onetime gross margin benefits of over 100 basis points that we don't expect to repeat each year.
And finally as indicated before we expect inflation impact to step up in the back half of the year.
Despite this our multi pronged multiyear gross margin at a glance.
He is in place while we also expect further benefits from positive channel category and regional mix changes.
Gross margin expansion remains a key towards driving the virtuous cycle, we have created.
I would like to now give a brief update on the topics of inflation and supply chain.
<unk> continues to successfully navigate this uncertain environment.
In fact, since we last spoke our outlook remains largely unchanged with strong mitigation efforts in place on both components and any potential supply chain bottlenecks.
On this point.
Not too sure that Walgreens has awarded the 2021 supply chain the world speaking to the exceptional coordination between our supply operations and commercial teams in a difficult environment.
On freight the majority of our freight is under contract.
Correct and not reliant on spot markets, while our teams also proactively increased transportation lead times and secured capacity in Atlanta.
Meanwhile, we are mitigating the impact of material inflation with pricing actions as well as through our material cost reduction program.
Importantly, these actions resulted in a very solid Q2 service level in the low nineties.
While also delivering revenues in nine gigawatt guidance on gross margins that were <unk>.
590 basis points.
As highlighted last quarter, we continue to expect the impacts of inflation to be higher during the second half. However, we remain confident that the actions. We continue to take will allow us to deliver on our higher fiscal year 'twenty two sales outlook.
So delivering gross margin expansion for the year.
Moving to our marketing investments in the quarter.
During Q2, we felt a stepped up our A&P investment to approximately 50% of sales which is in line with the plan we discussed last quarter.
Ian CP label will increase to capitalize on the strong momentum of our key brands in both prestige and consumer beauty.
This was undoubtedly so right decision.
Evidenced by the strong sellout performance Sue described earlier.
The increasingly NCP continued to be driven by working media, which more than doubled year on year.
Importantly, we are still investing behind the highest value opportunities, while maintaining flexibility to reallocate investments as needed.
Specifically, we continue to invest behind our key innovations, which are already successful such as very hero and Gucci Phil.
So continue to expand into white space opportunity such as prestige makeup in China, where we grew six times the market rate.
<unk> invested behind our key consumer beauty brand, resulting in a true turnaround of the business.
As we head into the second half, we fully intend to keep this momentum going with a high 20% page CP level.
During Q2, we continued to execute our cost reduction program, we achieved on those or labor, allowing us to fund marketing and derive profit growth.
Specifically, our fixed cost declined by 5% year over year in Q2.
We achieved over 40 million of cost savings in the quarter with a primary driver.
Gross margin and lower fixed cost.
Our fiscal 'twenty, two we remain on track to achieve over $90 million of net savings, which we have fully developing this first half.
<unk> is a very strong frontloaded savings, we have achieved year to date I want to explain the dynamics of our cost savings program in extreme.
As we discussed last quarter, we expect neutral net savings in second half of fiscal 'twenty two.
As our cost savings initiatives were concentrated in the first half.
However, beginning in fiscal 'twenty three.
<unk> of new savings initiatives.
Two key team.
At the same time, we expect to more than offset the increased inflationary impact in <unk> through 'twenty two.
Portfolio mix and pricing actions.
Patently, even as we monitor the inflationary impacts on different areas of our P&A, we remain on track to achieve our fiscal 'twenty four savings target of $675 million as we continued to implement our all in to win savings program.
Paul with mix and pricing initiatives in fiscal 'twenty, three and beyond.
Moving to our profit delivery in Q2 and H one.
For the quarter adjusted EBITDA increased to $311 million with a flat EBITDA margin, which is particularly strong in light of EP, increasing by 10 percentage points and reaching 30% of sales.
For the first half of fiscal 'twenty two.
Adjusted EBITDA delivery was a 600 strong rising 30% year over year to $590 million with a margin of 20%.
The significant improvement in profit was a result of strong sales growth.
Robust gross margin expansion and continued fixed cost leverage.
The performance, we delivered this quarter and in niche one demonstrates our virtuous cycle and improved financial trajectory. We are now on.
Now moving to our EPS, which included the following drivers.
Adjusted EBITDA for Q2 of $311 million.
Depreciation of $76 million net.
Net increase of $61 million in.
Income tax expense of $16 million.
Waiting to a tax rate of approximately 10%, which was below our expectation due to a reservation of default.
Stemming from a change in Dutch tax law.
And $2 million of adjusted pre filled dividends.
As a result, our Q2 diluted adjusted EPS and <unk> 17.
Which includes two <unk> from the aforementioned certain tax benefits.
For the first half of fiscal 'twenty, two so diluted adjusted EPS totaled <unk> 26 cents.
While not included in our adjusted EPS.
During the quarter with a fair market value rose by $128 million.
Looking ahead to Q3.
And as a remainder of fiscal 'twenty, two I would like to provide some more context on the different drivers of our adjusted EPS.
First we continue to expect interest expense in the mid 200 million for fiscal 'twenty two.
<unk> lowered our net debt balance offset by somewhat higher cost of debt post the recent refinancing.
Hey, Ken.
We anticipate an adjusted effective tax rate for fiscal 'twenty two in the low 20 percentage level, an increase from the 18% effective tax rates in each $1 22, as we anticipate some discrete tax costs that we helped EPS by approximately 1% in <unk> 2002.
However, we note there is a high degree of uncertainty with the effective tax rate projection in the current environment.
On the preferred dividend.
<unk> <unk> VP of <unk> ownership on the $146 million of preferred shares outstanding.
You mean, no further conversion of these prefill chair, we expect a roughly $3 million quarterly run rate for the preferred dividend going forward.
Moving to free cash flow.
I am very pleased to say the free cash flow delivery in Q2 and during the first half was exceptional.
In addition to the strong profit delivery.
Made improvements across receivables inventory and payables.
All key work streams of the Kestrel and peaks program.
We continue to have very strict management of Capex and our one time cost.
As a result, Q2 free cash flow came in at $408 million.
Free cash flow for the first half was $649 million.
During the second half of fiscal 'twenty two many of these work streams will remain in place with older two comments, which should partially mitigate the typical seasonal cash outflow.
Moving on to our capital structure.
We ended Q2 with the financial net debt of approximately $4 45 billion, which is a decline of about $500 million from Q1.
This decline was driven by two key factors.
The strong free cash flow generation as well as approximately $117 million of cash generated primarily from the sale of real estate assets and to a lesser extent receipt of contingent consideration related to Veda business tax credit after final.
<unk> of the purchase price true up related.
Related to the available business thing.
As a result, we.
And the calendar 2021 with a leverage of four nine times.
I am proud to say this came in ahead of initial target, which was to end of calendar year with leverage towards two five times.
Factoring in our 26 systems takeoff Villa at quarter end value of approximately $1 18 billion. We ended the quarter with economic net debt over one three pumps 28 billion.
Right.
We believe we have numerous work streams that will allow us to reach our four times leverage target organically.
I am pleased to say that entering Q3.
<unk> has completed a refinancing of existing debt in order to fund our shareholder distributions.
We expect this will result in approximately $175 million of cash proceeds to cookie.
We intend to utilize these distribution plus excess cash on the balance sheet to redeem our 2023 euro $550 million in secured bonds.
Following the times as a bond called premium drops to power on April 15th 2022.
This is clearly a significant stake in helping us reach our mix leverage target of approximately four times by the end of calendar year 'twenty two.
This moves us further towards our ultimate goal of two times like calendar 'twenty five.
Before I hand, the call back to Sue I wanted to briefly provide an update on the <unk>, Brazil, IPO, we had been exploring.
In light of the current economic volatility and adverse financial market conditions in Brazil, we have decided to withdraw from the IPO registration application process for the time being.
We'll continue to monitor market conditions evaluating future possibility to proceeds with a partial IPO in Brazil in the new opportune window.
I will now turn the call back to <unk>.
Thank you.
We continue to make strong tangible progress across our six strategic pillars in Q2 with many additional initiatives in the works, let's start with our first strategic pillar stabilizing and growing our consumer beauty brands.
I think the charts on this slide perfectly encapsulate the lightning speed with which we have turned it around this business something that few would have anticipated a year ago.
For the first time in five years, which is as far as our internal debt that goes but likely much longer with coty consumer beauty business has not only stabilized share, but is gaining market share on a global basis.
This is underpinned by strong momentum in our color cosmetics brands, which together account for roughly two thirds of our consumer beauty business.
While the global mass cosmetics category grew in the low to mid single digits, our sell out grew over 10% in mass cosmetics and high single digits in the mass beauty overall.
As a result over the past three months, we have gained roughly 60 basis points of share in the mass color cosmetics category globally.
Close to 100 basis points of share in November and December .
At the same time, our Brazil business maintained momentum with double digit sellout growth supported by key new innovations behind <unk> beauty care and risky.
Hello.
While the path to sustained consumer beauty expansion may not be easy now.
These exceptional results confirm that our consumer beauty brands are as relevant as ever and with the right products communication strategy in store execution and the right teams, we can truly excel.
Drilling a bit deeper into the momentum we are seeing in mass color cosmetics why.
While we began our consumer beauty turnaround with our biggest brand covered Bureau, I am proud to say that our four biggest cutoff cosmetics brands Covergirl Rimmel, Sally Hansen and Max factor.
Now all gaining market share on a global basis as you know we've announced that Colombia in March of 2021, with new communication assets, New brand ambassadors and doubling down on Qatar gas heritage in clean makeup and skin five makeup.
Now roughly 10 months into the launch <unk> has gained market share in 2006 of the last four weeks.
And the reason that we began the brand's positioning over the summer with a new brand activities at <unk> and the new communication, our revamped communication and execution are clearly resonating with consumers in key markets. As Rina is now winning share globally led by share momentum in the UK, Australia, Spain.
And Poland as a next step we have leveraged the cutoff grade book for email with the recent launch of remote clean and Zika makeup line called time and Sri.
However, it's important to note that the line began appearing on fixtures in key markets in January with the TV media support beginning now in February so the benefits to remain market share momentum from the revolutionary launch will only come in our fiscal Q3.
On Sally Hansen, the brand was already successful over the past couple of years and we have continued to fuel this trend through innovative launches like it takes two and supporting key franchises like miracle gel and instead drag as a result of the handset is gaining share across the UK, where it has recently.
Taken SC as.
As well as gaining share in Australia, and Spain. Finally, Max factors repositioning began in the fall with Priyanka Chopra joined us as the new brand Ambassador.
The revamped communication and in store execution, coupled with our revamped faced affinity foundation have returned and Max factor for market share gains globally.
The UK, Spain, Poland and Russia.
To reiterate while we do not anticipate a linear path of share gains for every brand in every market. In every month what is quite clear is that we have developed the right come at us and playbooks to turnaround our consumer beauty business.
And less than a year into our execution, we are already seeing strong success.
Turning to the second pillar of our strategy accelerating our luxury fragrance business.
To highlight here that the market backdrop for prestige fragrances.
And it's quite favorable even as trends vary by region.
Basically we estimate the global prestige fragrance market is up double digits in Q2, both year on year and versus 2019. This is supported by very strong momentum in the U S and China.
Importantly, while we are monitoring the U S market closely as we start lapping the high growth figures of the prior year, we have not yet seen any signs of slowdown in China. The fragrance growth is being driven by Chinese consumers truly discovering the fragrance category, which is often viewed.
As an extension of luxury fashion.
We see the fragrance momentum in China, continuing for many years to come given the incredibly low fragrance penetration in the market and see a clear path for China to move from the number five fragrance market today for the second market in the next few years.
On the other hand, why prestige fragrances are up solidly in Europe year on year. The category is only now stabilizing versus 2019, suggesting that as the European pockets. We open there is momentum in store for the fragrance category in Europe .
Early in travel retail while the year on year growth remains robust with two year trends are still negative which will also provide another leg of growth for fragrances in the coming years.
Against this attractive backdrop cookies launching market leading innovation.
Gucci Flora gorgeous Gardner is performing exceptionally well and resonating globally.
The fragrance was only launched in early 2021 Gucci store are gorgeous gardenia is officially the number one fragrance launch in the U S and Canada for all of calendar 2021.
This marks the second consecutive year, where cookie has claimed the number one fragrance launch in the U S with Marc Jacobs perfect holding the number one spot in calendar 2020, which.
<unk> has also truly resonated with Chinese consumers, becoming the number seven CMS fragrance on Tmall in December .
The mass fragrance side burglary hero, which also launched in early fall as claim the fourth spot in the U S. Amongst mass fragrances launches in all of calendar 2021.
Similarly on chemo align became the number seven mass fragrance on Tmall in December .
Geared at Gucci Flora and delivery hero are on track to become global fragrance icons and this speaks to the new capability and operational discipline, we have built within <unk> over the last year and half with a team of experts identifying the right profiles and pipeline of innovation and vigorously.
The testing all fragrances to reach both industry, leading scores before launching in markets.
And these enhanced capabilities in our fragrance business with assure that as a leader in fragrances cookie success rates for launches would be higher than the industry and <unk> success rate historically.
Part of the second strategic pillar is also becoming a key player in prestige makeup and we are making very strong strides here.
Our prestige makeup sales in the first half of 'twenty two approximately doubled year on year led by Gucci makeup and Kylie cosmetics as you can see individuals on this slide showing the Burberry beauty store in China, we are rapidly growing our footprint for our prestige makeup brands with eyecatching distinctive stores.
Encounters differentiated packaging and communication and locally relevant designs such as the Red Tiger to coincide with Chinese new year. As a result of this momentum prestige makeup grew from less than 3% of our total sales in the first half to over 4% of our.
Sales in the first half of 'twenty, two and we continue to target approximately 10% penetration by fiscal 'twenty five.
Basing on our biggest opportunity in prestige cosmetics Gucci makeup.
Both in Q2 and in first half 'twenty two Gucci makeup sales more than doubled year on year.
And as we've discussed it at our Investor Day, our focus is on growing our prestige makeup business in a profitable way by opening highly predictive flagship stores in the highest traffic locations and supplementing this with robust E. Commerce sales. Our Gucci makeup business in the U S is a clear example, but.
This strategy is working.
In recent months, we have doubled year on year, the number of Gucci makeup doors.
But we are also seeing that comparable store sales are doubling as well with <unk> accounting for over 50% of the sales in China Gucci remains a highly desired brand as evidenced by the long lines you can see disposal outside of one of our Gucci beauty locations.
Our strong Activations have driven our Gucci makeup sales in China to three per year on year in fact, as we advance our strategy of building, which she into a truly two axis brands. Gucci makeup sales in China, now exceed which sheet fragrance sales.
Turning to our third pillar building out our skincare business as we highlighted during our Investor day, we see fiscal 'twenty three as the year of skincare acceleration for cookie.
In the meantime, we are laying the foundation for strategic skincare initiatives, let me start with our strategic focus brand Doncaster.
As you know our strategy to turn on gas bearing to our scientific skincare brand extending in the repair and protection is focused first on Hainan and mainland China.
We have been actively opening Lancaster counters and focused in Hainan with beautiful fixtures such as the one you see here, we hosted VIP events with leading dermatologists celebrities and key opinion leaders, while also engaging consumers with retail tenants and we are seeing this.
Efforts translates to sellout.
Since opening the initial three doors in high 90 in May 2021 on Castex monthly sales there have nearly doubled as of December .
This confirms our view that with the right support and activation the lung cast our brand equity and credit Crunch truly resonate with Chinese consumers at the same time in mainland China noncash debt has become China before our second exclusive brand with strong double digit sales growth in the region.
<unk> periods.
We are also progressing our skincare ambitions with the next key milestone the launch of Covergirl skincare.
You'll recall, we first announced the launch of <unk> first ever Skincare line in November at the same time, as we announced that America ferrera as the newest Covergirl brand Ambassador last week, we formally unveiled the new language campaign with America Ferrera in both English and Spanish.
To coincide with the national rollout of the coverage gap clean fresh skincare line wherever the brand is so let's take a look at the new campaign video now.
We are about to change beauty.
That's helpful.
Okay.
Our interest.
Interest is included.
Susan.
At this time.
No.
Paul.
Sure.
Hello.
Okay.
Hi, Seth.
Please go.
Got it.
Brain will beautiful.
I want to emphasize that we protested the current gas skincare lineup communication and campaign extensively and have seen exceptional results on our tests. We are excited about this new initiative for <unk> and we look forward to updating you on the initial results of the next earnings call in May.
Turning to our fourth strategic pillar building, our e-commerce and direct to consumer expertise focusing on our E. Com results. We continued to make strong progress with E. Commerce sales in the first half at 16%, including particularly strong growth in consumer beauty as a result, our E com penetration for the <unk>.
First half, reaching high teens, including mid Twenty's penetration in prestige and approximately 10% penetration in consumer beauty.
However, as you've heard from John's a knee our chief Digital officer in November our digital transformation encapsulates so much more than just E com and we've made many strides across multiple areas over the last few months.
As part of our partnership with perfect car today, we announced an advanced virtual try on tool for Sally Hansen, allowing consumers to see hundreds of Sally Hansen shades on alive moving image of their own hand, before making their purchases. We have also been doubling down on beauty advisor live streaming across.
Our key markets training, our <unk> to.
<unk> with our client base through digital storytelling and brand building and this is driving real results. For example in the U S. We have successfully participated in the program by Amazon The Amazon Holiday gift guide Lifestream, with Covergirl, and Sally Hansen, resulting in $1 6 million views and three.
Million impressions.
Our very strong sales results on Tmall in December where in past fueled by our Bas, whose life streams contributed to a double digit percentage of our chemo sales up from single digits in previous months and recruited thousands of consumers to our CRM leased this mix.
Not only is less reliant on more promotion that life streams by the high profile live streamers, but also elevate the image and quality of our beautiful brands moving them to China, We continue to make strong progress on the fifth strategic feeder.
Following a very strong Q1, we maintained strong double digit sales growth in Q2, even as the resilience of Covid in parts of the country led to slowing beauty sales broadly in fact this work as the second quarter in a row with Coty prestige business sellout was the fastest growing amounts.
The top 10 beauty companies in China, our Q2 prestige setup grew over 30%, which is six times the growth rates of the prestige beauty market wide in overall calendar 'twenty one hour per SKU set out was four times faster than the market.
Our chemo revenues in the quarter grew over three times year on year and I'm proud to say that only 10 months after launching the brand on chemo Gucci Richard the number 10 spot on Tmall in December .
All of this gives me strong confidence that we have the right brands people and capabilities to win in China and to reach our ambition to drive China sales to 10% of our total revenues by fiscal 'twenty five.
That brings me to our outlook for the year.
We have detailed how our sales in Q2 reached mid to high teens and how January like for like sales growth accelerated from Q2 levels to plus 13%. All of this gives us confidence that revenue growth should accelerate in the coming quarters, and we now expect Q3 and overall the second half of 2002.
Like for like sales growth in the mid teens.
At the same time Forex is becoming a more serious headwind with an estimated 3% to 4% negative impact to our sales in the second half of 'twenty two from a profit perspective, while we had spectacular gross margin performance in the first half of fiscal 2002 as Ron discussed our gross margins are usually.
Secondly, lower in the second half compared to the first half while the year on year growth will be constrained by one time benefits in the prior year and a step up in inflation.
As a result, we would expect fairly limited gross margin expansion in the second half 'twenty two as compared to the prior year. However, when you couple this with the fantastic 530 basis points of adjusted gross margin expansion in the first half of 'twenty. Two we continue to expect a significant uplift in gross margins.
For fiscal 2002 as compared to the sixties in fiscal 'twenty, one moving down the P&L. Following the active reinvestment in Q2, we would expect <unk> levels to normalize to the high Twenty's and theirs.
As I mentioned on the tax rates, we expect some discrete tax headwinds in the second half of 'twenty two to fiscal 'twenty two adjusted effective tax rate in the low 20 in total we have six fiscal 'twenty two like for like sales at the upper end of our guidance range of low to mid teens growth assuming no.
Significant deterioration in the global Covid situation or macro environment.
We again comfortably confirm our fiscal 'twenty adjusted EBITDA of $900 million at the minimum.
Constant currency as we continue to monitor cost environment, while also fueling growth initiatives.
Here, we would note that forex benefit our benefited our first half EBITDA by approximately two 5% or $11 million in the first half while in the back half. We currently expect a foreign hurt a progressively similar order of magnitude or a mid single digit percent, which in total should drive.
Relatively limited Forex impact on EBITDA for total fiscal 'twenty two.
And with the strong delivery to date on EPS, we are increasing our fiscal 'twenty two adjusted EPS guidance to zero point 22 Zero point 26. This takes into account approximately one <unk> of net discrete tax benefits for the year, including a <unk> <unk> benefit in Q2, followed by a <unk> <unk>.
Expected in the second half of this Cisco.
Lastly, we continue to expect to end calendar 2022 with leverage of around four times with the expected $175 million or better distribution, a strong step towards reaching this target.
To conclude now we entered fiscal 'twenty two with a goal of further building upon the great success, we delivered last year and our first half results confirm we are moving full speed ahead. On this objective we grew sales and set up strongly in the first half with broad based strength across prestige and consume.
We delivered gross margin profit and cash ahead of expectations setting the stage for strong delivery for the total year, we continue to make progress across each of our strategic pillars with many more exciting initiatives ahead.
And the progress we've made is giving us confidence in an even stronger second half in short we are maintaining our pattern of consistent strong delivery as we progress on our ambitions to become a true beauty powerhouse. Thank you for your time today, we are now happy to take your questions.
At this time, if you would like to ask the question I would like to ask a question.
Please press the star and one of your assets I know you touched Homestar you may remove yourself from the queue at any time by pressing the pound key once again that is star one if you would like to ask a question.
We will take our first question from Olivia Tang.
Sorry, Olivia Tong with Raymond James Your line is now open.
Great. Thanks, Good morning I.
I wanted to take a bit deeper into EBITDA.
This quarter and your expectations for the remainder of the year, obviously came in nicely ahead of our expectations.
And your first half expectations.
But gross profit, obviously, meaning meaningfully better. So can you talk a little bit about what came in better than you expected and what you expect to continue into the second half.
You mentioned, obviously more tempered expectations in the second half, but I assume you still expect gross margin expansion in the second half just not at the same magnitude as in the first half.
I think to clarify that.
And then on.
On EBITDA.
Curious how you expect the message to the unchanged guidance I mean, I realize the upper end of the guidance now.
It is open ended but to the extent that you have gross margin upsides.
How do you think about whether you choose to keep brand support levels at that potentially at that 30% level in fiscal Q2.
Your view on how much flex do you want to leave.
That's at higher rates, if you choose and the flexibility in case other things happen. Thanks, so much I appreciate it.
Okay.
Thank you.
So I will start to need to be with the first part on on Q2, Indeed, why I mean, what gaming and better than expected. So <unk> I will give you a few of the key drivers number one is growth.
It's definitely end and you'll remember during this today.
When we explain how we are 19 and as a flywheel.
Definitely that.
<unk> with growth.
And how how do we fuel the growth is really with the gross margin expansion and at the same time, we keep strong DCP Nancy discussed. So these are definitely the two in jeans gross margin so as.
Named suites.
Driving this gross margin expansion.
So it's mix.
And we explained also in Q1, so we continue.
All of the drivers prestige prestige makeup China equal math skin.
Skincare. So all wet to you know we are building is really accretive falls in each I want also to comment which is super important.
Not only category need seats, and so we deemed as a category and I want to mention on consumer beauty.
Innovation that we are kicking off in consumer beauty. They are very accretive in terms of gross margin. So it's really combination of all these initiatives expanding gross margin combined with pricing and revenue management. We started already last year. We continue we even on <unk>.
Year to contain inflation and further.
As we keep working of course on productivity on all initiatives as part of your all in to win initiatives, though gross margin is really a key component key element of our equation fixed costs as we started last year and we continue minus 5%.
In Q2, and then shooting MCP.
Sure I mean, we are not to a level of 30% of niche of the new <unk>.
So it's really the combination of all these elements discipline on gross margin fixed cost shooting Union CP media and then generating groups. So that's <unk> <unk>.
And now definitely moving moving Twitch too.
Indeed.
As you know gross margins there is a seasonality on the gross margin on page two is is lower gross.
Gross margin is lower than each one.
<unk> is a key element is that there is a seasonality from a net revenue standpoint, which is and so on.
Volume number two next year, we are doing one time help of about 100 basis points, So which is creating a swoon hi, Dave.
And inflation, indeed will even continue of course in the <unk>, but at the same time, we have all the pricing.
Application, so as we see H to gross margin expansion will not be at the same level as we experienced in each one which is really tremendous.
The result, but on the total year of course gross margin expansion will be will be significant. So that's that's really important to understand this.
The model of the.
<unk> Q2, and where we are moving to win in.
<unk> now taken.
Second question, which is.
EBITDA guidance.
We confirm our guidance what we shared last time I mean, we constructively.
<unk> 902 minimum.
And we continue to display we included these clinically DCP and gross margin DCP on fixed cost and fueling fueling the growth.
To expand share of a lot of very concrete <unk>.
<unk>, where we are seeing some success market share gain both on prestige and consumer beauty. So we continue this model and shooting shooting to support.
Again always in a very pragmatic approach always with GPI retail loan investment and we don't compromise on the way, we allocate them on that.
<unk> disciplined rigor that we are keeping and of course I mean.
Keeping a strong item inflation and managing through pricing revenue management in retail.
And so we will take our next question from Jeff <unk> with Jefferies. Your line is now open.
Thank you good morning, everyone.
A question for you and this is really more contextual, but I'm curious how your conversations with your retail partners are evolving as you outperformed the category are you finding that theyre coming to you for new opportunities for shelf space or promotional events. So maybe just give us some context of how those conversations are changing and evolving and then Laura one for you is just on the <unk>.
Nancy.
In response to Olivia's question, you talked a little bit about the dollars and percent changing in the back half, but can you talk about that in relation to your accelerated sales growth targets are you finding more efficiency out of your ANC piece do you feel like you can pull back a little bit as a percentage of sales, but you can still see acceleration in the overall sales.
Our formats. Thank you.
As I assess the good morning, everyone. So this is <unk> speaking now.
Yes, that's a very interesting question that's true that we see very I would say a strong change in the discussions we're having with retailers since now I would say.
Our year end.
Accelerating if I may say like this.
See a lot of incredible opportunities given our way of creating innovation again.
Idea is not to launch just another mascara or another moisturizer <unk> vision is to build categories hand in hand with retailers and this is precisely what we have we have been doing on consumer beauty and this gives me the opportunity to again insist again on Hawaii Covergirl is regaining.
<unk>.
Visibility and market share gains in the U S. Since now our 26 weeks among the last four weeks, because we decided that we will category captain in a way the clean beauty category and we are doing now the clean skincare launch in.
In mass environment, which is another step into this direction of owning hand in hand with our partners in retail the category. We're doing exactly the same thing if I take the example of Gucci makeup Gucci.
Gucci makeup a lot of retailers see it as what's missing in the portfolio of brands. They say that they have on one side the heritage with your brands and the more younger in the niche brands and they think that Gucci has both at the same time, which makes the brand very unique and which makes us certainly a partner.
With our retailers in terms of creating new categories that are going to bring new consumers to their stores.
Not pleased I have to say that this crystallizes, even stronger online specifically for consumer beauty when it comes to retailers such as Amazon, where they are really helping us to build a clean beauty category online and the results here again of Cologuard also that we are seeing in the rest of the in Europe .
With the kind of three the latest launch from remodel are exactly a greater distribution of this vision that we are working hand in hand with indicators.
So it gives us a lot of opportunities and to conclude on this the rebirth of Max Max factor.
To take this example is also opening a lot of opportunity to use this brand thats a European centric brand a lot of countries around the world are now seeing the results very very successful gaining market share in a lot of countries very very strong image the only I would say Matt.
Our mass business brand that has pressed.
Prestige look and seal with makeup artistry at its heart and this is clearly I would say a destination that a lot at retailers around the world are willing to have in their stores.
So far the second part of our electronic jumped in.
Hello. Thanks.
So on MCP, so what's important for Steve <unk>.
To remind that our level of the NCP in Q2 with <unk>.
30%.
And this 30% drove very strong sellout what suite claimed is really this is a peak season, and we had again Beth with the equation with gross margin peaks US we were able really to feud consumer beauty initiative and prestige initiate initiative. So that's why we have stopped in Q3, we adjourn.
With very.
Thanks, Tim.
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<unk> here.
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The backup line.
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Tom.
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And we are live.
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Yes, Hello, we are back.
When will it get.
Alright, you're just starting your presentation your the answer to your question.
Okay. Okay.
We'll do it again I would do it again that's fine so.
So yes.
On your question on <unk>.
So starting first in the <unk> in Q2 was up to a level of 30%.
So with the significant increase in thanks to the high level of MTBE.
We could drive very strong spin outs in Q2, as we explained and translate into very strong reorder and sales growth in Q3 and Thats why we are talking generally.
Good shape and will amplify in Q3 and.
In Q4.
Key reason why you know we shared that we will be.
High end of our guidance of low to mid teens.
On fiscal year 'twenty two.
So.
Is <unk>.
<unk> patients so.
We are reviewing.
All the initiatives we.
We are testing the cookies as you know we are very disciplined teams and structures. So we are making sure that any initiative is built on strong again any reason the NOI.
Some tests are not at the level.
<unk> EBIT.
We simply work stops so that we make sure that any dollar we are investing there is a very very strong alloy. So this is a work we've talked to you last year, we see the results we continue and we <unk>.
If I even with discipline.
In both on prestige.
Consumer beauty.
That's why so this discipline combined with.
Level of HCP, which we remained in the high 20.
Image too.
All these elements are driving strong said our team in both prestige in consumer beauty.
Yes.
So we will take our next question from Andrea Teixeira with Jpmorgan. Your line is now open.
Hi, Good morning, Thank you and so I was hoping if you can unpack your like for like guidance.
Not to take away the merits of it but do you base in light of you are.
Two year stack deceleration in Q2 and I appreciate that obviously the sell out and sell in dynamics are or are not a straight line.
You guided also that January like for like with searching.
So your new guide implies mid teens for the full fiscal year. So your faith in your face how much tougher comps in Q4. So what gives you confidence and I know throughout this call you have given a lot of evidence for <unk>.
Now I'll choose and all of that so but if you can please unpack those dynamics in terms of sell in sell out in order to make your two year stack reaccelerate in the last five months of the fiscal thank you.
Good morning, Andrea So, yes, youre right.
Again this is the occasion in sector.
To quickly come back on the very robust results, we got during the second quarter on all metrics.
And also of course, you spoke about this the significant momentum beginning of quarter three with a gen being an acceleration of our sales suggests this Q2 that is quite clear what we see is that the sale out of the second quarter has been very very strong. It is exactly the story that we've told you.
When we reported the first quarter results Q1 was a pilot I would say caught up Q2 was set out Costa and there we have outstanding I would say results bids in prestige.
In the 20% growth in in mass market, where there has been a very very strong acceleration of our selling and sellout and you've seen the reason why because of Qatar gas continuing to gain market share and now something new Max factor.
And remodel next handset and gaining also market share. So this I would say optimism that we have because of this acceleration of <unk>.
Sales when it comes to consumer beauty. This is precisely translated into what you are seeing in the plus 13% in Jan and.
And we are clearly very confident that the second half will be in line with the fiscal year mid teens outlook that we have shared with you during.
That we shared with you during under press, earning release, so the confidence come from again, our prestige business since day since let's say, maybe two or three quarters is growing at a very high pace prestige fragrances are booming worldwide Cookie is doing very well on this area. We have the new engine of prestige makeup and their beta.
We encourage you cosmetics on one side Gucci and Burberry cosmetics on the other side, we do have the right brands to accelerate on this segment. We are starting a new story on skincare bids in.
In prestige with long cast step in mass with Covergirl skincare Thats, just starting to have advertising behind in Q3 next to a better much better oriented makeup brands.
Globally again cutoff guarantee met Sally Hansen Suezmax sector at the end of the day when when both divisions are growing in the same direction. It is giving us this confidence that there is no reason for us to.
To grow where we want to go last but not least key launches are arriving in Q3, one of them is kind of industry, which is the.
We applied the playbook of Covergirl clean fresh success to remodel and the rest of the world and this is going to be the biggest launch of consumer beauty in Q3, and Q4 advertising started a week ago or maybe a few days ago. If I'm not wrong. We have cologuard skincare also advertising just started in the U S.
A few days ago, and we have strong initiatives on prestige on Hugo boss, you know that the brand has just been launched yet on the fashion side. This is clearly going to benefit us globally on the beauty side I have to say and we are putting it at the moment a strong strong push behind.
But the <unk>, which is the younger franchise a bus we have a lot of initiatives on Gucci fragrances, we have a lot of initiatives on Burberry fragrances, and we have also carefully cosmetics launching new new initiatives. So overall, we have a kind of momentum starting at the beginning of this fee.
Go and we are accelerating this momentum thanks to.
New initiatives arising in Q3 and Q4.
Okay.
And we will take our next question from Rob <unk> with Evercore.
Your line is now open.
Great. Thank you very much.
I'd like to focus on on the U S consumer.
In consumer beauty and just try to get your sense of the state of the consumer given omni kron given food inflation.
What their appetite is for for new brands, clearly youre doing very well, but just trying to get a little more granularity on how you see the consumer.
And how youre positioned for the consumer with these sorts of inflationary pressures.
And then secondly.
If you could talk a little bit more about covergirl skincare, the kind of shelf space that you are getting.
Maybe initial reactions I know, it's really early but your initial reactions of how big that brand could be thank you.
Good morning, Robin. Thank you for your question so.
Yes, what we are seeing which is not just U S base I have to say that this is globally something we are seeing across many regions is that.
Consumers are more than ever looking for new ways to consumer beauty more online sales that brick and mortar is quite back quite strongly I have to say, which is great news for everyone. I have to say, but also on the consumer way of buying products, you clearly see that what I call <unk>.
Some people call it clean beauty some people call. It skinny side cosmetics beauty. This is where people are shopping more and more <unk>.
<unk> used to wear different ways of wearing makeup they could choose to wear more skincare and therefore when theyre back to makeup consumption, which is the big part of our business in the U S.
It is staggering what I call clean or skinny site options and Thats clearly explaining the back to growth and market share of cobalt go on one side with clean fresh.
Fresh skin.
<unk> with lost recipe and MS. Kara, but also on the other side with simply agents, which has been one of our most successful I would say growth engine for Covergirl in America, we do see we do see a re consumption in lip color mainly focused on <unk>.
Transfer long lasting deep color.
We have seen for example that are next to clean makeup and simply Hs on Covergirl Outlasts franchise for lids is doing very well without any kind of advertising, which means that when people are buying back color specifically for the deep area Theyre shopping into long non transfer products and we are seeing.
More or less the same trend on another of our prestige brands, which is Kylie cosmetics were the lip kit, which is really you know this max.
Long lasting almost non transfer keeps with the liner in a liquid lip color is more or less having the same performance quantities. When it comes to notwithstanding the mask. So clearly makeup business and specifically for US is back to growth. Thanks to these categories.
Prestige what we are seeing very strongly is fragrance consumption again. This is an ever high and we haven't seen any signs of slowdown I have to say of this category in the U S or anywhere else in fact, it's starting to pick up in Europe and in China. You know the story the level of consumption is so low.
They're in this market today is the.
<unk> markets around the world and in the last quarter, the fragrance category in China outpaced the growth of skin care category and the makeup category. So again there are many things that are in a way of giving a strong confidence that key categories, where the company is positioned on having the right I would say tailwind behind.
So when it comes to Qatar gas skin cancer space and we have very positive initial results specialty online I have to say what the brand started at Amazon.
<unk> been doing.
Tictoc using tictoc dermatologist et cetera, and the great News is that you know as you look to the ratings, which is a very very important item in skincare, our ratings up between $4 5 million ports for $4 seven on side five usually is fake ratings and therefore size, sometimes you need to look at.
It's not doing well, but four 5% to four seven is exactly what is considered as a very very strong ratings from consumers specifically on our stock product, which is the weightless what the cream. That's the one that's being advertised by America Ferrera. So Ah.
Very very confident that this launch is not only going to give us.
<unk> attractiveness to our discovery well in an even stronger way both makeup and skincare because the idea is also to benefit from the Halo effect of being stretched skincare. On makeup also but in terms of space. We are not having today additional space for skincare. We're starting in the makeup L which is us.
<unk> at the end of the advertising that you have seen you know if you could read at the end of the AD shop at that cobalt Gal.
So thats very clear for consumers, but this is a great opportunity I guess for us as I answered. The first question at the very beginning around the retailers from staff that we will use this to create categories hand in hand, with our retailers the clean skincare categories, clearly a key one and covered.
In the U S and hopefully other of our brands in the rest of the world are going to lead this story.
Okay.
Okay.
And we will take our next question from Lauren Lieberman with Barclays. Your line is now open.
Great. Thanks, good morning.
Two questions. One was I know you gave some color on productivity and cost savings from here, but I was just curious a little bit more detail on why there isn't more productivity slated for the back half I fully understand I mean, you were able to reach your targets earlier in the year, which is great.
But typically I think about company's programs are a bit more rolling in nature. So just looking for any additional color. There there was to offer on that point and then secondly, there's been management change since the Investor day, Andrew leaving for clearly a great opportunity to beat to be CEO of a public company, but I was just curious if you could offer anything on.
The thought process behind how you replace proceed any.
Timeline delays that might lead to with some with some of the activity with the kardashian brands. Thanks.
So maybe you can start with the first part which is around savings and I'll take the second part historically sure sure I will take him. Good morning, Laurence So on savings or basically is really that most of the initiatives. Indeed, so we deliver a lien in each one and we are a new type of key.
Shaky.
Which will really kick in beginning of fiscal 'twenty three.
Give you some concrete examples we have in our specific program, which is really your full review.
Material value in any region.
And this will translate into concrete savings in fiscal 'twenty, three combined with Soma procurement savings, whereas yield so as a team as node.
Two very very strong growth.
On top of this with the supply chain. We are also program on automation, which will bring additional savings in 'twenty three.
So would you mind talking about manufacturing as you know we made decision to close our factory on fragrance.
I mean, the plan is fully in place and we would see our social benefits in fiscal 'twenty three or are there elements for you to have in mind is that we will also benefit from lower depreciation so indeed strongest one.
Then we have really very strong initiatives. So thats why we are confirming the 600 million net savings plan by fiscal 'twenty three and on terms of 75, we announced for fiscal 2012.
So.
Quickly to complement the answer on this first part of the question.
We are continuing to do productivity gains during the second half, which are going to be used hand in hand with pricing to offset inflation for the second half and so its not oppose its really that its going to be used to offset inflation for the second half of this fiscal so to answer your question around management changes.
So first it's a great opportunity for Andrew.
So this everyone can understand it and it's a great opportunity for could you have to say.
This is clearly giving us the opportunity to take the next generation of leaders to the <unk>.
Highest level of the company.
That the U S business is run today bye.
Our former can adjourn general manager Adobe Ericsson has been with Coty for years and years. She is an outstanding leader and she is running today.
The number one country for coffee around the world and it's and she said women, which is I think something very very strong at Gucci.
Something we committed on earlier same thing in Canada.
Other women part of the management, that's becoming the general manager of Canada, and last but not least.
<unk> has become the CEO of the joint ventures, and Anna is with Gucci and myself since one year in the house and the relationship the AMA and myself are having with the Kardashians in New York is clearly big big assets into accelerating in fact, better relationship and I have to say that when you say is this going to delay.
In fact, it's exactly the opposite that May happen since we have separated the role of taking care of the biggest country of 30 around the world and taking account that joint venture so that today.
Vanessa and other teams around the world can focus hoodie to continue the huge potential we have been behind Kt and the upcoming Kim Kardashian skincare launch at the end of the fiscal year.
So thank you very much.
So if there are any concluding remarks now on your side, maybe that's the right moment for me I have to say that on Super Super proud of this six costa of improvements across all metrics. This is a really really I think something that makes the teams at Gucci Super Super proud, we're very very excited to be into this.
Half of the year and we are more even excited to start to prepare.
Skin care, yes, I call it which is fiscal 'twenty three thank you very much for your questions.
And hope to talk to you soon bye bye. Thank you bye bye.
This does conclude today's program. Thank you for your participation you may disconnect at anytime and have a wonderful day.
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