Coty, Inc. (COTY) Q2 2021 Earnings Call

Corrected Transcript

09-Feb-2021 Coty, Inc. (COTY) Q2 2021 Earnings Call

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021

CORPORATE PARTICIPANTS

Sue Youcef Nabi Chief Executive Officer, Coty, Inc. Laurent Mercier Deputy Chief Financial Officer, Coty, Inc......

OTHER PARTICIPANTS

Olivia Tong Robert Ottenstein Analyst, BofA Securities, Inc. Analyst, Evercore Group LLC Wendy C. Nicholson Lauren R. Lieberman Analyst, Citigroup Global Markets, Inc. Analyst, Barclays Capital, Inc. Andrea Teixeira Faiza Alwy Analyst, JPMorgan Securities LLC Analyst, Deutsche Bank Securities, Inc. Stephanie Wissink Analyst, Jefferies LLC ......

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen. My name is Laurie, and I'll be your conference operator today. At this time, I would like to welcome everyone to Coty's Second Quarter Fiscal 2021 Results Conference Call. As a reminder, this conference call is being recorded today, February 9, 2021.

On today's call are Sue Nabi, Chief Executive Officer; and Laurent Mercier, Chief Financial Officer.

I would like to remind you that many of the comments today may contain forward-looking statements. Please refer to Coty's earnings release and the reports filed with the SEC, where the company lists factors that could cause actual results to differ materially from these forward-looking statements. In addition, except where noted, the discussion of Coty's financial results and Coty's expectations reflects certain adjustments as specified in the non- GAAP financial measures section of the company's release.

I'll now turn the call over to Ms. Nabi...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. Ladies and gentlemen, having completed another quarter, I'm very pleased to share with you the substantial progress Coty has continued to make strategically, financially, and on its organization. This amplifies the improvements Coty made in the first quarter and confirms that Coty is emerging from the COVID-19 crisis much stronger, more nimble, and well-positioned to capitalize on the eventual market recovery.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 Our Q2 profit and net debt came in well ahead of expectations. First, our adjusted operating income and EBITDA grew high single-digits versus last year, as we continued executing on our cost reduction program, with approximately $80 million of savings delivered in the quarter, consistent with the first quarter.

The strong savings delivery in the first half of 2021, coupled with the acceleration of certain projects into the year, give us confidence to raise our savings target for the year to approximately $300 million compared to the previous target of over $200 million.

At the same time, the successful closing of the Wella transaction and strong free cash flow drove our financial debt down to $4.8 billion, with an economic net debt of $3.6 billion when taking into account the value of our retained Wella's stake.

At the same time, despite the resurgence of COVID and related lockdowns in multiple parts of the world, we delivered Q2 revenues in line with expectations, including a 1 percentage point improvement in like-for-like trends to minus 18%.

Most importantly, we made tangible progress on our strategic priorities, which, as you recall, include: one, moving our e-commerce business from a catch-up mode to a momentum mode; second, building out our presence in China; three, strengthening our foothold in white space opportunities, including prestige cosmetics, and skincare; four, building market leading innovation, and as a result, strengthening our core prestige fragrance business and stabilizing market share in our mass beauty business.

Building on the progress last quarter, we continued to strengthen our executive leadership team in recent months, including Stefano Curti, joining as Chief Brands Officer for Consumer Beauty; Alexis Vaganay, promoted Chief Commercial Officer for Consumer Beauty; Laurent Mercier elevated to Coty's CFO; and Stéphane Delbos, promoted to Chief Procurement Officer.

The new Coty team is now in place, bringing strong beauty and business experience, deep knowledge of Coty and relevant knowledge of new areas like skincare. At the same time, we are supported by a strong and female- majority board of directors, including the recent addition of two new directors, Anna Adeola Makanju and Mariasun Aramburuzabala Larregui.

So let me now spend some time reviewing our recent revenue trends as well as provide more details on our strategic progress. Our second quarter sales came in in line with expectations, even as the environment was disrupted in many parts of the world by a resurgence of COVID-19. This resurgence and the lockdowns announced in early November had been a key reason why we had suggested that sales trends would improve moderately in the second quarter. And this played out as expected with like-for-like sales down minus 18% compared to minus 19% in the first quarter.

Within this framework, we saw diverging trends across our channels. Our prestige business, which accounts for approximately 60% of our overall sales, declined minus 16% like-for-like in Q2, which was a meaningful sequential improvement of 9 percentage point versus quarter one.

Excluding travel retail, which remains heavily impacted by COVID, our prestige business declined minus 9%. During Q2, we continued to see the trend of resurging prestige fragrance demand in several markets, particularly in the US, where luxury fragrances once again outperformed luxury skincare and luxury cosmetics, as well as many parts of Asia, including China, Australia, Singapore and Thailand.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 This improvement in the prestige fragrance category, coupled with the growing contribution from our Gucci and Burberry cosmetics line, which are becoming the second leg of our prestige portfolio, helped drive the sequential improvement in our prestige business.

At the same time, our mass business decelerated in Q2 to minus 22% like-for-like. With the uptick of COVID cases and shutdowns coinciding with the holiday season and usual social occasions, there was a pronounced deceleration in mass cosmetics category trends in most markets. This, coupled with some trade restocking benefit in Q1, drove the deceleration in our mass business.

From a regional perspective now. The Americas, which account for 40% of our revenues, continued their relative outperformance. I'm excited to share that our US prestige business returned to growth. And this helped partially offset the mass beauty weakness, resulting in a 7% like-for-like decline in the overall Americas.

EMEA, which accounts for nearly half of our business, remained heavily pressured by COVID and multiple lockdowns, driving a mid-20s decline in our like-for-like sales. In Asia Pacific, half of the minus 17% like-for-like decline was driven by the pressure in travel retail. And while our sell-in for the region was negatively impacted by our continued cuts in low-quality distribution, the sell-out of our prestige brands across the Asia Pacific region was very strong, in many cases, outperforming the market.

While the headline number showed some improvement in sales trends, I'm pleased to say that we have continued to make very tangible progress on the strategic priorities we shared with you on the past two earnings calls.

One of these priorities centered on accelerating our digital and e-commerce capabilities, with a strategic focus on direct-to-consumer. Building on the momentum in Q1, our second quarter e-commerce sales grew 40% year- over-year, with the e-commerce penetration reaching 19% and helping overall margins. This growth was broad based with over 50% online revenue growth in the Americas, 30% growth in Europe, 45% growth in prestige, and 20% growth in mass.

US was the fastest growing market with over 60% e-commerce revenue growth fiscal year-to-date. EMEA is our largest e-commerce region and the number one contributor to growth. While in APAC, we continued to reduce low-quality sales and distribution. And finally, travel retail e-comm is beginning to accelerate.

At the brand level, our e-commerce powerhouses include Hugo Boss in luxury and Rimmel in mass, with booming e-comm businesses from Sally Hansen and Chloé fragrances. Underpinning this e-commerce momentum were multiple initiatives, and of course, digital activations.

As one of only 15 companies globally to be admitted to Amazon's Global Vendor Management Program, we have been working very closely with Amazon to share data, improve service levels, and trial new programs. One of these initiatives was vendor flex warehousing, where Amazon set up a fulfillment operation inside a Coty warehouse in the UK. This drove down the delivery lead time from seven days to three days, which is a critical driver for consumer purchases.

In the US, we have also initiated our first Spanish language Amazon media campaign, resulting in an uptick in consumers in this critical demographic, with 70% of them new to our brands. These initiatives, amongst many others, helped Coty double our market share of Amazon's mass beauty business with brands like CoverGirl consistently outperforming its peers at this critical customer.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 We also work closely with Snapchat on best-in-class activations, including Snap Ads for CoverGirl Clean Fresh make-up line, Marc Jacobs Perfect fragrance as well as Sally Hansen nail polish try-on lens. The efforts resulted in sales across these product lines significantly over-indexing to Gen Z consumers.

Finally, our creative TikTok campaigns for Marc Jacobs Perfect fragrance and CoverGirl Clean Fresh make-up have each garnered close to 10 billion views, further cementing both launches with younger consumers. In fact, the Marc Jacobs campaign surpassed TikTok beauty averages in video views engagement and engagement rates for the entire first half of calendar 2020.

Now, our second strategic priority, which is expanding our footprint in China. We have continued to drive this effort with two powerful and beautiful brands in our prestige portfolio, Gucci and Burberry, both of which are highly desired by Chinese consumers.

We are laser-focused on building out the beauty franchises of both brands by expanding the cosmetic assortment, engaging key opinion leaders and building excitement through in-store, and of course, digital activations. And in Q2 and entering Q3, we saw their momentum accelerate. Even a sell-out for our overall prestige business in China grew strongly, sell-out for Gucci Beauty and Burberry Beauty grew strong double-digits.

[ph] Other (00:12:13) prestige brands driving strong sell-out in China include Calvin Klein on JD.com, Chloé, as well as a year-to-date performance in Tiffany. As we discussed on the last call, at the end of Q2, we launched Gucci's first liquid foundation formulated specifically for Chinese consumers. The excitement is also evident on social media, with Gucci make-up ranked number three amongst all beauty brands and number two amongst make-up brands in social buzz.

And this week, we are adding a key pillar in Gucci's China strategy with the opening of the Gucci Beauty flagship store on Tmall, overnight, bringing Gucci Beauty to over 700 million Chinese consumers. While this is a soft opening with a grand opening and full support planned for March, April, we see tremendous potential for Gucci on Tmall in the coming years.

At the same time, we have been moving quickly to capitalize on the booming tourist activity and luxury purchases in Hainan, Sanya Island. We've opened three doors in Hainan, with three more planned in the second half of this fiscal year. As sales have continued to build up in these doors, Gucci make-up is already accounting for over 50% of our sell-out.

Our third strategic priority is expanding into white space opportunities, including prestige cosmetics, and of course, skincare. I've already discussed the strong momentum we have seen in Gucci make-up in China. However, this success is mirrored in many parts of the world.

In the second quarter, Gucci make-up retail sales grew by five times in China, doubled in the US and tripled Thailand and Singapore. In the first month of launch, the Gucci liquid foundation sold over 35,000 units globally. Burberry make-up sell-out likewise grew by close to plus 50% in China.

On the skincare side, our US-centric philosophy brand grew in Q2, thanks to strong momentum, in particular, on DTC and e-commerce. As for Kylie Beauty, the business continues to perform consistently, with Q2 revenues in line with Q1. It's evident that consumer engagement with Kylie and her products remains very, very strong.

The Kylie Skin advent calendar and skincare fridges, each priced at over $100, both sold out in roughly five minutes. Harnessing the social listening capabilities on Kylie's DTC site and tapping into the current consumer

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 desire for self-care, we launched Kylie's rose scented bath collection during the quarter, which reached over $1 million in sales in one day.

The incredibly fast sell-out on these launches confirmed that we continue to strengthen the drop model, which is critical to a personality-driven DTC brand like Kylie Beauty. At the same time, we are strengthening the fundamentals and building the brand for long-term growth.

This is evident in skincare, where we continue to see good momentum with the Kylie skincare direct-to-consumer website, with revenues up versus first quarter and versus the prior year. And as COVID related lockdowns begin to lift, we are optimistic about the potential of Kylie Skin in retailers across the US, Europe and Australia, supported by our unique brand installations.

Looking forward, it's important to note that Kylie's prior manufacturing arrangement for its color cosmetics line with a third-party manufacturer recently expired. We are working with Kylie on a new cosmetics line to be launched this coming summer 2021, which will also be a great opportunity to significantly improve the consumer experience with one website portal developed and supported by Coty offering the full collection of Kylie's beauty products across cosmetics and skincare.

In the meantime, we continue to focus on building the Kylie skincare business, with new launches and activations planned for the coming months. All together, we have continued to make progress in expanding into the white spaces opportunities of prestige cosmetics and skincare, with these two categories already accounting for 8% of our revenues in the first half of 2021, up from 6% in fiscal 2020.

Our fourth strategic priority and a key in making Coty a product-centric company is to continue building market- leading innovation that builds on the universality and deep equity of our brand portfolio.

With the conclusion of calendar 2020, I'm thrilled that Marc Jacobs Perfect fragrance has ended the year as the number one fragrance launch across the US, UK, Canada and Australia. In fact, Perfect is tracking to be the largest Coty's fragrance launch in the US for the past 15 years.

[ph] VIC (00:17:40) speaks not only to the appeal of its messaging, celebrating self-expression, authenticity, individuality, but also to the quality of its juice, packaging, and very, very unique media activation.

Another fragrance this year has been Hugo Boss Alive, launched at the start of the calendar year, this has been the number one fragrance launch in Germany and has also underpinned 30% growth for Hugo Boss female fragrance business in the UK.

On the mass side now, we have continued to build on the success of the first two mass clean beauty lines we introduced under the CoverGirl brand with the recent launch of CoverGirl Lash Blast Clean mascara, part of our effort to concentrate on the two leading categories of CoverGirl eyes and face make-up.

Building on the iconic Lash Blast franchise, this new volumizing mascara has a clean, vegan formula, free from contested ingredients. It's also certified cruelty-free, a key pillar for CoverGirl. While still in early stages of the launch, this new mascara is seeing strong success, already a top three CoverGirl SKU at the key retailers and providing a halo effect on Amazon, with a 10% lift to the total Lash Blast franchise. The launch is also over- indexing with Gen Z and Hispanic consumers, a key part of the market we were missing previously.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 In conjunction with the launch of Lash Blast Clean Mascara in the coming days, we will begin airing the first part of the new CoverGirl image and positioning that has been fine-tuned during Q2. The new campaign reinforces our strategic work over the past year to steadily build CoverGirl's [ph] clean pillar (00:19:29), which began with Clean Fresh foundation last spring, followed by Clean Fresh Pressed Powder, and now the Lash Blast Clean mascara.

Finally, on Rimmel, we recently revamped a core pillar, the Lasting Finish 25 Hour foundation, boasting full coverage, a long lasting, and of course, mask-friendly transfer-proof formula with hydrating ingredients, this revamp has helped Rimmel regain its spot as the number one foundation in the UK market. It also nearly doubled sales for the franchise in Australia.

Our final strategic priority is accelerating our core prestige fragrance portfolio and stabilizing market share in our mass beauty portfolio. Building on the recovery emerging in the first quarter, we are happy to report that prestige fragrance category is back to growth in several markets, including in the US, China, Australia, Singapore, Thailand, in many cases, outperforming prestige skincare and prestige make-up. This outperformance appears to be driven by consumers redirecting their discretionary spending to mood boosting categories with a higher emotional appeal, while also indulging in self-gifting.

And against this backdrop, Coty brands such as Gucci, Burberry and Marc Jacobs have seen strong sell-out growth, ranging from high-single-digits to double-digits depending on the markets.

And noting the strong momentum behind artisanal fragrances in many parts of the world, this is an area where we intend to expand quite quickly with several projects underway for several of our brands. On the mass beauty side now, while much work remains to be done, we are making progress towards our objective of stabilizing our market share. Broadly, the North America and Europe mass beauty market, particularly cosmetics, remain pressured by resurgence of COVID, and this is driving weakness in our mass beauty portfolio.

At the same time though, we are progressing on the market share side. While Coty's portfolio globally lost an average of 100 basis points of market share in the first nine months of calendar 2020, in the last quarter, the market share decline narrowed to approximately 80 basis points. Central to this share stabilization is the tremendous growth that our mass brands are seeing online, particularly on Amazon, even as performance in brick-and-mortar is more pressured, also underpinning the improvement our multiple brand country combinations.

Sally Hansen continues being strong in the US, UK, Canada, Australia and Italy, driven by franchises such as Miracle Gel or the clean, good, kind, pure line and nail treatment products. Rimmel continues to strengthen its position in the UK's number – as the U K's number one make-up brand, seeing no less than 18 months of market share growth, while also winning in Italy and Poland.

Bruno Banani fragrances continued to win in its core German market. And in Brazil, sell-out of our portfolio of local brands has been growing in the double-digits in recent months, two times the level of the market, led by brands such as Monange in deodorants and Risqué in nail. Broadly, on a brand and strategy level, we have finalized our brand equity and geographic mapping for each of our core color cosmetic brands, as well as adidas, which we intend to share in the coming months. And the progress in stabilizing our mass market share confirms that we are starting to see results from our dual strategy of making each and every brand positioned and Coty's key drivers of self-expression on the one side and healthy clean alternatives on the other side.

Let me now turn it over to Laurent to comment on our financial results, and of course, outlook......

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 Laurent Mercier Deputy Chief Financial Officer, Coty, Inc. Thank you, Sue. Having been with Coty for the three years in different capacities, I had the pleasure to work closely with Pierre-André for the past two years. I am excited to continue building on what we started together and lead as CFO this next phase of growth and transformation.

Before I go into our profit delivery for the quarter, let me first touch on how we will be measuring and discussing our performance going forward. First, we will now use adjusted EBITDA as our main KPI for profits, with EBITDA based on adjusted operating income, plus depreciation and non-cash stock compensation, in order to more directly drive and highlight our focus on cash flow and deleveraging, which remain key priorities.

Second, we have decided to recognize our retained 40% Wella's stake on a fair value basis going forward, recording only the changes in fair value in the P&L.

With this in mind, let's turn to the shape of the P&L in Q2. Our Q2 gross margin of 58.7% was stable with Q1 2021 and in line with fiscal year 2020 average. The adjusted operating income of $188 million for continuing operations was well ahead of consensus expectations of approximately $160 million. This translated to adjusted EBITDA of $284 million for continuing operations, with a margin of 20.1%, up 400 basis point year-over-year.

Including our Wella cost reimbursement, the adjusted EBITDA totaled $294 million or a 20.8% margin. The achievement of 6% profit growth despite double-digit sales decline and stranded costs was supported by the combination of; A, very focused marketing investment at approximately 20% of net revenues and in line with Q1, as we continued our pay as we go marketing deployment strategy; and B, strong fixed cost reduction as part of our broader cost reduction program.

Looking at our cost reduction progress in more detail. In Q2, our fixed cost decreased by 12% year-over-year. We achieved approximately $80 million of savings in Q2, a level consistent with Q1. As a result, we have achieved $160 million of savings year-to-date. The biggest component of the savings delivered in H1 2021 has been head count reduction, accounting for close to 30%. Beyond that, the biggest contributors have been significant cuts in business services, including consultants, recruiters, IT, real estate, and facility management cost, followed by direct and indirect procurement savings across cost of goods [ph] and NCP (00:27:11).

And while not impacting fiscal year 2021 savings delivery, we recently announced the consolidation of our fragrance manufacturing footprint with the closing of our German plant to be completed by summer 2022. This was a difficult decision to take, but a necessary one to address the overcapacity in our supply network. This consolidates our fragrance manufacturing into two remaining plants in Spain and France. The strong delivery in H1 2021, coupled with the acceleration of certain projects into the year, are driving an increase to the savings target for fiscal year 2021, now expected to be approximately $300 million compared to the previous target of over $200 million. And we remain on track to our saving targets of $600 million by end of fiscal year 2023.

Turning now to EPS. With adjusted EBITDA for the quarter of $284 million, less $96 million in depreciation and non-cash stock compensation, close to $60 million of interest expense, an 8.5% adjusted effective tax rate and two months of net income contribution for Wella, the Q2 diluted adjusted EPS for total Coty ended at $0.17.

For H1 2021, based on $450 million of adjusted EBITDA, $180 million of depreciation and stock compensation, roughly $120 million of interest expense and an adjusted effective tax rate of 12.5%, the diluted adjusted EPS for total Coty ended at $0.28. In the same period, the reported EPS came in at a negative $0.10, impacted by the Wella transaction cost and restructuring accruals under the cost reduction program.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021

To help frame the various puts and takes in EPS going forward, there are few things to keep in mind. First, it's worth noting that while depreciation is likely to stay fairly steady, the stock compensation component will step up beginning in Q3.

Second, on the tax line, we've had a few positive discrete items in H1 2021. But for the year, we continue to expect an adjusted effective tax rate in the low 20s. Third, as stated earlier, beginning in Q3, we will not show the earnings of Wella in our P&L, though we'd instead record any changes in Wella's fair market value.

And finally, on the convertible preferred stock, so far, we have been opting to accrue the coupon, resulting in incremental dilution. However, going forward, we intend to pay the coupon in cash following the diluted share count to stabilize.

Looking now at free cash flow for the quarter, which came in very strong at approximately $390 million, up $26 million versus the prior year. Underpinning this solid performance was strong operating income and EBITDA for the quarter, coupled with two months of contribution from Wella.

We also continued our strong working capital and CapEx management in the quarter, including material reduction [ph] and no reduce (00:31:17). At the same time, it's important to point out that the completion of the Wella transaction within the quarter and the finalized working capital transfers resulted in $200 million of positive working capital benefit in Q2, which will reverse next quarter.

Turning now to our capital structure, I'm happy to report that with the successful completion of the Wella transaction, with gross proceeds of $2.9 billion and our strong free cash flow of $389 million, our net debt at the end of Q2 stood at $4.8 billion. This, in fact, included over $300 million of negative impact on our debt from foreign exchange.

And factoring in our retained stake in Wella valued at quarter end at approximately $1.2 billion, our economic net debt fell to approximately $3.6 billion. We also maintained comfortable headroom under our financial debt covenants.

Our capital structure remains very attractive, with key maturities in 2023 and 2025 and cost of debt below 4%. It is important to highlight that with our net debt closing below $5 billion, this is a true milestone for Coty and sets up for continued improvement in the coming years.

Turning now to our fiscal year 2021 outlook, despite continued disruption to sales channels and short-term orders related to the COVID-19 pandemic, we remain focused on our strategic priorities.

With cost savings expected to reach approximately $300 million for this fiscal year and having in mind revenue trends and our intention to step up the investment, we now expect adjusted EBITDA of $750 million for fiscal year 2021. With the financial net debt that has now crossed below $5 billion, we will continue to drive our leverage ratio towards five times by the end of calendar year 2021, in line with our prior guidance.

Let me now turn it over to Sue for some concluding remarks...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 Thank you very much, Laurent. With the new Coty team now in place, it's clear to me that the stronger Coty is continuing to emerge. In the current volatile context, our focus is on optimizing short-term revenues, and of course, sell-outs. Yet as we continue to control our cost and debt, we are shifting our focus now to accelerating our topline guided by our strategic pillars.

One, digital and e-commerce acceleration; second, building out our presence in China; three, expanding into white space opportunities, including prestige cosmetics and skincare; and of course, strengthening our core fragrance and cosmetic businesses through leading innovation and improved execution.

The additional fiscal 2021 cost savings will enable the profit delivery we have guided to, while at the same time, increasing our commercial investment in the second half of fiscal 2021. In fact, we are like a boat setting sail now and letting go all of excess weight. The lighter we emerge from this crisis, the faster we will go, knowing how desirable many of our brands are.

As we have finalized our strategic review, including new growth opportunities, brand equity mapping, and repositioning plan for our core mass brands, we plan to share our strategic priorities around accelerating growth in mid-April, with a full Investor Day planned for fall 2021.

I'm really excited by the tremendous opportunities and exciting journey ahead for Coty and look forward to sharing this vision in the coming months.

Thank you very much for your time, and we are now pleased to take any questions......

QUESTION AND ANSWER SECTION

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Olivia Tong of Bank of America...... Olivia Tong Analyst, BofA Securities, Inc. Q Great. Thanks, good morning. First, I wanted to ask about costs and then I want to ask about China. First, on costs. Can you just talk about what drove the incremental savings? Is it additional head count reductions, more manufacturing consolidation, advertising, media efficiencies? And then can you talk about the redeployment of that investment towards investment to drive growth in key markets or channels like e-commerce? And now that you have four months left in the year, what's your view in terms of getting back to margins more in line with 2019? And then I have a follow-up. Thank you...... Laurent Mercier Deputy Chief Financial Officer, Coty, Inc. A Okay. Hello, Olivia. So on cost of incremental savings, as I explained, so is really across all initiatives. So we really continue intensifying head count reductions, but also on all non-people cost. So we continue the journey, and we really accelerate all the actions we initiated in H1. So it's not one specific bucket or another, it's really all across the board. So now to answer your question on margins, definitely, what we are aiming at is high-single- digit, and you see the result in H1 which confirm this trajectory......

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 Olivia Tong Analyst, BofA Securities, Inc. Q Great, thanks. And then I wanted to talk a little bit about the expansion of Gucci Beauty on to Tmall and your view on the opportunity there. If there are other brands in your portfolio that you think could resonate, particularly [ph] launch in (00:37:53) China, and how much investment you think that would necessitate in your view.

And then just also, what about the social media brands like Kylie and KKW? How do you think about their potential in China? And then, overarchingly, how do you think about the opportunity for profitability long-term in China? Thank you...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Olivia, this is Sue speaking. So to answer the first question about China and the Tmall soft opening that we are doing at the moment. The great news is that we have now arranged under Gucci Beauty brand, but same thing under Burberry brand, by the way. But under Gucci brand, we have now a comprehensive range.

We were operating on areas such as lipsticks, powders, pencils, mascara, which are, I would say, a tiny part of the market. And now with the launch of the new foundation [indiscernible] (00:38:46), that's arrived in January, we are suddenly operating on the biggest chunk of the market. And the results that we have had on during January, which is the first month, are outstanding. We sold 35,000 units in a very, very little number of locations globally and especially in APAC and in China. And the feedbacks are absolutely great about the product.

And we, of course, are super, super excited by the new door that's opening because, suddenly, Gucci Beauty, super desirable image and line is now plugged into a huge, huge, I would say, machine that's called Tmall Pavilion, that will give us the reach of 700-plus million users in China. So, you can imagine when a super desirable brand that's putting on the market the best quality products on the right areas of the market [ph] means (00:39:42) the power of Tmall, there is clearly big potential for Gucci, but also Burberry and overall, for our luxury business in general. And clearly, the next steps we are thinking about is, how can we operate skincare in this area of the world, but also on Tmall?

To answer your questions about Kim and Kylie, when it comes to Kylie Jenner line, the line is delivering consistently with the first quarter. Skincare is accelerating between the first and the second quarter globally and second quarter globally and versus last year and we are at the moment adapting the products of Kylie line to the Asian Chinese market, so that when we go there, we go with the right offer precisely for the, I would say, customers of this area of the world that has very, very specific needs.

And when it comes to Kim Kardashian line, which is scheduled for fiscal 2022, skincare line, it's going to be aligned. Hopefully, that's going to have everything that's needed to compete on the Chinese and Asian markets......

Operator: Your next question comes from the line of Wendy Nicholson of Citi...... Wendy C. Nicholson Analyst, Citigroup Global Markets, Inc. Q Hi good morning. My first question......

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Good morning...... Wendy C. Nicholson Analyst, Citigroup Global Markets, Inc. Q ...Sue, maybe just has to do with the level of internal controls at the company. Because I think historically, one thing that made the story so frustrating was that, often, there was guidance given or there were targets for certain launches or expectations that then the company failed to deliver upon. And there were things like massive SKU assortment that the company just didn't have any ability to manage.

So, I'm wondering, just as you come in with your new management team, do you think you need to make investments in IT or infrastructure? Just so that when you're putting a lot of money behind something like CoverGirl, you have an accurate read on how that launch is doing just so that you can adapt and pivot and shift as need be? ...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Hi Wendy, thank you for this question. So, we've been saying that since this, I would say, pandemic started. We've been really revisiting everything we are doing at Coty. Starting from the way we create products and nothing goes out if it's not, as I usually love to say, new, better, and different, which is really something that was not the case in the past. And a good way to avoid, as you said, over stocks is to do products that sell. This is, I would say, basic, but it was not – probably not always respected in the past.

The second thing we have been doing and we are doing on a monthly basis today is called pay as we go sessions. This is probably the first time, I don't know what's happening in other companies, but from my past experiences, it's the first time that this goes up to the level of the CEO with a top-down, bottom-up way of working to make sure we are putting our money on bets that are – really bets we all believe in, but not only believe in bets that have tests and studies and anything that needs to be done to confirm that we are putting money behind products and launches that are going to deliver and ideally over-deliver.

And this is one of the main reason I have been sometimes postponing some of the launches. Because I said they were not ready either in terms of formulation, in terms of cleanliness, sustainability, or in terms simply of non- efficient advertising. So, this is really something that we are putting in place at a company level – at different levels of the company. And this goes up to the CEO level, which is, I think, unseen anywhere else...... Wendy C. Nicholson Analyst, Citigroup Global Markets, Inc. Q That's all fair, and that sounds great. And hopefully, that works better than it has in the past. But my second question is kind of the biggest bear thesis on the stock right now is that you are cutting advertising to sort of make the numbers and show higher EBITDA growth in the short term. But that's not actually going to be good for the business. So can you talk about kind of a target level of advertising?

I know you said you expect to increase that. But in terms of your overall spending, do you think you have the right approach to investing in the business, while at the same time, managing to show EBITDA growth and that it's not going to be a trade-off between the two? Thanks so much......

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Thank you, Wendy. So as you know, as we said it earlier during the presentation of the results, the main areas were the spending – the main areas – sorry – of cost savings were head count reduction on one side and business services on the other side. We are doing everything to protect what we call the AnCP, and specifically, the working media.

So as Laurent mentioned, the working media for the second quarter were in line with the ones from the first quarter, around 20%, AnCP in general, and working media, we try to preserve as much as possible. The good news is that during Q3, what we are targeting is being at the level in absolute value of what we have been spending in terms of working media during the year 2019, which is pre-pandemic. And this is really something that it's super, super important as you have mentioned it.

And this is going to allow us to invest, I would say, working media on fewer but bigger initiatives since we are going to be using amounts of money that are what we used to spend in normal years. So it's a big change. And this is, again, in a way, correcting the feeling that you mentioned at the beginning of the question. We are not cutting on working media.

On non-working media, we are doing a lot of renegotiation and what we call other AnCP, which usually are about [ph] BAs and a thing (00:45:52) we do in stores, we are adapting to the situation of the different regions. As you can imagine, we've been super flexible to lower this bucket when it comes to travel retail. And we're happy we've been able to do it, because today, stores are closed. And we're doing exactly the same thing on other areas in the world where other AnCP can very, very flexibly easily be resetted up or down......

Operator: Your next question comes from the line of Andrea Teixeira of JPMorgan...... Andrea Teixeira Analyst, JPMorgan Securities LLC Q Hi, thank you and good morning. So I appreciate the comments about Kylie. But can you please elaborate more about the plans ahead and also to the Kim Kardashian skincare embedded in your outlook and the timing of those launches? And just as a second, just a clarification on fragrances. What is the typical percentage of sales of fragrances in the month of December?

I understand, on a normalized basis, about 50%. So you seem obviously upbeat with the momentum in Gucci. And how confident are you are with – as you keep growing this area, offsetting the mass make-up declines in the next few quarters despite the seasonally weaker performance and potentially destocking? Thank you...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A So to answer the first question, I'll do question after question. So the first question is about Kylie and Kim Kardashian with beauty businesses. So when it comes to Kylie, as you know, we have recently – there was a manufacturing agreement that has recently expired. So, we intend to launch a new cosmetics lines under the Kylie Jenner beauty around next summer and this is clearly, I would say, the next step for this line.

We continue to do our very successful drop model. This is really something that the Kardashian, in general, and Kylie Jenner specifically invented some years ago, which is a key driver of traffic, and therefore, sales on our DTC websites. So, we are continuing in this area and cosmetics line – new cosmetics line arriving in next summer.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021

When it comes to Kim Kardashian, and again, we are clearly positioning these two brands very differently. Kylie becoming a key destination for any beauty need when it comes to Gen Z and millennials. Clearly, this is the way we're going to expand Kylie in the future. And it's going to be across several categories and not linked to specific categories.

When it comes to Kim, we are progressing very well hand-in-hand with Kim in creating, hopefully, a skincare line that's going to be, again, new, better and different, and bringing to her hundreds and hundreds of millions of followers around the world the ability to access the latest dermatological or ingredient or, I would say, health – skin health trends that her followers are looking for. So, this is what's going to happen on Kylie on one side and on Kim on the other side.

When it comes to the fragrance business, this size of the business, we think that the prestige fragrance category strength in certain markets should continue, seeing that the US and China through January are doing still very well.

And the other region that gives me confidence, again, we've been watching one key launch that we have done at Coty. It's Perfect by Marc Jacobs. As we said during the call earlier, this launch is probably Coty's biggest fragrance launch in the last 15 years. And you have to think that the biggest fragrance launch happened in the middle of a pandemic.

So, what made it the biggest launch in the history of Coty? It's simply because we've been shifting the way we do launches totally to a new mindset and new way of doing things. First, the advertising has nothing to do with the classical one spokesperson advertising that is usually, I would say, the common standard in the industry. We've been using 40 people from all ethnicities, ages, genders, whatever you want, and these people promoted the fragrance online.

And for me, this has been a powerful way to replace the lack of store visits to test and smell the fragrance. If you listen and hear these people and their audience is sharing for those who both online, the products, they were sharing to each other why they love the scent, et cetera. In a way, they are virtually inventing fragrance testing.

So for me, it's going to last. I strongly believe it's going to last. This campaign had on TikTok more than 10 billion views and it's clearly surpassing all TikTok standards. So, it shows us a new way to sell fragrances that's in a way not being stopped by the lack of testing that usually is the case when you launch a fragrance. So, I'm quite confident for the future on this topic......

Operator: Your next question comes from the line of Steph Wissink of Jefferies...... Stephanie Wissink Analyst, Jefferies LLC Q Thank you. Good morning, everyone. Our question is twofold. That's first on gross margins. We're wondering, Laurent, if you can spend a little time just sharing with us where gross margins landed relative to your expectations. They came in a bit below where we were expecting. And I just wanted to reconcile if that's partly related to the cost restructuring and where that's located within the P&L.

And then secondly, on your EBITDA guidance for the year. I think you mentioned in your press release that the current quarter is pacing on trend in terms of where your sales expectations are. But could you help us think

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 through again the body of the P&L? And where we should expect some of the puts and takes between gross margin and OpEx as we look at the back half versus the first half? Thank you...... Laurent Mercier Deputy Chief Financial Officer, Coty, Inc. A Okay. So – hello, Steph, thanks for your question. So gross margin, definitely, I mean the big impact is related to COVID pandemic. So it's definitely that, of course, lower volumes is impacting fixed cost absorption. So – and this is something that we had anticipated in our Q2 equation. It's creating also some tension on gross to net, and also, to some extent, on mix.

Of course, as Sue mentioned, Europe is facing the lockdown and big markets and big brands. So these are really related to the COVID-19, and we anticipate it definitely in our equation. So now definitely, to answer your point on productivity, in our gross margin, we have some positive productivity from supply chain and procurement, and this is helping to mitigate part of the negative COVID headwinds.

So now building on what's next. Definitely, step-by-step, this negative COVID headwinds will disappear. While at the same time, the productivity, and part of this $300 million savings will start to reflect in the gross margin improvement. So this is just to give you some flavor on gross margin. But as you could see, we are in line with our Q1, so EBITDA guidance.

So definitely, the equation is really, as we mentioned, is definitely, we are delivering the $300 million savings. So this is really the work we are doing, and we delivered [ph] 18% in Q1, 18% in Q2 (00:54:00). Now what we are working together with Sue and the Executive Committee is, of course, as Sue mentioned, with the pay as we go, we are reallocating some of these savings very targeted way to the actions which are working, on the working media and where we have a very good [ph] ROI (00:54:17). And this is really the triangle we are building, so savings, target investment and then delivering the EBITDA that we are sharing with you today......

Operator: Your next question comes from the line of Rob Ottenstein of Evercore...... Robert Ottenstein Analyst, Evercore Group LLC Q Great. Thank you very much. You identified I mean digital initiatives, I think, is your number one strategic priority, which obviously makes a tremendous amount of sense. Can you talk about kind of where you are, where you think you are in terms of your investment curve? Obviously, this is an area that requires a lot of technology, a lot of upscaling of the workforce, kind of a general change of how you do business in general. So perhaps if you can tell us kind of where you are in that progression, how much more you need to invest to get where you need to be? Thank you...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Hello. Good morning, Rob. This is Sue speaking. So, you're right to say again that the e-comm net revenues are growing super-fast at [ph] Coty (00:55:25) plus 40%. Again, the penetration is today, reaching the level of 19%, clearly driven by our luxury business, but our mass business is also doing very well, especially at e-retailers such as Amazon. And we have areas like Americas that are having plus 50% of growth, EMEA plus 30%. Prestige, as I said it before, is driving the growth at plus 45% and mass is plus 20%.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 In terms of what needs to go – what is needed to go to the next step, as you know, we've been, for the first time, announcing the arrival of the first Chief Digital Officer at Coty, Jean-Denis Mariani, who joined the company in November. Jean-Denis is doing huge progress with his teams worldwide to put in place what needs to be put in place in terms, first, of having all the assets that this area of the business is requiring. Some call it cars, it's about content and the right investment on the right assets, et cetera. So, this is something that we are going to accelerate in the next months and think about the best way to organize this in-house here at Coty.

So, this is how I see it. It's clearly an area where there is wind behind us. We have the brands. Most of our brands had huge followings on Instagram. I was calculating the other day that if you add our own brands plus the fashion houses that we are working with, and if you add also our, I would say, personalities, we have a reach of 700 million people.

So, if you add this 700 million people reach and you add next to it the new Tmall opening that we have just done for Coty in the last, I would say, two to three years, suddenly, there is a direct way to address consumers that are as numerous as 1.4 billion people around the world. So, it's a super strong opportunity. And you are right; we'll need to finance this.

This is clearly part of our key priorities. And pay as we go that Laurent mentioned several times, it's not only about where do we put our money in terms of advertising and clearly, we've been shifting strongly media towards digital, it's also in terms of CapEx and investments for the future that we are doing exactly at this time at the moment......

Operator: Your next question comes from the line of Lauren Lieberman of Barclays...... Lauren R. Lieberman Analyst, Barclays Capital, Inc. Q Thanks very much. Good morning. I was...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Good morning...... Lauren R. Lieberman Analyst, Barclays Capital, Inc. Q ...curious if you could talk a little bit about the Singles' Day shopping holiday. To what degree do you think that that contributed to some of the outsized performance in the quarter? But also, I'm curious about activations. And maybe it was too soon, right, with the Tmall launch more coming this quarter for Gucci, but I'm curious the activations there and then also plans looking ahead to Lunar New Year and the degree to which – maybe the business isn't quite there yet, but I was curious to learn a bit about that. Thanks...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Good morning, Lauren. So, you're right. We are doing a soft launch at the moment at Tmall. We are putting in place the different assets, the products, et cetera. So, we are not yet into this super high, I would say, promotional moments that are happening in China and in the Asian world.

So, we'll see this hopefully happening – we'll see hopefully how we are going to benefit full potential from this launch at Tmall, probably around the end of the third quarter, beginning of the fourth quarter. This is one.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021

Second, we will need to find our way to be part of this highly promotional moment because we are operating highly desirable and highly, I would say, luxurious and prestigious brands. So this is something that we are working hard to make sure we are still having the same level of excitement, et cetera, without compromising the image of our brands. And we can – of course, we are starting to think about some other brands that are already into that game, such as adidas or Calvin Klein, which are doing very, very big, but they are not at the moment big drivers of the growth in China......

Operator: Your next question comes from the line of Faiza Alwy of Deutsche Bank...... Faiza Alwy Analyst, Deutsche Bank Securities, Inc. Q Yes. Hi, good morning. So a couple of related questions for you, Sue. First is, how are you thinking about the evolution of the make-up category as we exit COVID? You've previously talked about the skinification of make-up. And it does seem that every small make-up brand has launched a skincare brand. So maybe you can talk about how this is impacting your approach to reinvestments. Because I hear you talking a lot about marketing and commercial investments, which are apparent, but as we think about skincare, in my mind, at least, it seems like efficacy and performance really matters for consumer retention.

So would love to get your perspective around this. Do you agree with the premise? And where do you think the company is in terms of R&D expertise, product quality? And is this an area where you think more investments need to be made? Or are you satisfied with where you are? ...... Sue Youcef Nabi Chief Executive Officer, Coty, Inc. A Thank you very much for your question. So again, thank you for asking me about R&D because this is really a topic that's dear to my heart. I'm an engineer, so I love to spend time with R&D people and scientists and also with the people who are operating our different factories. And what I've been seeing is really fabulous IPs owned by Coty R&D.

I've been mentioning this probably in the previous call. But Coty owns key IPs in terms of long wear, if you take – if you speak about make-up, the success of brands such as Outlast by CoverGirl, Lasting Finish 25 Hours at Rimmel or many others are clearly based on this uniqueness in terms of IP that we do own at Coty.

We also own a lot of IPs when it comes to, what I call, protection – environmental protection, be it from the sun, from blue light or from pollution. And this is clearly something that the company has been continuing to progress on, thanks to Lancaster brand. And we intend to expand this know-how to numerous number of brands, skincare, but also make-up brand that are being more and more skinificate in other words.

And we have also IPs in the areas of dermatologic – I'm sorry, ingredients inspired by dermatology, to make it simple. And this area is an area where, again, Lancaster and Coty R&D has been operating for years and years. People are all talking about retinol since a few years now, and it's going to be higher and higher. And Lancaster, for your information, was the inventor of vectorization of retinol in the skincare product something like 20 or 25 years ago.

Coty, Inc. (COTY) Corrected Transcript Q2 2021 Earnings Call 09-Feb-2021 So this is really an area that the company has know-how in, has expertise in and has intellectual property in. So we are going to build the skinification of make-up and the skinification of Coty business based on these key IPs that we own at Coty today.

When it comes to the skinification of the make-up category, again, what we are seeing is that what's doing well in our business are, what we call, clean, healthy and sustainable alternatives. CoverGirl is leading the way in America in this area. Clean Fresh make-up, number one foundation launch in 2020. And then the Clean Fresh Powder that we launched in September was the number one powder. And we are just launching right now Lash Blast Clean, the first mascara with clean, vegan, cruelty-free formulation, adapted for sensitive eyes, et cetera.

So, this area of the business is clearly an area that's not only attracting, I would say, old consumers, but also strongly and over-indexing, I would say, Gen Z consumers and Hispanic consumers.

So, this is an area that we intend to accelerate in the future. Thinking about skincare, of course, not only on our, I would say, color cosmetics brands, but also we can think about adidas, which is another brand of Coty portfolio, where we see a huge potential in terms of self-care, body care and anything around fitness, beauty – related beauty.

So, this is the way I see the future of the company. Confident on the ability to build on this – and you said it, on this efficacy, ingredient-led, science-led categories in several areas of our businesses, mass beauty, adidas, but also in our prestige skincare with brands such as Lancaster and philosophy, but also Kim and Kylie, developing the future in skincare......

Operator: Thank you. We have reached the allotted time for questions and answers for today. We thank you for participating in Coty's earnings conference call and webcast. You may now disconnect your lines and have a wonderful day.

Disclaimer The information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete or error-free statement or summary of the available data. As such, we do not warrant, endorse or guarantee the completeness, accuracy, integrity, or timeliness of the information. You must evaluate, and bear all risks associated with, the use of any information provided hereunder, including any reliance on the accuracy, completeness, safety or usefulness of such information. This information is not intended to be used as the primary basis of investment decisions. It should not be construed as advice designed to meet the particular investment needs of any investor. This report is published solely for information purposes, and is not to be construed as financial or other advice or as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. Any information expressed herein on this date is subject to change without notice. Any opinions or assertions contained in this information do not represent the opinions or beliefs of FactSet CallStreet, LLC. FactSet CallStreet, LLC, or one or more of its employees, including the writer of this report, may have a position in any of the securities discussed herein.

THE INFORMATION PROVIDED TO YOU HEREUNDER IS PROVIDED "AS IS," AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, FactSet CallStreet, LLC AND ITS LICENSORS, BUSINESS ASSOCIATES AND SUPPLIERS DISCLAIM ALL WARRANTIES WITH RESPECT TO THE SAME, EXPRESS, IMPLIED AND STATUTORY, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, ACCURACY, COMPLETENESS, AND NON-INFRINGEMENT. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, NEITHER FACTSET CALLSTREET, LLC NOR ITS OFFICERS, MEMBERS, DIRECTORS, PARTNERS, AFFILIATES, BUSINESS ASSOCIATES, LICENSORS OR SUPPLIERS WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION DAMAGES FOR LOST PROFITS OR REVENUES, GOODWILL, WORK STOPPAGE, SECURITY BREACHES, VIRUSES, COMPUTER FAILURE OR MALFUNCTION, USE, DATA OR OTHER INTANGIBLE LOSSES OR COMMERCIAL DAMAGES, EVEN IF ANY OF SUCH PARTIES IS ADVISED OF THE POSSIBILITY OF SUCH LOSSES, ARISING UNDER OR IN CONNECTION WITH THE INFORMATION PROVIDED HEREIN OR ANY OTHER SUBJECT MATTER HEREOF.

The contents and appearance of this report are Copyrighted FactSet CallStreet, LLC 2021 CallStreet and FactSet CallStreet, LLC are trademarks and service marks of FactSet CallStreet, LLC. All other trademarks mentioned are trademarks of their respective companies. All rights reserved.