Q1 2023 Coty Inc Earnings Call - Pre-Recorded Management Remarks
<unk> 23 earnings.
Later this morning at approximately 815, a M. Eastern we will hold a separate live Q&A session on todays results, which you can access via our Investor Relations website Joy.
Joining me this morning for our presentation, our shoe Nabil Coty, CEO and Laura Murphy, a coty CFO .
Before I hand, the call over to Sue 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.
In addition, except where noted the discussion of <unk> financial results and Coty has expectations reflect certain adjustments are specified in the non-GAAP financial measures section of the company's release. Thank you I will now turn it over to our CEO Sue Nabil.
Ladies and gentlemen, the Q1 results that we have reported this morning, once again reaffirm the strength and resilience of <unk> brands.
Correct.
Operating model.
In the midst of a complex and dynamic external environment Gucci has delivered the ninth consecutive quarter of results in line.
Those expectations are.
At the same time dynamics of the beauty market in which we are a key player remained largely unchanged since our last earnings.
Beauty as a category remains resilient.
The sweet spot of being a separate in consumer's beauty routines and the category of offer where the innovative products and communications will bring to market directly drive demand.
He has certainly benefited from our beauty category that has remained resilient, particularly from what we refer to as the fragrance index as consumers turn to mood boosting an affordable luxury of fragrances.
Same time, we are particularly pleased that our balanced growth strategy remains in full force we.
We delivered like for like growth across each of our regions.
Each of our key categories, including fragrances, cosmetics, and skincare and body care.
Both divisions.
This has allowed us to again report sales growth well above the underlying beauty market.
The best in our competitive sets.
As a result, even in the midst of this macro uncertainty we continue to target growing our sales ahead of the beauty market growing our profit ahead of sales and steadily deleveraging our balance sheet positioning <unk> to become a true beauty powerhouse.
There are several key points from our results that I would like to highlight today.
First fueled by the strong beauty demand in key brand initiatives. We once again delivered revenue growth ahead of expectations and ahead of guidance. Our Q1 like for like revenues grew 9%. Despite a 200 basis points negative impact from our Russia business exit.
Adjusting for Russia, our core business grew 11% like for like.
Ahead of our raised guidance of 8% to 9% like for like second we delivered another quarter of strong growth margin growth strong profit expansion and net debt reduction despite the various inflationary headwinds our Q1 adjusted gross margins increased seven.
<unk> basis points year on year as a result, Q1 adjusted operating income grew 24% year on year, our net debt declined to $4 2 billion and our net leverage ended at below four five times.
Yes, well on track to drive leverage towards four times exiting calendar 'twenty, two and towards three times exiting calendar 'twenty three.
Third we continue to execute and make progress across each of our six strategic growth pillars. In fact, we have a number of ESG milestones to share with you today and more to come in the coming days finally, the strong delivery in Q1 reinforces our confidence in our system.
Q3 guidance, we continue to see the fiscal 'twenty three growth trajectory developing in line with our medium term targets with the core business adjusting for the impact of the Russia exit growing sales, 6% to 8% like for like and then overall adjusted EBITDA.
Approximately $955 million to $965 million based on current Forex rates.
While demand signals across most markets remains robust we remain vigilant in monitoring the external environment and has in place the necessary resilience plans to react should the demand backdrop, we can.
In the near time, we will continue to execute with discipline premium rising our portfolio driving our balanced growth agenda reinvesting behind our key brands and capabilities.
And advancing our profitability and deleveraging agenda I will I will now take a few moments to cover our revenue trend during the quarter before <unk> takes you through our financials, then I will finish with an update on our strategic progress and our outlook.
Starting now with our revenue and set out performance. This quarter, we saw diverging trends between sell in and sell out due to a number of factors at play in our like for like revenue growth.
From a sales perspective, which truly reflects consumer demand our prestige business continued to outperform fueled by the strong demand for prestige fragrances and the continued consumer desire for a more premium beauty products as a result, our prestige sellout grew in the low teens.
While consumer beauty set out also remained solid with mid to high single digit growth. However, this growth trends were reversed at the revenue level.
<unk> revenues grew 7% like for like well below the sellout as the sell in growth was impacted by one 300 basis points of headwinds from the Russia exit two industry wide shortages in certain fragrance components, which Laura will discuss in more details and three difficult.
Comparisons in the prior year over year, where our prestige business reported 34% like for like growth on the back of strong launch by Phil.
<unk> revenues grew 12% like for like surpassing the sellout and with no material impact from the Russia exit.
While revenue growth in our cosmetics and mass fragrance businesses was broadly in line to ahead of sell out that consumer beauty sales performance was boosted by a strong launch pipeline and brand initiatives in our <unk> businesses, including Adidas skin in mind premium unsustainable Nu.
<unk> Orange Mohan, the silicon free deodorant, and but Sino clinical range in Brazil as a result, our overall like for like revenue growth was broadly in line with our total sellout geographically I am very pleased to say that the like for like revenues grew in all regions.
Revenues in the Americas grew 5% like for like as we saw strong momentum in Brazil, and Latin America, while the continuous strength in U S. Consumer demand was counterbalanced by supply constraints.
Clearly in prestige fragrances EMEA region sales grew 11% like for like fueled by significant travel retail momentum.
Double digit growth across most markets Asia Pacific revenues grew grew 12% like for like with strong momentum in Asia, Excluding China and travel retail, while China returned to growth. Despite the intermittent lockdowns I will now hand, the call over to Johan to.
Take you through our financial results. Thank you Sue.
As many of you know Jake Domino environment. During Q1 became increasingly complex with highly volatile forex rates and further uncertainty.
And in the future interest rate on environment globally.
Despite the dynamic backdrop I am pleased to share our results as we continued to show solid progress across key financial Kpis, including gross margin profit and deleveraging.
So these two cycle is fully in motion and delivering the results we set out to achieve.
Im also very encouraged by the interactions engagement, we have had with many of you in the investment community during the quarter.
The progress we have made is increasingly being recognized particularly as long only institutions now account for a significant majority of Curtis public ownership and there is a heightened awareness of coty being an attractive and sustainable investments.
Let's start with our gross margin performance in the quarter.
Q1, adjusted gross margin of 64, 1% increased 70 basis points from last year.
Gross margin performance in the quarter was driven primarily by strong price improvement in both prestige in consumer beauty as well as improvements in trade spend.
While we see mix as one of the positive building blocks in our gross margin expansion going forward.
This quarter some nice benefit was limited based on the growth dynamics in both divisions and the outsized contribution from body care, which sue alluded to earlier.
The positive drivers more than offset the heightened level of Cogs inflation, which were approximately 200 basis points of revenues similar to what we experienced in Q4.
Given the significant volatility in Forex rates, more recently, and particularly the euro and pound I want to briefly discuss the natural hedge in our business model.
The deterioration in both of these currencies has had a material impact on our reported sales with a 7% negative forex impact as the top line.
However, the majority of our manufacturing and sourcing takes place in Europe , including some in the U K.
These create some natural hedge in our business meetings of Forex exposure on our gross margin.
Going forward, we will continue to execute on our on our multi pronged multiyear gross margin attack plan and we remain well positioned to benefit from positive mix shifts in the business.
Now, let's touch on the global supply and inflationary backdrop on how we are navigating through this challenging environment.
As sue alluded to earlier global supply chain complexities, coupled with ongoing robust demand for fragrance, which was not fully anticipated by the supply chain is driving industry wide supply constraints in key fragrance components.
If all of our peers have discussed the shortages in key components like glass bottles and to a lesser extent gaps and pumps.
As a result with fragrance volumes ramping up seasonally in Q1, our service levels remained in the low nineties for consumer beauty, but slipped below 80% for prestige.
The feedback we have received from our retailers suggest that our peer set is experiencing similar dynamics.
And we seasonally stronger fragrance demand in Q2, we are getting similar constraint for this coming quarter.
The issue is Timothy traces back to the general elevated lead times and raw material constraints across our global supply chain, which is impacting the supply to our own suppliers and exacerbated by your fragrance market, which shows no sign of slowing which has depleted safety stocks in the supply.
<unk>.
As a company we are preparing ourselves for this economy of scarcity building crucial inventory when available and shifting support behind lines, where stock is available.
Ultimately this supply demand imbalance is a good program weapons apparent on the enrollment and only reinforces our pricing power as we look to take an additional round of mid single digit pricing in late winter. Following the mid single digit pricing we executed this past.
Sure.
It is also important to stress that despite this component constraints. We delivered Q1 revenues ahead of guidance and strong gross margin expansion in the quarter.
We are also cognizant of investor concerns, but energy supply in Europe , and our manufacturing base there.
Here, we have developed a business continuity plans and dual sourcing initiatives to protect our inputs.
At the same time due to the low energy use edge in our manufacturing plants, we see limited risk of an energy related business disruption.
And finally on inflation, our gross margin outlook remains unchanged as we continue to estimate Cogs inflation of approximately 2% of revenues in fiscal 'twenty three to be offset by pricing mix benefits and savings.
Let me now provide an update on the on our all in to win program.
In Q1, we delivered savings of over $20 million driven by a combination of fixed cost and gross margin initiatives.
And David on the upstream of projects ramping up over the course of the year. We continue to expect fiscal 'twenty three savings of $170 million.
The projects that we expect to ramp up and contribute more significantly in Q2 through Q4 include.
Material value analysis, as we continue to streamline the sourcing and variability in non value added components.
Optimization and trade spend and the MCP.
Improvement in excess and obsolescence charges as we continue to improve our forecasting and planning processes.
Now.
Moving to a recap of our marketing investments.
During Q1, <unk> CPE investments represented over 24% of sales, which is down slightly from last year in.
Importantly, our working media at constant currency grew year on year and was relatively stable as a percentage of sales.
We targeted our media investment behind our most recent and successful innovations, including a new delivery hero Edp.
<unk> just mean.
Hugo boss bottled buffer in prestige as well as program goes simply age less innovation bundle and remains three seeker <unk> mascara in consumer beauty.
We also continued investment behind our white space areas of prestige makeup and skincare.
Now with Q2 underway, we expect a meaningful ramp up in our A&P spending during this critical sellout period.
For the fiscal 'twenty three we continue to expect our CPE investments to be in the high twenty's level of sales.
Now moving to our profit delivery for the quarter.
Our Q1 adjusted operating income grew a robust 24% to $250 million driving a 340 basis point improvement in our adjusted operating margin to 18% imports.
Importantly, both divisions delivered over 300 basis points of operating margin improvement.
On adjusted EBITDA, we delivered 11% growth to $308 million.
As a result, our adjusted EBITDA margin was 22, 2%.
190 basis points versus last year.
Our profit improvement in the quarter was driven by our solid revenue growth gross margin expansion fixed cost leverage as well as a slight decline in agency.
Now moving to our adjusted EPS, which includes the following drivers.
Adjusted EBITDA in Q1 of $308 million.
Depreciation of $58 million.
Net interest of $66 million.
Income tax of $44 million, representing an adjusted effective tax rate of 29, 6%.
And diluted share count of 859 medium.
As a result of Q1 diluted adjusted EPS was 11%.
An improvement of three <unk>.
Versus last year.
It is important to highlight that this adjusted EPS of 11.
Included a negative impact of <unk> from the equity swap.
Recall, we previously entered into a total return swap transaction with several bank counterparties effective locking in an attractive share price below $7 54, a targeted 200 million share buyback program during calendar 2004.
Beginning in Q1, the noncash mechanical mark to market on this total return swap has to be included in our adjusted net income and EPS calculation.
Going into the other income line.
This is mark to market EPS impact will continue to factor into our net income and EPS calculations moving forward.
Looking ahead to Q2 and fiscal 'twenty three let me provide some additional details related to our current expectations for certain drivers of our adjusted EPS.
First we continue to expect depreciation to be in the mid $200 million.
Second we continue to expect net interest for the year towards <unk> in the mid 200 million, reflecting the fact that the majority of our debt is fixed.
And we have aging in place on most of the remainder.
Third we continue to expect an adjusted effective tax rate for fiscal 'twenty three in the high 20% assuming no significant changes in tax regulation.
And finally on fiscal 'twenty three shop count base.
On the GAAP accounting provision around anti dilution, we now expect diluted shares consistent with Q1 at $860 million to $870 million.
Moving to our free cash flow, we generated $88 million of free cash flow in the quarter consistent with our expectations.
Quarterly results reflected the timing of certain capex and working capital payments as well as the increase in inventory as we built stock in certain components as part of our efforts to mitigate the global component shortages, we discussed solid year.
For the full year, we continue to expect strong free cash flow generation.
So as we indicated on the last call, we would expect cash flow to be a little lower than fiscal 2002, due to onetime working capital benefits, which helped fiscal 2002 and won't repeat in fiscal 'twenty three.
Our intent is to continue to use our strong free cash flow to steadily reduce our debt.
Our deleveraging agenda.
Moving to our capital structure.
We ended Q1 with net debt of just under $4 2 billion, an improvement of roughly $100 million from Q4, driven by our free cash flow.
As a result, our leverage at the end of the quarter was below four five times down from four seven times at the end of Q4.
And with Q2 as our seasonally strongest free cash flow quarter, we remain fully on track to bring our leverage down towards four times by the end of calendar 'twenty two.
In the quarter, so book value of 26% stake in <unk> increased to approximately $1 billion, reflecting valence acquisition of the high growth healthcare brand.
Factoring in our Vela stake we ended the quarter with economic net debt of approximately $3 2 billion.
I would also like to take a minute towards the rates are rising and seemingly uncertain interest rate environment and put these sensitivity to this.
Approximately two thirds of our debt is fixed rate notes.
And for the remaining valuable depth, we have aging in place such as 90% of our debt is fixed supporting our unchanged expectations for fiscal 'twenty three interest expense in the mid 200.
Looking beyond fiscal 'twenty three.
Continued progress on deleveraging and debt Paydown support our expectation for our interest expense to steadily decline in the coming years. Despite the rising interest rate on government.
We now hand, it back to Sue to review, our strategic progress in the quarter.
Thank you.
So as we have continued to update you quarter after quarter in Q1, we made further progress on our six strategic pillars.
With our first strategic pillar of stabilizing and growing our consumer beauty business over the past quarter. The global mass beauty market grew in the low single digits year on year broadly in line with historical trends.
Against this backdrop, our successful repositioning of many of our key brands has allowed us to continue to outperform the market with good sellout growing in the mid to high single digits. In total this marks the 10th consecutive months of market share gains for our consumer beauty business.
Both in Caracas genetics, and overall mass beauty.
Our goal is to continue to drive market share momentum, even as we start lapping some of these improvements.
We've seen particularly strong market share momentum globally, and Max factor and remote in fact arena. The recent tictoc driven launch of its three CCAR Mascara, whose AD campaign you can see here has quickly become the number two mascara in the U K market based on the latest market data and <unk>.
Even more impressively the biggest mascara launch ever for the Arena brand.
While our deliberately sequenced with launch calendar for our consumer beauty brands began with our cosmetic brands. We have now begun the relaunch of our top five consumer beauty brand Adidas.
In keeping with our fashion brands focus on uniting premium athletics and sustainability.
And could he is focused on leading the signification trend we've launched the new premium <unk> range for Adidas cause active scheme in mind.
The skin <unk> body care around includes clean and vegan formulations packaging bottles that are 100% recycled recyclable and receivable representing a true leap forward in our sustainability agenda.
Also part of our body care portfolio, our leading Brazilian brand Milan.
<unk> has also growth market, leading innovation during Q1 <unk> launched the first to market patent pending non silicon deodorant, which is already seeing great success in the market.
Our second key Brazilian body care brand, but channel was also fueling momentum with the launch of a long lasting clinical deodorant client as a result of this strong brand launches and supporting media Activations, our overall body care like for like sales in Q1 grew over 25%.
While our Medicare business, including this premium launches carry gross margins below the corporate average we are very pleased with both the revenue growth and strong profit contribution that this business is bringing particularly as we continue to invest behind key strategic initiatives.
Such as skincare.
Let's take a look now at the new brand campaign for Adidas.
Sure.
Turning now to our second pillar focused on accelerating our luxury booming fragrance business.
It is quite clear is that the global prestige fragrance market continues to boom as we continue to see the fragrance index in full effect after lapping growth of over 20% in fiscal 'twenty, two and even as the macro backdrop remains difficult the market data confirms that demand for prestige fragrances.
Continues to grow in the high single digits. This represents over 25% growth versus 2019 and in markets like the U S. The prestige fragrance market is over 40% higher than pre COVID-19 levels supported by the structural drivers that we've been discussing for some time.
Including increased usage by Gen Z men and Hispanic consumers further underpinned by social media.
Also worth highlighting that the latest market data we have shows no slowing in the <unk> trend in fragrances.
With the higher priced and higher concentration fragrances, continuing to increase their penetration across all major fragrance markets.
These diamond dynamics manifested in our results as well as we saw close to 10% price mix growth in our prestige fragrance sales with volumes growing one adjusted for the Russia exit.
Against this very favorable backdrop, we are continuing to fuel our market leading innovation.
Building on last year's successes with innovative and brand building extensions.
The launch of boss bottled Tata.
While still in limited distribution is off to a great start driving double digit like for like growth for the iconic bust but franchise.
On delivery with last year's February hero of the Twilight launched becoming a top five male fragrance launch across all major markets. This year, we've launched the more premium burberry hero or the platform the.
The headway effect has pushed the burglary hero franchise to become top 10 in the U S and protocols Burberry fragrances to the highest market share in the core U K market.
On Gucci last year's disruptive launch of Gucci, Florida Rogers guarding our ranking as the number one and number two best female launched in key markets. We have built on the success with this year's launch of Gucci Flora gorgeous adjustment, which has propelled the gucci saw a franchise to top 10 across North America and Europe .
So pacing the iconic channel number five.
Meanwhile, <unk> continued success with its premium <unk> collections has allowed the collection to become the number one artisanal fragrance.
In China, Sephora, and our number one fragrance brands in travel retail APAC.
All of this we affirms our view that Coty remains the leader in building strong and long lasting fragrance brands and high growth and high margin fragrance business with a very balanced portfolio of distinctive brands of course, this unprecedented robust fragrance demand growth coupled with complications.
In the global supply chain has resulted in industry wide fragrance component shortages, which lohan discussed in details and this remains the key inhibitor to growth in the short term.
At the same time with demand outstripping supply this only reinforces our view of the fragrance index, which is part of the larger well-being index, where even in difficult economic circumstances consumers will continue to look for the mood boosting affordable luxury offered by prestige.
Fragrances.
Let's take a look at the new bus campaign, which perfectly aligns with the new brand story and aesthetic of the fashion House.
For your own boss.
On prestige cosmetics, while the overall business transfer Gucci and Burberry cosmetics were pressured by the intermittent lockdowns in China, We continue with our strategic focus and expansion of this business in the U S. Our prestige makeup sellout grew at double the pace.
The underlying prestige cosmetics market and the critical travel retail APAC corridor, our prestige cosmetics business has now rapidly reaching half of our sales again, confirming the desirability of our brands and the right to win in prestige cosmetics and <unk>, even as the brand lapped.
The difficult comparisons of prior year's brand relaunch the brand continues to resonate with the Gen Z shoppers worldwide. As we've continued to open new travel retail locations for Kylie beauty, whether in Europe , Israel or Latin America. The Caddy brand continues to rank amongst top beauty brands across key travel retail.
Corridors.
Shifting now to our third strategic pillar building, our <unk> business across both divisions.
As we shared during our skincare strategic update investor event in September growing our skin care business is a key strategic objective for us in the coming years led by our prestige brands and with non cash there is a critical building block in this targeted growth is very anchors.
<unk> got Lancaster sales grew over 20% in the quarter.
This growth was fueled by strong momentum in Hainan, even in the midst of periodic closures there illustrating that with the right brand Activations storytelling and product trial Lancaster can win with Chinese consumers.
Based on the learnings we have accumulated in recent months as we have now the playbook for our ultra premium lung cancer product launch and brand Activations in China, which remain on track for the second half of this fiscal.
On the <unk> team following the strong launch at the end of June we are continuing to build the skincare brand online following and awareness on DTC.
Worth highlighting that the ninth preset priced at over $500 still remains the top selling item.
Finally, while our skincare build strategy is anchored on our prestige brands I'm pleased to share that our pure play mass skin and body care brands are also seeing strong momentum.
Both by show in Milan, Jay again, 260 basis points of share in the very competitive Brazilian lotions and oils market growing their household penetration by $2 2 million households, So look out for more brand initiatives and momentum on our skincare and body care business in the coming quarter.
And of course yours moving.
Moving now to our fourth strategic pillar digital and E. Com overall E. Commerce sales grew modestly year on year weighted down by Lockdown related weakness in key Chinese e-commerce platforms.
At the same time, we have continued to fuel our digital momentum across key areas, such as social Commerce E retail and new partnerships.
Let me now shift some of the highlights from the quarter on the assurance on the social Commerce side, our recent launch of market Jacobs Daisy ever so fresh when viral after two organic mentions by Tictoc Influencer Michela and again. The result was truly remarkable with the fragrance setting out at CFO .
Within two weeks.
We also expanded our E com partnership by opening two new flagship stores on last mile prestige first for Chloe, which show very promising early results and then for Hugo boss.
<unk> E Commerce platform.
<unk> group is the largest online shopping platform in southeast Asia, and bringing our brands to over 90 million consumers in the region. Finally on Amazon. We continue to partner with this critical pure play E retailer across key markets.
This has yielded key results with our global Amazon sales up 50% year on year during Amazon Prime week, we're continuing our collaboration as we've recently signed a global media deal with Amazon, which will unlock more data for us to leverage more support from the retailer and more optimized media.
<unk>, which should continue to drive a higher return on investment.
Shifting now to China, the intermittent COVID-19 related lockdowns in the country during Q1 pressure at category trends at the same time, our lower base continued expansion in the market and strong launch activity behind key brands, such as burglary Gucci clearly allows us to grow sales in China.
Including high nine you can see on this slide the beautiful <unk> board and in store activation, we executed around the launch of buggery hero of the bottle.
Importantly, we drove our business across both our prestige and mass brands in consumer beauty in China, both Adidas and Max factor leaned into the rapidly growing doing platform with overall sales for both brands up over 30% in the quarter in fact this quarter.
Max factor are partnered with level Hood self-styled cultural community that discovers and promotes Chinese fashion, the resulting limited edition faced significant packs, where first for Max factor and doubling the sales of the foundation with a strong over indexing to Gen Z consumers, while we do not know when the.
Covid related restrictions in China will be lifted on a sustainable basis, our view of the attack attractiveness of the China beauty market remains unchanged as market data continues to show that the ultra premium beauty categories are still the fastest growing ones as such why do we do.
In short term from the geographic diversification of our business model, we continue to target strong expansion in our China sales in the coming years.
In Italy on our travel retail business the momentum continues to build.
Even as international passenger traffic has continued to recover and grow it still remains 20% to 30% below 2019 levels at.
At the same time beauty demand in travel retail remains much stronger and largely on par with 2019.
And in this favorable backdrop cookie is gaining share in this highly profitable channel fueled by our multi category approach channel exclusives and disruptive Activations in Q1, our travel retail sales grew over 30% year on year you can see on this slide some of our beautiful.
Fragrance this space in travel retail.
Pacific to Hainan, it's worth noting the Lancaster sales grew over five times year over year and with the consumer appetite for travel post the pandemic showing no signs of easing we continue to be optimistic about the prospects for this channel.
Finally, moving to our sixth strategic pillar, becoming a leader in sustainability.
Could you be pleased that <unk> continued improvement in <unk>.
Chief transformation disclosures and policy setting have been recognized by <unk>.
The leading rating agency recently raised our ESG rating, putting could see in the top quartile of personal product companies.
And our progress does not end there with a major milestone in our social agenda with our recent announcement of <unk> market, leading gender neutral global parental leave policy. This enables all onto he's regardless of gender to have access to the same number of fully paid weeks of parental leave when starting or <unk>.
Extending our family whether through pregnancy adoption of services. We also have more updates to come on our environmental agenda in the coming days. We are therefore excited by Curtis ESG progress to date and of course journey ahead and.
That brings me to our outlook for the remainder of the year.
While the broader microeconomic picture has worsened in recent months is in certain markets I want to emphasize that demand in our categories across key markets remains robust, we see no signs of slowing demand or trade down for prestige fragrances, including in the U S U K, Germany.
Any and travel retail we also continue to see solid demand in mass beauty across our categories. In fact, as we've mentioned the main constraints to our sales growth near term remains the global component constraints, primarily in fragrances and to a lesser extent the.
Its coverage policy overhangs in China.
We continue to expect the first half of 'twenty three like for like sales growth of our core business adjusting for the impact of the Russia exit in line with our medium term algorithm and previous outlook for 6% to 8% growth.
The net impact of our Russia exit is expected to negatively impact Q2 sales by roughly 3%.
Based on current rates, we expect Forex headwinds to sales in Q2 of 7% to 9% with a more moderate impact on profit based on the natural hedging embedded in our model.
We continue to expect modest gross margin expansion in Q2.
And we continue to target leverage moving towards four times exiting calendar 'twenty two.
Based on calendar 'twenty, two adjusted EBITDA approaching $950 million.
For total fiscal 'twenty, three assuming no significant deterioration in the macro environment. We continue to expect like for likes growth of the core business adjusting for the impact of the Russia exit in line with our medium term growth target of 6% to 8%.
We expect impact from the Russia exit to be approximately 2% in fiscal 'twenty three with the Forex headwind on fiscal 'twenty three revenues of 6% to 8%. We continue to expect modest gross margin expansion in fiscal 'twenty three.
Positive mix savings and pricing offsetting inflationary pressure.
As a result, and assuming no significant macro deterioration, we continue to target Cisco 23, adjusted EBITA of $955 million to $965 million based on current Forex rates relatively in line with our medium term growth target of nine to 11.
Percent adjusting for the impact of the Russia exit.
We continue to expect fiscal 'twenty three adjusted EPS growth in the mid teens to 32 to 33 cents, which excludes any mark to market adjustments on the equity swap. We also continue to anticipate adjusted EPS growth acceleration in fiscal 'twenty four and beyond fused.
By lower interest expenses as part of our deleveraging efforts consistent with our medium term targets, we laid out at our investors day.
And we continue to target further reduction in leverage to three times exiting calendar 'twenty, three and two times exiting calendar 'twenty five.
To conclude now Im very pleased to report our ninth consecutive quarter of results in line to ahead of expectations. Despite the increasingly complex external environment.
Our continued efforts to <unk> our portfolio in both divisions, our disciplined pricing implementation and continued cost control are all positioning <unk> for success in both.
Short and long term this.
This is reinforced further by our strengthening culture as we have recently honored internally and externally the new Coty purpose vision and values, which center on seriousness and forward thinking mindset and.
And with demand in our markets and categories remaining strong and a great start to this year with our Q1 results. This reinforces our confidence in our fiscal 'twenty three outlook to be in line with our medium term algorithm.
As reinforced further by our strengthening culture as we have recently honored internally and externally the new Coty purpose vision and values, which center on seriousness and forward thinking mindset.
At the same time, we remain vigilant in monitoring the ever evolving macro backdrop with resilience plans developed to support the business should conditions worsen we remain very excited about what's in store for Coty in the coming years and look forward to updating you on our continued progress.
And with demand in our markets and categories remaining strong and a great start to this year with our Q1 results. This reinforces our confidence in our fiscal 'twenty three outlook to be in line with our medium term algorithm.
At the same time, we remain vigilant in monitoring the ever evolving macro backdrop with resilience plans developed to support the business should conditions worsen we remain very excited about what's in store for Coty in the coming years and look forward to updating you on our continued progress.
We are ready now to take your questions. Thank you.
We are ready now to take your questions. Thank you.
Okay.