Q1 2023 Coty Inc Earnings Call
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Good morning, Ladies and gentlemen, my name is Gretchen and I'll be your conference operator today at this time I would like to welcome everyone to code each first quarter fiscal 2023 question and answer conference call.
As a reminder, this conference call is being recorded today November eight 2022. Please note that earlier. This morning, <unk> issued a press release and prepared remarks webcast, which can be found on its investor relations website.
On today's call are Steve <unk>, Chief Executive Officer, and Lori Laurent Mercy, 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 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 <unk> financial results and Cody.
These expectations reflect certain adjustments as specific fine in the non-GAAP financial measures section of the company's release with that we will now open for questions.
If you'd like to ask a question at this time. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star two.
And we'll take our first question from Ashley Hogan from Jefferies.
Hey, good morning, and thanks for taking our questions and congrats on the quarter. So to start it was nice to see China return to growth can you just talk about some of the drivers in the region and your expectations for recovery for the balance of the fiscal year.
Yes. Good morning actually this is <unk> speaking so yes, China is.
Slightly positive.
She is in a way good news for us even if this region of the word in this country is only 4% of our net revenue. So in a way we are protected against all the slowdowns that we've been seeing since a few months is now that are continuing and we do not see improving in the coming quarter and probably cocktails if I may.
But at the same time, starting from a slow base small day, sorry, Gucci is seeing a lot of potential upside in this country of course with the fragrance business again, I'd love to remind everyone that this business in this country is only 3% penetration and our brands. If you think about <unk>.
That's the number one does your brand that say for Gucci belt Lilly Calvin Klein Hugo boss. All these brands that are doing fabulous work globally, our growth and jeans for the near future and I would say solid future for the company of course as you can imagine on makeup again, we started you know with Gucci makeup.
He makeup in both brands had a fantastic start before Lockdowns and this is the category I would say that the most impacted by the recent series of Lockdowns and last but not least skincare, 70% of the Chinese market is beauty.
Huge potential for the company as you can imagine and there we are starting with the first round, which is noncash.
As you see during the presentation Lancaster in Hainan. So it's sales multiplied by five year on year, which is a great demonstration of the desirability of the brand towards the most demanding Chinese consumers. This is one second Lancaster, which is I'd say, Florida is a niche exclusive brand and your reason.
<unk> you know the number one new skincare brand, that's just behind China, and this gives us a great confidence specifically after the investors day that we have done the one month and then how is the go to start with this brand as the first I would say fall into the big huge skincare market in China. So this is the way I would do.
Scrubbed this situation in terms of how we are in a way.
Moving quite okay in China, Despite all this very difficult environment.
Great. Thanks, and if I can I just throw in one more we're starting to hear about some you know trade down and some beauty categories were curious if you've seen any of these trends within your consumer division.
Overall expectations for the consumer Division, if we do go into a recession.
Yes.
That's a good question that we hear a lot and honestly, we don't see any kind of trade down know slowed down by the way.
No trade down at all as you see our prestige division.
The way, we are running up to supply now.
The market is booming. This is what we like to call. The fragrance index, because our innovations are doing fantastically, well and we see it also in the way retailers are ordering from us, including sometimes ordering in advance during Q1 for the Q2 season. So on this part we don't see this in the secondary.
Is that our consumer beauty business as you've seen in the figures plus 12% like for like is doing also fantastically well and this is thanks to the great work that the teams that you have done behind the different brands, making sure to take these brands from large heritage brand that people trust into steel.
The same qualities, but not on top of this what we call food brands and I'd Love to talk about smart shopping goes so a lot of consumers are also shopping they're saying this brand is a cool brand and its proposals products that are the quality of other products that are more expensive and therefore, you can see that in both divisions the premium.
<unk> beauty beat the desirable one from luxury or the cool smart approaches in consumer beauty. This to premium is parts of the business are doing great and this is what explains in a way the results that you see across both divisions.
Our next question comes from animals, all from Bank of America.
Hi, good morning, and thank you so much for the question.
On the mass beauty side some of your competitors are gaining shelf space at key retailers domestically, such as Walmart and target and the drugstores.
As youre continuing to stabilize and gained market share can you talk a bit about your distribution of brands such as Covergirl and are you happy with the current shelf space of the brand and also is there any opportunity to gain shelf space from Sterling brands, such as Revlon. Thanks.
Yes, hi, good morning. So thank you for your question again, when it comes to the shelf resets for the consumer Beauty Division I would say that for spring 2023, which is you know the the next I would say slot.
We expect to maintain a stable shelf space for our consumer beauty business globally. We also expect at the same time pockets on incremental shelf space gains, particularly in the U K driven by the outstanding success behind the remark kind entry new vegan and sustainable line.
Makeup and Mascara and powders also behind Sally Hansen that seen in many many markets as you know the indisputable leader of the nail business and therefore, many countries are now, giving more space to Sally Hansen and last but not least bodes well, which we have very successfully repositioned recently.
You know remember what has the number one selling mascara in a very competitive country like France, and Boardwalk is re entering several new markets, including recently U K, where the brand is exclusive to superdrug and doing very very well over there. We also expect incremental gains for cover girl in the mix of trucks and non.
Track channels. So this is I would say the overall picture that I can share with you when it comes to the shows shelf space.
Future movements.
Thanks very much.
Our next question comes from Nik Modi from RBC capital.
Yeah, Hi, good morning, everyone.
Good question.
Two questions. One is just more of a housekeeping item I'm trying to understand what's actually happening with glass I mean, maybe you can just provide.
What's actually the derivation of the supply shortages and then the bigger picture question. So I'd love your kind of Big picture thoughts on this is it looks like the fragrance category. It's shifting you know.
Away from gifting and more towards kind of self consumption at least from what we can see.
I'm just curious how is that certainly do you agree with that statement number one and how does that change your strategy as you as you move forward to kind of keep the momentum going.
Yes, Nick Thank you so much.
Two very important questions that we're asking ourselves on a daily basis, and let me share with you the way we see it that Gucci.
Glass. This is quite sexual in fact, it's really about the reduced number of suppliers doing quality colossal and they are not a lot.
Mainly a European base. So this is what explains in fact, the tension that we are seeing today and this tension in fact is exacerbated by the fragrance index in sector. So for Gucci by the big success behind our innovations from 2021. This is I would say very simply said the overall picture small number.
Suppliers booming category worldwide and booming innovations at Gucci far above you know our best expectations from last year. So this is what explains this I would say tension around around glass when it comes to the fragrance business and the shifting away from gifting to self consumption. This is absolutely true and this is.
Great.
Our business because as you can imagine our self consumption of.
You know fragrances is much more dilutive for us in good stead sandwich, our diluted in general So that's a great I would say sign of a category, whose penetration is increasing so we are less into I would say the classical consumption of gifting, which people do automatically year over year and we are more into.
I'm buying something for me I'm buying something if I am a young Gen Z that I'm going to show in social media or.
Any other consumer I'm going to we're hopeful for the remainder of the year or for many many years and this shift is clearly a structural shift that we're seeing in the best demonstration is the fact that people are buying more and more I would say expensive items moving strongly from <unk> to <unk>.
The box in larger sizes, which is clearly another demonstration of self consumption and second a lot of them are moving from the <unk> into what we used to call the niche category, which I do believe he is not anymore, a niche category given the growth and the size of this category is starting to have in many many areas around the world.
And this is Canadian what is at play behind to say Miss Fragrancy Index and you can relate this to of course, social media, but I have to say to also a heightened quantity from us suppliers.
Suppliers.
<unk> as you know there used to be years and years, where the beauty industry, including on Christy's was launching fragrances, that's where everyone is really not at the right level of quality and since maybe seven eight years. This has been corrected probably because of niche brands showing the way to most of the other brands and today the habit.
<unk> got your debt certainly in very strongly and this is what we are seeing today in terms of such fragrance index that sun called the way being indexed and I think it's totally right.
Our next question comes from Andrea <unk> from J P. Morgan.
Okay.
Hi, Good morning, this is siobhan up from.
Speaking on behalf of Andrea.
I was wondering with about like low single digit pricing in the beginning of calendar year 'twenty to mid single pricing.
The portfolio. Unlike late summer in another round of like planned low single digit price increases in full fiscal quarter.
Are you assuming volumes will be declining in the current guidance. Thank you.
Hum.
Absolutely. So I mean, it's important to remind that we we anticipated and you see some things that we built most of the new year ago, we built a pricing you'll face exactly to be.
Be able indeed to implement price increases.
And this was of course, absolutely needed to mitigate to offset inflation and you're seeing the tangible results as we are growing gross margin by 70 basis points. So indeed, we did.
Losing mid single digit to recently and we continue we are not seeing any decline.
Decline in differently.
When we are doing these price increases we do it with very in a very granular lender and we are taking opportunity also.
Great momentum that we hobby.
On our brands and to support that we are putting on our brands and do some great innovations. So it's really part of all these the equation.
We are doing and understood.
Tangible.
The result is that our volumes fragrance outgrowing and volumes in consumer beauty awkward.
Okay.
Thank you.
Your next question comes from Olivia Tong from Raymond James.
Good morning, Thank you.
Wanted to talk a little bit about the shortage is getting fragrance and where you stand relative to the.
The past in terms of the glass quality and what have you.
To what extent you think it could impact holiday durability, that's why gift sets during what is obviously an important period.
Thanks.
But whats.
Hi, Olivia definitive we confirm our guidance of 6% to 8%.
So you'll see there is there is no no change on our guidance for each one 6% to 8%, excluding Russia of full year, we confirm the 6% to 8%.
Gross excluding Russia. So it is following a strong Q1 as you we just published.
Demand is very strong.
At the same time, we are monitoring very closely.
All the attention that we are facing on components.
Rug runs of yes, either number one.
Sanctions that were seeing but we are seeing also.
All our peers.
Tension on the <unk>.
And to some extent on pumps. So we are monitoring tightly but despite these tension on the components, we are confirming our guidance each one.
Got it thank you.
Can you give us.
Any color into what you think the impact of the of the glass shortage had on on our results. This quarter and then broadly just in terms of SG&A.
SG&A I mean this is the.
Best performance Malawi's SG&A, we've seen in several years, even prior to Covid. So can you just talk about the SG&A opportunity in front of you, what's driving that improvement this quarter, particularly against.
What's arguably a bit more of a challenging comp for you guys.
The comps, obviously get a fair bit easier.
We are progressive so just if you could talk a little bit about the SG&A opportunity in front of me that would be fantastic. Thank you so much.
Yes, hi, good morning, Olivia I'm going to take the first part which is around the impact of the shortages on the results in Q1 again.
Our mass.
Our mass.
Our service level is in the low nineties, which as you know quite good compared to what we are seeing around us on christy's, it's roughly under 80%, which is not good if I may say, but in the same level of our peer set answer we're not worse than the others, but we're not better than the others, but I can just.
Give you how much.
Potential of our prestige costs that would have been if we didn't space of this kind of I would say limitations.
Sellout for prestige in the cost that was in the low teens and the performance of the division was 7% like for like excluding Russia. This gives you an idea of how strong is our fragrance business at the moment.
Thank you so on.
Second question on SG&A.
He is the one specific element to consider which is a full rates.
As I highlighted during my presentation and a few times.
We are of course very significant forex headwinds.
On top line and we say you know, it's about 6% to 8%, but on P&L side are you sure the resource that we have natural hedging.
Equity because we have a cost of goods, which are sitting in Europe , we have factories in Europe right. So chose a case on <unk> is G&A because we have teams in.
Europe , so to be more specific on SG&A, we have HQ in Amsterdam. We are also a team in Paris. So and we are also sizable team in UK. So there is a mechanical effect of currency, which is lowering SG&A.
In reporting numbers do without having to take that.
We are we keep working of course on SG&A reduction this is completely profitable all in to win agenda.
So we keep this work will continue and definitely we amplify and we have some additional new initiatives, especially on the support function.
Continuing in Ohio.
Nimble organization.
Within Coty and to manage our equation.
Okay.
Our next question comes from Steve powers from Deutsche Bank.
Yes, Hey, good morning, Thank you.
Just on the on a full year reaffirmation of guidance it sounds like you've assumed more or less current consumer demand conditions remain intact.
I guess within that.
Wondering if you have any allowances embedded.
For even.
Even modest demand slowing or allowances for retailers substantially pullback in inventory.
If they if they if they foresee potential slowing.
Or alternatively, what what levers you have your disposable should those conditions.
Thank you.
Hi, Steve.
So indeed, we confirm our full year guidance top line, 6% to 8%.
EBITDA guidance of 9%.
955 to 965, and obviously, we confirm our roadmap towards four times leverage ratio by the end of calendar 'twenty. Two so indeed, we are to Sheldon mentioned in UC confirmation to members we are not seeing any slowdown in the demand.
And even in Q1 as we just shared with you.
And then just an OTC even stronger so definitely the season.
There is good momentum in consumer beauty and prestige.
We are not seeing any slowdown on the all the plans that we have in place that gives us full confidence but these are these momentum in these dynamic at the same time.
Currently we are.
I am monitoring we are monitoring really all the actions that we have been all in to win a giving us also.
Some munitions to manage and mitigate the equation. So this is really the way we monitor and under so to your specific question about retailer Destocking and so on what we are seeing differently. We are not seeing any destocking I mean, even in the context over <unk>.
The intention we are seeing more okay. Some needed relief to fulfill and we need to push for Sidney. This is what we have seen in Q1 and we see currently.
Okay, that's very helpful.
And then if I could.
I have to ask on Gucci.
Because while you and carrying at this point have both acknowledged that license has a number of years.
Remaining.
Carrying as I'm sure you know continues to talk pretty openly about work, they're doing to potentially take that that license that business back in house overtime, even if down the road I guess I'm just wondering if there's anything you can.
Additionally offer on the current standing of that relationship whether renewal ultimately is at your discretion or carrying and and if its out there is a question I keep getting from investors is how that impacts your willingness to continually invest in a franchise that has been central to your ambition.
Especially in prestige makeup et cetera.
With the rest of that portfolio.
One day revert back to the.
The original brand owner, just how youre thinking about that thank you.
Thank you Steve for this question again.
First of all again what.
We have heard is that beauty is a very attractive category and this we see it of course, even more today, given what's happening around us and specifically the <unk>.
Fragrance index and it makes sense that others would do some initial work on that on that space.
We have heard that has nothing to do with Gucci, if im not wrong and we hope the license for the long term is concerned by carrying themselves and there is also no mechanism for an early exit the <unk>.
Other thing I wanted to share with you is that this is one of the growth engines of the company certainly not the only one I can tell you that the success, we are seeing behind where prestige division is clearly widespread across the different brands and every quarter. We have a new brand. Thanks to the work we are doing that's joining.
Pack of growth drivers into the company without even talking about skincare, that's the biggest upside potential for the company I would say in the coming in coming years.
But not least I can't tell you that the relationship between us and Gucci is fantastic I have to tell you. The results, we got behind a Gucci store.
Just in the last year and go this adjustment this year unprecedented as you've seen it during the presentation today and I was last week in Singapore, and together with Merck will be sort of a year and we made the opening of a beautiful fantastic new boutique in the middle of as you can get.
Okay.
Our next question comes from Rob <unk> from Evercore.
Yeah.
Great. Thank you very much and apologies if you covered covered this this morning, but.
You say youre not really seeing any any any weakness can you kind of bear that down into into Europe .
Given all everything we hear right about.
Excrete increasingly strained consumer.
Maybe touch on a little bit more on Max factor.
And Remo.
What youre seeing there.
And then also.
If you can touch on travel retail.
Your initiatives in travel retail everywhere I travel I do absolutely see more and more of your brands. So maybe talk a little bit about that and how they see the December quarter outside of hard on it.
Terms of increased traveling and the impact on your business. Thanks.
Yes, good morning Robin. Thank you for your question again, I confirm that we are not seeing any weakness including in.
EMEA, you've seen that EMEA is growing double digits. After it is of course travel retail that is doing fantastically well and then come back on this later.
Sir but on the fragrance part Europe is doing also very well our brands are doing very well recently, we even saw France, there used to be an entry prestige market moving towards premium.
Our premiums slash.
Surely fragrances, which is a first and says a lot about where consumers are going including in the biggest country in Europe , which is which is France. When it comes to our consumer beauty business.
Youre right to point out that Max factor and remember these are the two brands that are in a way a strongly taking our market share is up we met again with <unk> presented to you. The plan are female which was first to lead in clean beauty, which he has done fantastically well thanks to kind of entry.
Which is today, representing more or less 10% of the net revenues of the brand and a big success in menu menu pops around the world opening the brand to the younger generation in a massive way I have to say and remember I spoke to you about how we are learning quickly how to create products that we can become tictoc sensations and <unk>.
The latest mascara from remit is exactly the embodiment of out of this it was created with kickback in mind by TIK two curves that we have in house and with Kikta occur faster.
The TV commercial is you've seen it a few minutes ago and the result is that <unk> is the second miscarriage, the UK market and the biggest mascara launch for he met since many many years on Max factor or the brand is gaining market share consistently and globally and this is thanks to a strategy that's very.
Well developed between base business and new innovation and this brand once it has been repositioned towards late millennials and Gen X is doing fantastically well its job which is to capture this audience that has the spending power that is more sophisticated and that is looking for products that stand the test of.
Simon This is exactly what Max sector is all about to date and last but not least the last part is about travel retail even if travel is still 20% to 30% below the levels of 2019, we see this part of the business booming equity plus 30 something percent of growth and this is thanks of course to our fragrance.
Dynamism.
The dynamism of our brands the fragrance index, but also because we added two new next to this business. The first one is prestige makeup.
Cosmetics, that's doing very very well everywhere. We are opening this brand, but also skin care. Thanks to Lancaster, that's again booming in Hainan, which is this I would say.
Central place now when it comes to travel retail in the Asian, and the Asian region, but also elsewhere. So in a way we are.
We do not see this weakness happening.
At the moment, we are really running after rebuilding the stocks behind our fragrance products.
Yes.
Your next question comes from Chris Carey from Wells Fargo.
Hi, Good morning can you just expand on what you mean by modest gross margin expansion.
In Q2 and for the full year and we're on just some of the key puts and takes that we should be thinking about as far as the government than headwinds.
Hi, Chris.
First of all I mean.
We are very proud.
The results we delivered in Q1.
70 basis point.
Gross margin expansion.
And this is definitely a testament to all the actions that.
We have implemented so let me give you a little more color on this.
Which are contained wins on the headwind so definitely teaser the headwind is inflation.
Two two points of net revenue.
It's in line with what we shared last quarter. So there are some positive.
To get to you, but all in all this is quite in line. So how we mitigate and we more than offset this inflation, but we continue to work on the cost reduction cost of goods reduction.
A clear example is Oh, we announced.
Most of the new year ago closure of factory.
Victoria in Germany. This is no implemented and this is a way to increase utilization rate of fragrance and this is definitely helping for fixed cost absorption and 18 gross margin. We are working also on the.
Market value in their disease.
Is really to reduce to simplify.
Components.
While many of our products and this is a winner.
But we're full weight also to reduce costs and to improve efficiency. So this is really on the.
Cost side.
There is the big element, which is mix. We continue this is what we kicked off two years ago and all the initiatives also work. We are doing is always focused on mix and the gross margin accretive is that it.
Our prestige business is also valid within consumer beauty, all the new initiatives that we are launching sometimes some of these initiatives or even you know gross margin equivalent to prestige and.
And number three which is absolutely key is the pricing.
We did do low single digit beginning calendar 'twenty two we just implemented a mid single digit price increase.
During your summer September .
And we are implementing a new price increase mid single digits. So beginning calendar 'twenty three so you see that all these elements. Thanks to all these elements we are able to confirm.
Modest gross margin expansion within fiscal 'twenty three.
Our next question comes from Lauren Lieberman from Barclays.
Great. Thanks, Good morning, I know in the in.
In the.
Press release, you had mentioned that the second.
I think the hundred month for market share gains for for Covergirl, but I was hoping we could get a little bit of an update on performance. There. Some additional thoughts on skincare launch, how that's progressing or really how you look to them.
To migrate that to kind of even stronger performance in 'twenty three so a lot of the prepared remarks, a focus on some of the other brands.
Good morning, Laurence in Q4 your question around <unk>, so because they have their own it's interesting to you I would say the overall picture and the way I see it you know remember when we started to talk about the brand it was somewhere around September 2020.
We're in we're listing the difficulties this brand has been facing for years and years and years and the work that we have done that since September 2020 until very recently was to reposition the brand to reinforce the brand equity to make this brand the indisputable leading brand when it comes to setting clean sustainable.
Healthy beauty to American people.
This has been delivering fantastic results as you've seen it until recently.
And then we got into the constraint.
<unk> strengths when it comes to the last blast line, which is a big big Big net revenue maker into a couple of ago, which we went out let's say recently just at the end of the summer and recently, we are back in stock with Cabo.
With the last <unk> sorry in the meantime, what we've done is of course, we've continued to invest behind the brand and we invested behind a younger line cause exhibitionist Mascara, which is doing fantastically well by the way strong market share et cetera, but this line is not having the same halo effect on the overall color on market share.
As lush glass used to have so what we are doing now is now that we solved the supply constraints you still have a few little ones here and there, but let's say that overall these are behind US we are fine tuning the media mix behind pick up again, which is very very specific and there is really test learn.
Tesla implement and we understood what needs to be done so hopefully by Q3 and the registered being a little bit now we are playing the playbook of thrill seeker.
Leveraging the power of our Tictoc behind less glass line, but the read I would say comeback of large blocks into media will happen somewhere around the next quarter. So that's overall the big picture I can share with you around cobalt go the Big news and the good news is that all the fundamentals such as you know the demand dependent.
<unk> among Gen Z is the penetration among the <unk>.
Hispanic consumers has increased dramatically versus just two years ago. When it comes to skincare skincare has done is jud the packed up skincare that we don't set a year ago is as you know it stopped in the makeup al so by definition it was for us.
Place, where we could test learn fine tune again, it's out there and we learned a lot of things that we intend to continue to implement and progress on this part of the business of Covergirl, probably here again in quarter, three and quarter. Four so everything is on track when it comes to cover girl and the brand dynamics and health of the brand.
These impacts.
And our last question comes from Carla Casella from J P. Morgan.
Hi, I had a question on the debt structure, you've got a lot of debt maturing in 'twenty five and 26 I know, it's not imminent that you need to do anything in the right markets aren't great, but any sense for how far in advance of maturity. If you feel you need to address or lengthening your desktop share.
So first of all as you rightly say the caller is done.
We made you know those are right things over the last two years is to extend the debt maturity 25 and 26. So we have many years to go.
We will continue to pay down debt.
Confirmation is that.
Our deleveraging agenda is perfectly on track.
Delivering 400 million free cash flow at a minimum per year.
In 'twenty five and on top of this we have as you know.
The last stake.
The value, which is $1 billion.
At a minimum so all these elements with all these elements I mean, we are in full confidence in our deleveraging agenda. We did majority of 'twenty five 'twenty six.
In a very good place.
Okay. Thank you.
Okay.
Yes, I'm, sorry, sorry caller. Please go ahead.
I was just wanted to follow up you're doing so well in the prestige cosmetics gene that you thought that Gucci and Burberry and currently what percentage of sales are those today.
This part of the business is in the low single digits and so it's still a small portion of our business growing good but a small portion of the business.
Okay, great. Thank you.
Thank you Carla Thank you Aloha. So thank you everyone I would like to you know.
Close this Q&A session with some closing remarks assure low me the first one is that.
Again, we have.
Shown how much we are all about consistency since nine quarters in a row now which is a very important element for us and for you of course. The second thing is that we will start you will start to hear us talking about the leverage that's going towards three times by the end of next calendar year. This is a big step change for Coty as a company.
And the third element is the closing remark is the one of ESG you've seen recently because we've been questioned a lot by a lot of you around this element you have seen that the company has been rated by sustainability.
So in the top quartile of personal products company, which is great news, but this is just the beginning of what this company is doing around the sustainability and ESG topics. So I do believe that again and again. This is the best and the right moment to enter cookies investors base. Thank you very much for your attention.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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